From Robert C. Merton’s and Myron S. Scholes’ methods to determining the value of derivatives 10 years ago, through Amartya Sen’s welfare economics in 1998 and Daniel Kahneman’s integrated insights from psychological research into economic science in 2002, it seems the Nobel Prize for Economics has gone back six years to 2001, when three economists George A. Akerlof, A. Michael Spence and Joseph E. Stiglitz got the award “for their analyses of markets with asymmetric information”.

Technically called ‘The Sveriges Riksbank Prize in Economic Sciences’, the troika that has won this year’s prize — Leonid Hurwicz of the University of Minnesota (and at 90 the oldest to get a Nobel); Eric S. Maskin, 57, of Institute for Advanced Study, Princeton; and Roger B. Myerson, 56, of University of Chicago — has got it for “having laid the foundations of mechanism design theory”. In English, for marrying asymmetric information with institutional design.

“Adam Smith’s classical metaphor of the invisible hand refers to how the market, under ideal conditions, ensures an efficient allocation of scarce resources,” the Nobel Committee stated, while awarding the world’s highest award an economist can aspire for. “But in practice conditions are usually not ideal; for example, competition is not completely free, consumers are not perfectly informed and privately desirable production and consumption may generate social costs and benefits.”

The question the three economists have answered is: when the invisible hand is not working and transactions take place as bargains between individuals and interest groups and “under a host of other institutional arrangements”, how well do such allocation mechanisms perform? Is there an “optimal mechanism” to serve goals like social welfare? Or, how important and relevant is government regulation and how is it best designed?

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