In 1969 Dutch economist Jan Tinbergen and Norwegian economist Ragnar Frisch shared the first Nobel Prize in economics “for having developed and applied dynamic models for the analysis of economic processes.” Tinbergen, who held a Ph.D. in physics, had become interested in economics while working on his dissertation, “Minimum Problems in Physics and Economics” (1929). He began to apply mathematical tools to economics, which at the time was a relatively verbal and nonmathematical discipline. In 1929 he joined a unit of the Dutch Central Bureau of Statistics to do research on business cycles. He stayed there until 1945, taking a leave of absence from 1936 to 1938 to work for the League of Nations in Geneva. Along with Frisch and others Tinbergen developed the field of econometrics, the use of statistical tools to test economic hypotheses. Tinbergen was one of the first economists to create multiequation models of economies. He produced a twenty-seven-equation econometric model of the Dutch economy, and his 1939 book, Business Cycles in the United States, 1919–1932, includes a forty-eight-equation model of the American economy that explains investment activity and models American business cycles. Another of Tinbergen’s major contributions was to show that a government with several economic targets—for both the unemployment rate and the inflation rate, for example—must have at least as many policy instruments, such as taxes and monetary policy. Selected Works   1939. Business Cycles in the United States, 1919–1932. Geneva: League of Nations. 1951. Business Cycles in the United Kingdom, 1870–1914. Amsterdam: North-Holland. 1952. On the Theory of Economic Policy. Amsterdam: North-Holland.   (0 COMMENTS)

George Stigler was the quintessential empirical economist. Paging through his classic microeconomics text The Theory of Price, one is struck by how many principles of economics are illustrated with real data rather than hypothetical examples. Stigler deserves a great deal of the credit for getting economists to look at data and evidence. Stigler’s two longest-held positions were at Columbia University (1947–1958) and at the University of Chicago (1958–1991). From the early 1950s to the late 1960s, most of his research was in the field of industrial organization. A typical Stigler article laid out a new proposition with clear reasoning and then presented simple but persuasive data to back up his argument. Take, for example, Stigler’s “A Note on Block Booking.” Block booking of movies was the offer of a fixed package of movies to an exhibitor; the exhibitor could not pick and choose among the movies in the package. The Supreme Court banned the practice on the grounds that the movie companies were compounding a monopoly by using the popularity of the winning movies to compel exhibitors to purchase the losers. Stigler disagreed and presented a simple alternative argument. If Gone with the Wind is worth $10,000 to the exhibitor and Getting Gertie’s Garter is worth nothing, wrote Stigler, the distributor could get the whole $10,000 by selling Gone with the Wind. Throwing in a worthless movie would not cause the exhibitor to pay any more than $10,000. Therefore, reasoned Stigler, the Supreme Court’s explanation seemed wrong. But why did block booking exist? Stigler’s explanation was that if exhibitors valued films differently from one another, the distributor could collect more by “bundling” the movies. Stigler gave an example in which exhibitor A is willing to pay $8,000 for movie X and $2,500 for Y, and B is willing to pay $7,000 for X and $3,000 for Y. If the distributor charges a single price for each movie, his profit-maximizing price is $7,000 for X and $2,500 for Y. The distributor will then collect $9,500 each from A and B, for a total of $19,000. But with block booking the seller can charge $10,000 (A and B each value the two movies combined at $10,000 or more) for the bundle and make $20,000. Stigler then went on to suggest some empirical tests of his argument and actually did one, showing that customers’ relative tastes for movies, as measured by box office receipts, did differ from city to city. Stigler’s thinking on government regulation was even more influential than his work on industrial organization. Because of Stigler’s research, economists view regulation much more skeptically than their counterparts of the 1950s did. His first article on the topic, coauthored with longtime research assistant Claire Friedland and published in 1962, was titled “What Can Regulators Regulate? The Case of Electricity.” They found that regulation of electricity prices had only a tiny effect on those prices. In the late 1970s, their finding was challenged by Gregg Jarrell, himself a Stigler student. But more important than this finding was their demonstration