1996–2012: Prominence

When an Engineer takes on the “Dismal Science:” Vernon L. Smith and the Nobel Prize for Economics, 2002

The tall man with the ponytail and the flashy silver rings gave a slight smile as he shook hands with the King of Sweden on December 10, 2002.[1] Even in the formal setting of the Nobel Prize ceremony, Dr. Vernon Smith’s idiosyncratic style shown through the tuxedoes and satin sashes. He was then presented the award "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms."[2]  Smith, a Kansas farm boy, raised during the Dust Bowl and trained in electronic engineering, had taken on the established ideas of economic theory and brought an engineer’s and scientist’s sensitivities to the field. His experiments created a new way for students to learn theory and for seasoned economists to test their assumptions. Experimental economics, and the model experiments devised by Smith, have become commonplace in economic and business courses internationally. More importantly, economists now have methods to test hypotheses in a laboratory setting before putting them into use.  These results owe their popularity to Smith’s “outside of the box” ideas. This innovative spirit found a home at George Mason University from 2001 to 2008, where Smith and seven colleagues brought their brand of experimental economics to Mason’s already well-known economic department.

Vernon Smith was born in Wichita, Kansas on January 1, 1927. His father was a mechanic, but had lost his job, and the family was forced to move to a farm to try to make ends meet.  Smith recalled that his childhood on the farm, even though it lacked such amenities as running water and electricity, was an adventure.[3] His early school experiences in a one-room schoolhouse, where all the students of six grades shared the same classroom and teacher, allowed him to listen in on his upperclassmen’s lessons and consequently skip second grade.  Back on the farm, Smith gained from his mechanic father a deep interest in how things work. This led to Smith’s application at age sixteen to work in Boeing Aircraft’s Wichita plant assembling and testing the machine guns on B-29s. After the war, and with some remedial classes at a local Quaker college to bring up his high school grade point average, Smith headed west to California Polytechnic Institute (Caltech) to earn his BS in electrical engineering. During his senior year, he took an economics class, found that he really enjoyed the intellectual challenge of the discipline, and headed first to Kansas University to get his Masters of Arts, and then to Harvard for his PhD in the field, which he finished in 1955. [4]

For the next twenty years, Smith taught at several top-flight universities including Purdue, Stanford, and Harvard. More importantly, he was building a network of fellow economic researchers and publishing studies. It was also during this time that he began to develop his theory of experimental economics. Since his first days teaching, he experimented with using his students as models of the market, and asking them to perform selling/buying experiments. These simple experiments started as a way to answer a particular research problem. In repeating these tasks, Smith gathered data, as any good scientist should. He found his results correlated very closely to the results one found in the market in general. Consequently, Smith broadened his questions, and created new exercises that he used with his students, as well as asking his colleagues to try with their students.[5] Prior to this, economists thought that markets would behave differently than small groups because of the dynamics of the interaction of large groups. Smith’s work showed that not only could small groups get the some of the same results as the market in general, but also that, given sufficient trials and applications, the results of the small-group experiments could be used to predict the behavior of markets. [6]

Thomas Carlyle dubbed economics “the dismal science” in an article printed in 1839.[7] Economics had been considered a science like astronomy—destined to gather data by way of field observation. Smith’s experimental economics showed that economics can be treated like a laboratory science, and starting in 1975, he found that laboratory at the University of Arizona. For twenty-six years, Smith and his colleagues grew the field of experimental economics into a powerful set of tools. In keeping with their unconventional practices, their work encompassed such non-economic methodologies as game theory and psychology to find the answers.

