Public Release: 

Purdue-grown economist wins Nobel Prize in economics

Purdue University

WEST LAFAYETTE, Ind. -- An economist who launched his groundbreaking research at Purdue University today (Wednesday, 10/9) was awarded the Nobel Prize.

Vernon L. Smith, known as the father of experimental economics, began his academic career at Purdue's Krannert School of Management in 1955. Smith came back to Purdue and spent part of the 2000 school year on the West Lafayette campus. He is currently a professor at George Mason University.

George Horwich, Krannert School professor emeritus of economics and one of Smith's colleagues at Purdue in those early years, said Smith began his experiments in economics with his students when he came to Purdue in 1955. Borrowing techniques from psychology laboratory experiments, Smith created virtual markets by designating half his class as buyers and half as sellers of fictitious goods. Smith gave the buyers and sellers different ranges of prices and had the students interact freely and negotiate trades until price and quantity achieved equilibrium, or in economic terms, "made a market."

"This was the first time anyone had demonstrated experimentally how markets form," Horwich said. "It was a form of empirical verification of economic theory."

Smith wanted to prove that economic theories can be tested in laboratory-type settings for two reasons: to move economics closer to the methodology and replication under controlled circumstances of the natural sciences, and to test economic theories and hypotheses -- even the seemingly indisputable, bedrock theory of supply and demand -- before introducing them to real markets.

After his initial experiments, Smith began experimenting with more complex markets, Horwich said.

"For example, Vernon designed experiments to test market monopolies and markets where there were only two or three different sellers and many buyers," Horwich said. "His work killed the old myth that economics can't be simulated in a laboratory. All of the experiments demonstrated that, left to their own, markets will reach an equilibrium, except under exceptional circumstances. Thanks to Vernon's experiments, those circumstances now can be identified.

"What Vernon has accomplished is an economic revolution. He took the theory of market behavior out of the ivory tower and showed us how to simulate what is going on in the real world."

As a result, Horwich said, Smith's experiments broadened the empirical bases of economic knowledge that policy makers can draw upon. "What Vernon has given us is a mechanism, a machine to answer so many important economic questions," he said.

At the University of Arizona in 1985, Smith established and became research director of the university's Economic Science Laboratory. Taking advantage of computer technology, he and his associates continued to perform more and more sophisticated experiments simulating increasingly complex markets.

Timothy N. Cason, a Krannert School professor of economics and and former student of Smith, who team taught a class with Smith in 2000, today (Wednesday, 10/9) said: "Vernon has made many of the most important contributions in experimental economics, and he continues to work at the forefront of the field. He is using the laboratory to design new markets where markets never existed.

"For example, much of Vernon's laboratory work in the last decade has focused on designing better markets for trading electricity and gas."

Horwich said: "The young Smith was a precursor to the computer technological revolution a couple of decades later."

One of the most accomplished of those who have followed Smith in experimental economics is another former Purdue colleague, Charles R. Plott, who is now Edward S. Harkness professor of economics and political science at the California Institute of Technology. "Vernon was the founder of experimental economics, and Charlie was a leading disciple," Horwich said.

Smith, a 75-year-old native of Wichita, Kan., completed his undergraduate degree in electrical engineering at the California Institute of Technology and master's degree in economics at the University of Kansas before taking up his doctoral studies at Harvard. Horwich described Smith as "warm, friendly and unassuming, always dressed casually," usually in Western style with cowboy boots and turquoise.

Smith stayed at Purdue for 12 years and attained the rank of full professor. He subsequently taught at Brown University, the University of Massachusetts and the California Institute of Technology and the University of Arizona.

Purdue awarded Smith an honorary doctorate in management in 1989. He said at the time:"What made Purdue so powerful an experience for me was that I really was free to do my own thing. It wasn't just the administration, but also my colleagues -- who didn't for a moment think that, because I wanted to do experiments, my opportunities or resources should be limited."

Today, there are more than 40 experimental economics laboratories all over the nation, including at the Wharton School of Business at the University of Pennsylvania and at the Haas School of Business at the University of California, Berkeley, as well as at universities in Canada, Europe, Hong Kong, Mexico and Australia. The Economic Science Association, an international organization of economists, focuses mainly on experimental economics and has published the academic journal Experimental Economics since 1998.

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Writer: J. Michael Lillich, (765) 494-2077, mlillich@purdue.edu

Source: Timothy Cason, (765) 494-1737, cason@mgmt.purdue.edu

Related news tip, Purdue colleague and former student can comment on Nobel Prize winner Vernon Smith: http://news.uns.purdue.edu/html3month/Story.Ideas.html

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