that one could examine the actual effects of regulation, and not just theorize about them. Stigler devoted his entire 1964 presidential address to the American Economic Association to making this point. He argued that economists should study the effects of regulation and not just assume them. He twitted the great economists of the past who had given lengthy cases for and critiques of government regulation without ever trying to study its effects. In Stigler’s view things were not much better in the twentieth century. “The economic role of the state,” he said, “has managed to hold the attention of scholars for over two centuries without arousing their curiosity.” Stigler added, “Economists have refused either to leave the problem alone or to work on it.” Many economists got the point. Since the mid-1960s, economists have used their sometimes awesome empirical tools to study the effects of regulation. Whole journals have been devoted to the topic. One is the Journal of Law and Economics, started at the University of Chicago in 1958. Another, the Bell Journal of Economics and Management Science, later the RAND Journal, started in 1970. As a general rule economists have found that government regulation of industries harms consumers and often gives monopoly power to producers. Some of these findings were behind economists’ widespread support for the deregulation of transportation, natural gas, and banking, which gained momentum in the Carter administration and continued until halfway through the Reagan administration. Stigler was the single most important academic contributor to this movement. Stigler was not content to examine the effects of regulation. He wanted to understand its causes. Did governments regulate industries, as many had believed, to reduce the harmful effects of monopoly? Stigler did not think so. In a seminal 1971 article, “The Theory of Economic Regulation,” he presented and gave evidence for his “capture theory.” Stigler argued that governments do not end up creating monopoly in industries by accident. Rather, he wrote, they regulate at the behest of producers who “capture” the regulatory agency and use regulation to prevent competition. Probably more important than the evidence itself was the fact that Stigler made this viewpoint respectable in the economics profession. It has now become the mainstream view. For his earlier work on industrial organization and his work on the effects and causes of regulation, Stigler was awarded the 1982 Nobel Prize for economics. Stigler was an uncommonly clear and humorous writer. Economics from him never seemed like “the dismal science.” With his sometimes biting wit, he could put a profound insight into one sentence. In discussing the benefits of capitalism, for example, Stigler wrote: “Professors are much more beholden to Henry Ford than to the foundation that bears his name and spreads his assets.” Not to be missed in a listing of Stigler’s contributions is his research on information. His 1962 article “Information in the Labor Market” was a watershed for further studies on unemployment. According to Stigler, job seekers needed short periods of unemployment in order to search for a higher wage. Even in industries with a “going wage,” variances in wage rates still exist. Therefore, the unemployed are as much information seekers as job seekers. His theory is now called the theory of search unemployment. Information is also a problem for firms when they collude, implicitly or explicitly, to set prices. They do not know whether their competitors are secretly undercutting them. This uncertainty can be reduced, wrote Stigler, by spending resources to gather information. Stigler applied this insight to show that collusion is less likely to succeed if there are more firms in a market. Also highly regarded as an economic historian, Stigler wrote numerous articles on the history of ideas in the early years of his career. His Ph.D. dissertation on the history of neoclassical production and distribution theories was highly acclaimed as a critical link in the chain of economic thought. Some of his articles in the area are collected in Five Lectures on Economic Problems (1950) and Essays in the History of Economics (1965). The entry on monopoly in this encyclopedia is one of Stigler’s last published works. Straight Talk from Stigler Sears, Roebuck and Company and Montgomery Ward made a good deal of money in the process of improving our rural marketing structure, but I am convinced that they did more for the poor farmers of America than the sum total of the federal agricultural support programs of the last five decades. Am I to admire a man who injures me in an awkward and mistaken attempt to protect me, and to despise a man who to earn a good income performs for me some great and lasting service? Smith’s