January 31, 2003
Nobel Prize winning economist visits, honored by colleagues
WEST LAFAYETTE, Ind. Vernon Smith, the Nobel Prize winning economist who launched his groundbreaking research at Purdue University's Krannert School, was honored with a reception and dinner on Jan. 22 and had a laboratory renamed in his honor.
Attending the dinner in the East and West Faculty Lounge in the Purdue Memorial Union were about 75 current and emeritus Krannert faculty, spouses and Smith's former Krannert colleagues who have gone on to other universities. Smith was welcomed by University President Martin C. Jischke.
"You have extended a great honor to Purdue through your talents, your accomplishments and your association with this university," Jischke said. "We are very proud of all that you have done and look forward to all that is yet to come."
Richard A. Cosier, Krannert School dean and Leeds Professor of Management, spoke of the Krannert School's pride in Smith's achievement and introduced Jisckhe, Provost Sally Frost Mason and George Horwich, professor of economics emeritus, who was Smith's colleague when he was at Purdue.
Horwich and Tim Cason, a professor of economics at the Krannert School, who was Smith's student and then worked with him when he spent part of the 2002 school year at Purdue, made comments on Smith's early and late career.
Smith spoke about starting his career at the Krannert School and the support and freedom he received for what was uncharted research territory in the '50s and '60s. He also spoke about his colleagues from the period.
A seventh-floor Krannert computer laboratory, formerly known as KRAN 701, is now the Vernon L. Smith Experimental Economics Laboratory. Cason presented Smith with a plaque commemorating the lab's naming.
Smith, known as the father of experimental economics, began his academic career at Purdue's Krannert School of Management in 1955. He 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.
Horwich 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 work, 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 to simulate increasingly complex markets.
Cason 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. Plott, now the Edward S. Harkness professor of economics and political science at the California Institute of Technology, was among the guests at Smith's Krannert event. "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, 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."
Smith shared the 2002 Nobel Prize in economic sciences with Daniel Kahneman.
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.
Writer: J. Michael Lillich, (765) 494-2077, firstname.lastname@example.org
Sources: Richard A. Cosier, (765) 494-4366, email@example.com
George Horwich, (765) 463-2063, firstname.lastname@example.org
Timothy Cason, (765) 494-1737, email@example.com
Purdue News Service: (765) 494-2096; firstname.lastname@example.org
A publication-quality photograph is available at ftp://ftp.purdue.edu/pub/uns/smith.visit.jpeg.