Intelligent design
From The Economist print edition
A theory of an intelligently guided invisible hand wins the Nobel prize
“WHAT on earth is mechanism design?” was the typical reaction to this year's Nobel prize in economics, announced on October 15th. In this era of “Freakonomics”, in which everyone is discovering their inner economist, economics has become unexpectedly sexy. So what possessed the Nobel committee to honour a subject that sounds so thoroughly dismal? Why didn't they follow the lead of the peace-prize judges, who know not to let technicalities about being true to the meaning of the award get in the way of good headlines?
In fact, despite its dreary name, mechanism design is a hugely important area of economics, and underpins much of what dismal scientists do today. It goes to the heart of one of the biggest challenges in economics: how to arrange our economic interactions so that, when everyone behaves in a self-interested manner, the result is something we all like. The word “mechanism” refers to the institutions and the rules of the game that govern our economic activities, which can range from a Ministry of Planning in a command economy to the internal organisation of a company to trading in a market.
Leonid Hurwicz, Eric Maskin and Roger Myerson won their third-shares of the $1.5m prize for shaping a branch of economics that has had a broad impact, both in academia, in subjects such as incentive theory, game theory and the political science of institutions, and in the real world. It affects everything from utility regulation and auctions to structuring the pay of company executives and the design of elections. Mr Hurwicz must be especially delighted as, aged 90, he is the oldest ever Nobel winner, and may have thought his chance had gone. He worked long ago with one previous winner, Kenneth Arrow, and was the graduate adviser to another, Daniel McFadden. One of his most influential papers was published when he was 55, about the same age his co-winners are now, which proves, if nothing else, that making big intellectual breakthroughs is not exclusively a young person's game.
Mechanism-design theory aims to give the invisible hand a helping hand, in particular by focusing on how to minimise the economic cost of “asymmetric information”—the problem of dealing with someone who knows more than you do. Trading efficiently under asymmetric information is hard, for how do you decide what price to offer someone for something—a product, say, or their labour—if you do not know at what price they would sell it? On the one hand, you may not offer enough to get them to deliver the product or work, or at least do so adequately; on the other, you may overpay, wasting resources that might have been better used elsewhere.
Mr Hurwicz took up economics at a time when debate was raging about the relative merits of central planning and the market mechanism. While agreeing with the great libertarian, Friedrich von Hayek, that the dispersion of information was at the heart of the failure of planning, Mr Hurwicz saw that it went deeper than that. He observed that there was a lack of incentive for people to share their information with the government truthfully. Moreover, although the market mechanism was far less afflicted than central planning by such incentive problems, it was by no means immune from them.
His big idea was “incentive compatibility”. The way to get as close as possible to the most efficient economic outcome is to design mechanisms in which everybody does best for themselves by sharing truthfully whatever private information they have that is asked for. Even this cannot guarantee an optimal outcome, Mr Hurwicz showed, because the existence of any private information precludes the economist's holy grail, known as Pareto efficiency, even if everyone's incentives are compatible. But it will get closer to it than if incentives are incompatible (ie, when some people can do better by not sharing information or lying). Pareto efficiency means that no one can be made better off without someone becoming worse off. Mechanism design has “incentive efficiency”: given compatible incentives, no one can do better without someone doing worse.
Mr Hurwicz's theories deployed some very elegant mathematics. Starting in the 1970s mechanism design was taken to a new level of sophistication and complexity thanks to the simultaneous boom in computing power and game theory. It was increasingly put to work on tasks ranging from how to auction a radio spectrum to devising a better way of paying defence contractors than cost-plus contracts (which create incentives for the contractor to be inefficient) or fixed-price contracts (which may result in overpaying).
Mr Myerson's biggest contribution to mechanism design is his work on the “revelation principle”, a mathematical method that simplifies calculation of the most efficient rules of the game for getting people to reveal their private information truthfully. Mr Maskin's breakthrough was “implementation theory”, which clarifies when mechanisms can be designed that only produce equilibria that are incentive efficient. He has also given his name to a statistical condition called “Maskin monotonicity”, which might not be the sort of thing to mention at parties.
The work of this year's winners is closely related to that of several earlier laureates, including William Vickrey and James Mirrlees, John Harsanyi and John Nash, the game theorist whose life story was made into an Oscar-winning film, “A Beautiful Mind”. Mr Maskin lives in a house in
1.Mechanism design : how to arrange our economic interactions so that the result is something we like .
2. Three Nobel Price winners, Leonid Hurwics , Eric Maskin , Roger Myerson, had a broad impact, both in academia, in subjects, and in the real world.
3.Mr. Hurwicz , the oldest, support “incentive compatibility”meaning the way to get as close as possible to the most efficient economic outcome is to degign mechanisms in which everybody does best for themselves by sharing thruthfully whatever private information they have that is asked for.
4.Mr. Myerson contributes his work on “revelation principle” which is a mathematical method that simplifies calculation of the most efficient rules of the game for getting people to reveal their private information thruthfully.
5. Mr Maskin's breakthrough was “implementation theory”, which clarifies when mechanisms can be designed that only produce equilibria that are incentive efficient. He has also given his name to a statistical condition called “Maskin monotonicity”, which might not be the sort of thing to mention at parties.
Refernece:
dismal a,
1 if a situation or a place is dismal, it is so bad that it makes you feel very unhappy and hopeless synonym depressing:
▪ The future looks pretty dismal right now.
▪ a dismal, grey afternoon
2 bad and unsuccessful:
▪ The team's record so far is pretty dismal.