intellectual heirs did little to strengthen his case for laissez-faire, except by that most irresistible of all the weapons of scholarship, infinite repetition. Advertising itself is a completely neutral instrument and lends itself to the dissemination of highly contradictory desires. While the automobile industry tells us not to drink while driving, the bourbon industry tells us not to drive while drinking…. Our colleges use every form of advertising, and indeed the typical university catalog would never stop Diogenes in his search for an honest man. When a good comedian and a production of Hamlet are on rival channels, I wish I could be confident that less than half the professors were laughing. Selected Works   1950. Five Lectures on Economic Problems. New York: Macmillan. 1965. Essays in the History of Economics. Chicago: University of Chicago Press. 1966. The Theory of Price. 3d ed. New York: Macmillan. 1969. The Organization of Industry. Homewood, Ill: Irwin. 1975. The Citizen and the State: Essays on Regulation. Chicago: University of Chicago Press. 1986. The Essence of Stigler. Edited by Kurt R. Leube and Thomas Gale Moore. Stanford: Hoover Institution Press. 1988. Memoirs of an Unregulated Economist. New York: Basic Books.   (0 COMMENTS)

Max Weber was one of the founding fathers of sociology. In his most famous book, The Protestant Ethic and the Spirit of Capitalism, he claimed that the seeds of capitalism were in the Protestant work ethic. But Weber was also an economist who saw the distinctive feature of advanced capitalism, as in his pre–World War I Germany, in the extensive division of labor and a hierarchical administration that resembled the political bureaucracy. The two features together had created a new middle class whose position depended on neither physical capital nor labor, but on their human capital. Even in advanced capitalism, though, Weber considered the major source of progress to be risk taking by businessmen and entrepreneurs (see entrepreneurship). Weber accepted Ludwig von Mises’s criticism of socialist economic planning and added his own argument. He believed that under socialism workers would still work in a hierarchy, but that hierarchy would be fused with government. Instead of dictatorship of the worker, he foresaw dictatorship of the official. Like David Hume before him, Weber believed in the possibility of value-free social science. By that he meant that one could not draw conclusions about the way the world should be simply from studying the way the world is. Weber did not rule out normative analysis as being feasible or worthwhile—he believed in rational discussion of values—he simply wanted economists to distinguish between facts and values. Born in Germany, Weber studied law and went on to do graduate work with a dissertation on medieval trading companies in Italy and Spain. He was appointed to a chair in political economy at Freiburg in 1894, and to another chair in political economy at Heidelberg in 1896. He suffered a nervous breakdown in 1898 and did not continue his scholarly work until 1904. From 1904 on he was a private scholar, mostly in Heidelberg. Selected Works   1904. The Protestant Ethic and the Spirit of Capitalism. Reprint. London: Allen and Unwin, 1930. 1918. “Socialism.” Reprinted in Weber Selections in Translation. Edited by W. G. Runciman. Cambridge: Cambridge University Press, 1978.   (0 COMMENTS)

    Michael Spence, along with george akerlof and joseph stiglitz, received the 2001 Nobel Prize “for their analyses of markets with asymmetric information.” Spence’s particular focus was on information about workers’ productivity. Assuming that a worker knows more about his productivity than a potential employer knows, Spence showed how it can make sense for highly productive workers to “signal” their productivity by getting formal education. This insight may sound basic, but until Spence’s work, economists had not had the insight—or at least had not thought through it rigorously. A large part of human behavior is signaling, whether it be in the clothes and watches we wear, the cars we drive, the beer we drink, or the degrees we earn. Spence earned his B.A. in philosophy from Princeton University and his Ph.D. from Harvard in 1972. He was a professor at Stanford from 1973 to 1975, a professor at Harvard from 1975 to 1984, dean of arts and sciences at Harvard from 1984 to 1990, and dean of Stanford Business School from 1990 to 1999. Selected Works   1973. “Job Market Signalling.” Quarterly Journal of Economics 87: 355–374. 1974. Market Signalling. Cambridge: Harvard University Press.   (0 COMMENTS)