In June of 2001, George Mason University, through the efforts of Dean of the College of Arts and Sciences, Daniele Struppa, presented Smith with an offer he could not refuse: a chance to lead the Interdisciplinary Center for Economic Science (ICES)[8] at the Arlington Campus. This Center, created in part by a three million dollar grant from the Charles G. Koch Charitable Foundation, would be part of the Department of Economics, and would offer Smith and seven of his colleagues links to the Mercatus Institute and the opportunity to work in the heart of the Washington DC area, with its confluence of government, business, and high tech industry.[9] It was only a short year and a half later that the Nobel Committee chose Smith and Princeton economist Daniel Kahneman as the 2002 recipients of the prize for Economic Science. Kahneman also approached economics from outside the field, pioneering the research of the role of psychology in the market process.[10] The two professors divided the one million dollar prize: Smith donated his portion of the award to fund the International Foundation for Research in Experimental Economics (IFREE), which he founded in 1997 to further education in experimental economics.[11]  George Mason University’s Department of Economics now had an international reputation as a school which hosted two Nobel laureates and with major research facilities in the field of experimental economics.

In 2008, Smith left the University to join the faculty of Chapman University in Orange, California. There he has established a research facility for IFREE. [12] He is still an advisor to the Mercatus Institute, and research using experimental economics continues at George Mason University’s Department of Economics Interdisciplinary Center for Economic Science. [13]

Browse items pertaining to Vernon L. Smith.

[1] Video Clip of Dr. Vernon Smith, The Nobel Prize Website, Nobelprize.org. Accessed July 5, 2012, http://www.nobelprize.org/mediaplayer/index.php?id=628 .

[2]  "Vernon L. Smith – Autobiography," The Nobel Prize Website, Nobelprize.org. Accessed July 5, 2012, http://www.nobelprize.org/nobel_prizes/economics/laureates/2002/smith.html .

[3] "Vernon L. Smith – Autobiography," The Nobel Prize Website, Nobelprize.org. Accessed July 5, 2012, http://www.nobelprize.org/nobel_prizes/economics/laureates/2002/smith.html .

[4] "Vernon L. Smith – Autobiography," The Nobel Prize Website, Nobelprize.org. Accessed July 5, 2012, http://www.nobelprize.org/nobel_prizes/economics/laureates/2002/smith.html .

[5] "Vernon L. Smith - Autobiography". The Nobel Prize Website, Nobelprize.org. Accessed July 6, 2012, http://www.nobelprize.org/nobel_prizes/economics/laureates/2002/smith.html .

[6] Vernon L Smith, “Experimental Methods in Economics,” in The New Palgrave: A Dictionary of Economics, edited by John Eatwell, Murray Milgate, and Peter Newman (Hampshire, UK: Palgrave MacMillan, 1987) Accessed on July 6, 2012, http://www.chapman.edu/research-and-institutions/economic-science-institute/_files/AboutUs/Smith_ExpMethodsinEconomics.pdf#_blank  

[7] David M. Levy, How the Dismal Science got its Name (Ann Arbor: University of Michigan Press, 2001).

[8] Jennifer Jacobson and Dan Curry, “7 Economists leave University of Arizona for George Mason University,” The Chronicle of Higher Education, June 22, 2011. Accessed July 6, 2012, http://chronicle.com/article/7-Economists-Leave-U_of/2379/ .

[9] Elena Barbre,“Professor wins Nobel Memorial Prize in Economic Sciences,” The Mason Gazette, October 10, 2002. Accessed July 6, 2012,  http://gazette.gmu.edu/articles/3990 .

[10]  "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2002." Nobel Prize Website, Nobelprize.org. Accessed July 6, 2012, http://www.nobelprize.org/nobel_prizes/economics/laureates/2002/ .

[11] Daniel Walsch, “Nobel Winner Smith to Depart; Mason to Continue to Focus on Experimental Economics,” The Mason Gazette, July 26, 2007. Accessed July 6, 2012,  http://gazette.gmu.edu/articles/10550 .

[12] Daniel Walsch, “Nobel Winner Smith to Depart; Mason to Continue to Focus on Experimental Economics,” The Mason Gazette, July 26, 2007. Accessed July 6, 2012,  http://gazette.gmu.edu/articles/10550 .

[13] ICES Website at George Mason University.  Accessed July 9, 2012, http://ices.gmu.edu/about-2/our-center .