Hand of Smith revealed by Smith

Paving Wall Street : Experimental Economics and the Quest for the Perfect Market

EXTRA! Hand of Smith revealed by Smith; invisible appendage appears in wind tunnel

Vernon L. Smith was recently awarded the 2002 Nobel prize for economics. And what contribution earned him half a million dollars and a date with the Queen of Sweden? The answer has to do with wind tunnels.

As luck would have it, I’m reading a very good book on this very topic by a guy named Ross Miller who was once a student of Smith’s. Incidentally, the book, Paving Wall Street: Experimental Economics and the Quest for the Perfect Market, was given to me by a clever and generous reader of this weblog who works in the finance business. The key phrase in the title is experimental economics. Miller regularly uses the analogy of wind tunnels in his descriptions. Most economists, as they try to explain Adam Smith’s famously invisible hand, prefer to treat the “rational behavior” of humans in a very hands-off theoretical way. Vernon Smith asks instead: What can we learn about economics by actually performing experiments with real people? Quite a lot, as it turns out. His work showed that markets, even tiny ones without much shared information, can be extremely effective at pricing goods. And why weren’t economists doing this kind of experimental work years ago? Engineers, for example, are trained to start experimental simulations as soon as possible. No jet designer would build a plane without running it through extensive tests in a wind tunnel. Miller’s book shows how the cultural biases in the economics profession blocked the acceptance of experimental work early on, and then he traces his storyline through the vindication and ascendency of experimental techniques. Now the second edition of his book can acknowledge his mentor’s ultimate achievement.

By the way, here’s something cool: the resum� of a Nobel Prize winner, including 15 pages of publications. I’m picturing myself flipping through this and giving him a call: “Sorry, Vern, it doesn’t look like a good fit here… uh-huh. No, no, Vern, don’t feel bad. Look, here’s the number for Nobel & Co. in Stockholm. Give them a call… ask for Al. They might have something. You never know. Yeah… uh-huh. Buh-bye.”