Economics historian Mark Blaug called Jacob Viner “the greatest historian of economic thought that ever lived.” One of Viner’s greatest accomplishments is his book Studies in the Theory of International Trade. This work is not just a history of the theory of international trade but also a guidebook that tells where the early economists who studied trade were wrong and where they were right. In it Viner decisively refuted fallacies of mercantilism. Viner also wrote a famous 145-page introduction to an edition of John Rae’s Life of Adam Smith. Viner was an international trade theorist in his own right. His book The Customs Union Issue introduced the distinction between the trade-creating and the trade-diverting effects of customs unions (see international trade agreements). His earliest book, Dumping, is a comprehensive analysis of the subject. Viner is known for his view that the long run matters. Some of his best articles are reprinted in a 1958 book, The Long View and the Short. “No matter how refined and how elaborate the analysis,” Viner wrote, “if it rests solely on the short view it will still be … a structure built on shifting sands.” One of the articles included in Viner’s book, “Cost Curves and Supply Curves,” lays out the short-run and long-run cost curves that still show up in microeconomics texts. Viner, who grew up in Montreal, was an undergraduate student at McGill University, where he studied economics under the famous Canadian humorist Stephen Leacock. He earned his Ph.D. at Harvard, writing his dissertation under international trade economist Frank W. Taussig. He was a professor at the University of Chicago from 1916 to 1917 and from 1919 until 1946. He moved to Princeton in 1946, where he taught until retiring in 1960. For many of his years at Chicago, Viner, along with Frank Knight, edited the Journal of Political Economy. Viner is not considered part of the Chicago school as he was much less sympathetic to free markets than his Chicago school colleagues. Selected Works   1917. “Some Problems of Logical Method in Political Economy.” Journal of Political Economy 25, no. 3: 236–260. Available online at: http://www.econlib.org/library/Essays/JPE/vnPLM1.html 1923. Dumping: A Problem in International Trade. Chicago: University of Chicago Press. 1937. Studies in the Theory of International Trade. New York: Harper. Available online at: http://www.econlib.org/library/NPDBooks/Viner/vnSTT.html 1950. The Customs Union Issue. New York: Carnegie Endowment for International Peace. 1958. The Long View and the Short: Studies in Economic Theory and Policy. Glencoe, Ill.: Free Press. 1965. “Guide to John Rae’s Life of Adam Smith.” Introduction to Life of Adam Smith. New York: Augustus M. Kelley. First edition (without Viner introduction) available online at: http://www.econlib.org/library/YPDBooks/Rae/raeLS.html   (0 COMMENTS)

Thorstein Veblen was odd man out in late-nineteenth- and early-twentieth-century American economics. His position on the fringe started early. Veblen grew up in a Norwegian immigrant farming community in Wisconsin. He spoke only Norwegian at home and did not learn English until his teens. He studied economics under John Bates Clark, a leading neoclassical economist, but rejected his ideas. He did his graduate work at Johns Hopkins University under Charles Sanders Peirce, the founder of the pragmatist school in philosophy, and at Yale University under laissez-faire proponent William Graham Sumner. He repudiated their views as well. Veblen is best known for his book The Theory of the Leisure Class, which introduced the term “conspicuous consumption” (referring to consumption undertaken to make a statement to others about one’s class or accomplishments). This term, more than any other, is what Veblen is known for. Veblen did not reject economists’ answers to the questions they posed; he simply thought their questions were too narrow. Veblen wanted economists to try to understand the social and cultural causes and effects of economic changes. What social and cultural causes were responsible for the shift from hunting and fishing to farming, for example, and what were the social and cultural effects of this shift? Veblen was singularly unsuccessful at getting economists to focus on such questions. His failure may explain the sarcastic tone his writing took toward his fellow economists. Veblen had to struggle to stay in academia. In the late nineteenth century many universities were affiliated in a substantial way with churches. Veblen’s skepticism about religion and his rough manners and unkempt appearance made him unattractive to such institutions. As a result, from 1884 to 1891 Veblen lived on the largesse of his family and his wife’s family. His big break came in 1892 when the newly formed University of Chicago hired his mentor, J. Laurence Laughlin, who brought Veblen with him as a teaching assistant. Veblen later became the managing editor of the Journal of Political Economy, which was and is edited at the University of Chicago. Veblen spent fourteen years at Chicago and the next three at Stanford. He died in obscurity in 1929. Selected Works   1899. The Theory of the Leisure Class. New York: Macmillan. 1904. The Theory of Business Enterprise. New York: Charles Scribner’s Sons.   (0 COMMENTS)