▪ Her scheme was a dismal failure.
dreary a,
dull and making you feel sad or bored:
▪ the same dreary routine
▪ a dreary winter's day
underpin v,
1 to give strength or support to something and to help it succeed:
▪ the theories that underpin his teaching method
▪
2 technical to put a solid piece of metal under a wall or house in order to make it stronger
command economy
the economic system in a country where the government owns most of the industry and makes all of the economic decisions
academia un,
the activities and work done at universities and colleges, or the teachers and students involved in it:
▪ Business, government, and academia must work together.
▪ The workshop was attended by 25 participants from academia and industry.
institution cn,
] a large organization that has a particular kind of work or purpose
intellectual a, 1 relating to the ability to understand things and think intelligently ➔ mental
intellectual development/ability/activity etc
▪ a job that requires considerable intellectual effort
2 an intellectual person is well-educated and interested in serious ideas and subjects such as science, literature etc ➔ academic:
▪ Mark's very intellectual.
3 needing serious thought in order to be understood:
adequately adv,
enough in quantity or of a good enough quality for a particular purpose synonym sufficient;
merit cn,
an advantage or good feature of something
merit of
▪ The film has the merit of being short.
▪ The merit of the report is its realistic assessment of the changes required.
▪ The great merit of the project is its flexibility and low cost.
▪ Each of these approaches to teaching has its merits.
▪ Tonight's meeting will weigh up the relative merits of the two candidates.
libertarian cn,
someone who believes strongly that people should be free to do and think what they want to, without any government control
afflict v,
to affect someone or something in an unpleasant way, and make them suffer
afflict with/by
▪ a country afflicted by famine
immune a,
[not before noun] specially protected from something unpleasant
immune from
▪ The senior members of the group appeared to be immune from arrest.
outcome cn,
the final result of a meeting, discussion, war etc - used especially when no one knows what it will be until it actually happens synonym result
outcome of
▪ It was impossible to predict the outcome of the election.
▪ factors that influenced the outcome of the war
▪ The patient's general health and fitness can also affect the outcome of the disease.
▪ People who had heard the evidence at the trial were surprised at the outcome.
holy grail n,
1 [singular] something that people want very much, but which is very difficult or impossible to achieve
Holy Grail of
▪ Nuclear fusion is the Holy Grail of energy production.
2 the Holy Grail the cup believed to have been used by Christ before his death
pareto efficiency
worse off
1 if you are worse off, you have less money opposite better off:
▪ The rent increases will leave us worse off.
worse off than
▪ I don't think we're any worse off than a lot of other people.
2 in a worse situation opposite better off:
▪ People in rural areas are even worse off, as they have no regular bus service.
worse off than
▪ Other sports are much worse off than athletics.
deploy vt,
to use something for a particular purpose, especially ideas, arguments etc:
▪ a job in which a variety of professional skills will be deployed
—deployment noun [uncountable and countable]
elegant a,
1 beautiful, attractive, or graceful:
▪ a tall, elegant young woman
▪ You can dine in elegant surroundings.
2 an idea or a plan that is elegant is very intelligent yet simple:
▪ an elegant solution to the problem
—elegantly adverb
—elegance noun [uncountable]
▪ the style and elegance of the designs
sophistication a,
1 having a lot of experience of life, and good judgment about socially important things such as art, fashion etc:
▪ a sophisticated, witty American
▪ Clarissa's hair was swept up into a sophisticated style.
2 a sophisticated machine, system, method etc is very well designed and very advanced, and often works in a complicated way:
▪ sophisticated software
▪ a highly sophisticated weapons system
▪ In Roman times, a sophisticated technology brought running water into private homes and public bathhouses.
3 having a lot of knowledge and experience of difficult or complicated subjects and therefore able to understand them well:
▪ British voters have become much more sophisticated.
—sophistication /së;fûstÂ"keûÐÊn/ noun [uncountable]
▪ a
simultaneous a,
things that are simultaneous happen at exactly the same time:
▪ They grabbed each other's hands in simultaneous panic.
▪ Up to twenty users can have simultaneous access to the system.
simultaneous with
▪ The withdrawal of British troops should be simultaneous with that of US forces.
▪ The speeches will be broadcast live, with simultaneous translation (=immediate translation, as the person is speaking) into English.
—simultaneously adverb:
▪ The opera will be broadcast simultaneously on television and radio.
breakthrough cn,
an important new discovery in something you are studying, especially one made after trying for a long time
breakthrough in
▪ Scientists have made a major breakthrough in the treatment of cancer.
laureate cn
someone who has been given an important prize or honour, especially the Nobel Prize:
▪
make into
make somebody/something into something phrasal verb
1 to change something so that it has a different form or purpose synonym convert:
▪ We can make your room into a study.
2 to change someone's character, job, position in society etc:
▪ The movie made her into a star overnight.
suspect vt,
1 to think that something is probably true, especially something bad
suspect (that)
▪ I suspected that there was something wrong with the engine.
▪ She strongly suspected he was lying to her.
▪ She's not going to be very happy about this, I suspect.
2 to think that something bad has happened or is happening ➔ suspicious:
▪ The doctors suspected pneumonia.
suspect murder/foul play
▪ The position of the body led the police to suspect murder.
suspect something/nothing/anything
▪ He never suspected anything.
3 to think that someone is probably guilty of a crime ➔ suspicious:
▪ Who do you suspect?
suspect somebody of (doing) something
▪ He's suspected of murder.
▪ Pilcher was suspected of giving away government secrets to the enemy.
4 to think that something is not honest or true:
▪ I began to suspect his motives in inviting me.
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