In addition to honoring the world’s most brilliant people, Nobel Prize season also has the remarkable ability to make people wish they’d paid more attention in school.
Today, Minnesota’s Leonid Hurwicz received his prize in economics.
Minnesota Public Radio’s Art Hughes said Hurwicz’s son, Maxim, “simplified his father’s notable economic theory, which includes people he called ‘interveners,’ who act altruistically instead of in their own self-interest.”
“He did not invent interveners, because interveners are real people. But as an economist he has discovered them and given them a name. He has created a space for them in economics. A little bright spot in a normally gray landscape,” said Maxim Hurwicz.
Now, here’s the explanation for those of us who didn’t:
Take games with a desired outcome. The people playing the games are a wild card — they want different things. So the game’s desired outcome is achieved by giving the players incentive to act in a certain way. In a popular online game, a player can be convinced to head a certain way by giving him/her points for killing a dragon guarding a door, for example. In those games, though, the goal is to have one winner. While giving someone a reason to act a certain way to achieve a desired outcome is part of mechanism design theory, having a single winner at the end of the game is not.
Taking that a bit further, Reason Magazine, uses the example of two children squabbling over how to divide a pie.
Parents will already know one answer—one child cuts and the second child chooses. The second child will choose the larger half which gives the first child the incentive to cut as evenly as possible. The first-cut, second-choose solution is a simple example of an incentive-compatible mechanism.
Hurwicz applied his theory in economics in the ’60s in the critical debate of the time, according to the economic commentary site, Vox. Which is better: capitalism or socialism?
His results did not, however, let Capitalism off lightly, because individual incentives are not always aligned with social incentives. It did, however, help governments think about how best to regulate a capitalist economy.
In economics, and perhaps in the group meeting you’ve recently had, there are “players” with different agendas. Hurwicz’s work, at least in theory, provides a way to allocate scare resources — the pie in the above example — in a way that will achieve a desired outcome, be it happy people, developed nations, housing, whatever.
The importance to the world of having its disparate factions (game players) solve the problem of allocating scarce resources is obviously a big deal. The fact that Hurwicz came up with a theory that shows us exactly how that can happen is why he’s a big deal, too.