  Turgot was the French Adam Smith. His Reflections on the Production and Distribution of Wealth, which predated Smith’s The Wealth of Nations by ten years, argues against government intervention in the economic sector. Turgot recognized the function of the division of labor, investigated how prices were determined, and analyzed the origins of economic growth. Like François Quesnay, Turgot was a leading Physiocrat who attempted to reform the most stifling of his government’s economic policies. Probably Turgot’s most important contribution to economics was to point out that capital is necessary for economic growth, and that the only way to accumulate capital is for people not to consume all they produce. Most capital, he believed, was accumulated by landowners who saved the surplus product after paying the cost of materials and of labor. Turgot agreed with Quesnay’s notion of the circular flow of savings and investment, where savings in one period become investment in the next. In Reflections, Turgot analyzed the interdependence of different rates of return and interest among different investments, noting that interest is determined by the supply and demand for capital. Although the rates of return on each investment may vary, he argued, in a competitive free-market economy with capital mobility, rates of return on all investments will tend toward equality: As soon as the profits resulting from an employment of money, whatever it may be, increase or diminish, capitals turn in that direction or withdraw from other employments, or withdraw and turn towards other employments, and this necessarily alters in each of these employments, the relation between the capital and the annual product. (p. 87) Turgot distinguished between a commodity’s market price—determined by supply and demand—and its “natural” price, the price it would tend to if industries were competitive and resources could be reallocated. An increase in demand, for example, could increase a good’s price, but if resources were free to enter that industry, the new supply would bring the price back down to its “natural” level. In this reasoning Turgot anticipated Adam Smith. Turgot also predated Smith in recognizing the importance of the division of labor for an economy’s prosperity, and he was the first economist to recognize the law of diminishing marginal returns in agriculture. Predating the Marginalists by a century, he argued that “each increase [in an input] would be less and less productive.” Turgot applied many of his laissez-faire economic beliefs during his thirteen-year appointment (1761–1774) as chief administrator for the Limoges district under Louis XV and as minister of finance, trade, and public works from 1774 to 1776 under newly anointed Louis XVI. In the latter job one of his first measures was to abolish all restrictions on sales of grain within France, a measure the Physiocrats had long advocated. He ended the government’s policy of conscripting labor to build and maintain roads, and replaced it with a more efficient tax in money. Milton Friedman has called the replacing of taxes in kind with taxes in money “one of the greatest advances in human freedom.” Turgot abolished the guild system left over from medieval times. The guild system, like occupational licensing today, prevented workers from entering certain occupations without permission. Turgot also argued against the regulation of interest rates. Louis XVI did not welcome Turgot’s reforms and dismissed him in 1776. Some historians claim that had Turgot’s reforms been kept, the French revolution might not have erupted thirteen years later.     Turgot himself never lived to witness the upheaval his own reforms might have helped thwart. He died in Paris of gout at age fifty-four. Selected Works   1766. Reflections on the Production and Distribution of Wealth. Reprinted in P. D. Groenewegen, ed. and trans., The Economics of A. R. J. Turgot. The Hague: Martinus Nijhoff, 1977. Also available online at: http://www.econlib.org/library/Essays/trgRfl1.html   (0 COMMENTS)

  In 2002, Vernon Smith and daniel kahneman were awarded the Nobel Prize in economics. Smith received his prize “for having established laboratory experiments as a tool in empirical analysis, especially in the study of alternative market mechanisms.” The dominant view among economists as recently as the 1970s was that economists, unlike chemists or biologists, would never be able to perform controlled experiments. Smith’s work on experimental economics, which began in the mid-1950s, challenged that view. Today experimental economics is widespread and has been used to study electricity pricing, to allocate airplane landing slots, and to design auctions of operating licenses for pieces of the electromagnetic spectrum (see experimental economics). In his first semester of teaching economics at Purdue, in the fall of 1955, Smith found it a challenge to present basic microeconomic theory to undergraduates. So the next semester, to make the theory more accessible, he ran a market experiment on the first day of class using rules that are laid out in the Experimental Economics entry. Smith, himself a skeptic about how quickly such an artificial market would reach equilibrium, was stunned by the results. More than anything he had learned in graduate school, these results convinced him that free markets work. From 1956 to 1960, he experimented further with various changes in the rules, and in 1962 he published his article on experimental economics. In a market experiment, the experimenter must somehow control for the subjects’ preferences. Of course, the subjects want to make more money—this preference is well-nigh universal. But how much utility does each person get from an increase in his or her wealth? This will vary from person to person. In 1976, Smith solved this problem with the “induced-value method,” which has become a standard tool of economics. Smith also used experimental economics to test for differences and similarities between various auction systems. The most familiar auction system is the English system, in which buyers bid sequentially and in increasing order until no higher bid is submitted. Another auction system beloved by economists (see william vickrey) is the second-price sealed-bid system, in which the buyer pays only the second-highest bid. Smith found that English and sealed-bid second-price auctions produced similar experimental outcomes. Interestingly, though, Dutch auctions (in which a high initial bid by the seller is gradually lowered in fixed steps at fixed times until a buyer yells “buy”) yielded lower prices than sealed-bid second-price auctions, which is contrary to the basic economic theory of auctions. Experimental economics seems to have led Smith to delve into a more complex reality of human motivation than is outlined in standard economics texts and classes. Always the empiricist, he does not assume that markets work, but is open to seeing them work or fail. In his Nobel lecture, Smith laid out a number of examples of private enforcement of rules that seem to have worked well—in cattle ranching, mining, lobster trapping in Maine, and Eskimo polar bear hunting. Smith pointed out that these examples contradict the myth that a central function of government is to “solve” the free-rider problem in the private provision of public goods. In fact, he noted, the cattle-ranching example showed the reverse: private entities solved the public-good problem, and when governments came along and provided protection paid for by the taxpayers, cattle ranchers were quite happy to have the general taxpayer bear the cost of protecting their cattle. Smith also noted work by Robert Ellickson, who found that cattle ranchers in Shasta County have developed informal rules for handling the problem of stray cattle.1ronald coase had argued that with well-defined property rights and low transactions costs, people would handle such problems in an efficient way. Although the Shasta County ranchers’ methods were not ones most economists would have thought of, in Smith’s words, Ellickson “out-Coased Coase.”2 That is, Ellickson showed that private negotiations and sanctions worked to handle knotty problems without government intervention. Smith earned his B.S. degree in electrical engineering from Cal Tech in 1949, his M.A. in economics at the University of Kansas in 1952, and his Ph.D. in economics from Harvard in 1955. He was a professor at Purdue University from 1955 to 1967, at Brown University from 1967 to 1968, at the University of Massachusetts from 1968 to 1975, and at the University of Arizona from 1975 to 2001. Since 2001 he has been a professor of economics and law at George Mason University. Selected Works   1962. “An Experimental Study of Competitive Market Behavior.” Journal of Political Economy 70: 111–137. 1965. “Experimental Auction Markets and the Walrasian Hypothesis.” Journal of Political Economy 70: 387–393. 1976. “Experimental Economics: Induced Value Theory.” American Economic Review 66: 274–279. 1991. Papers in Experimental Economics. Cambridge: Cambridge University Press. 2000. Bargaining and Market Behavior: Essays in Experimental Economics. Cambridge: Cambridge University Press.   Footnotes 1. Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge: Harvard University Press, 1991).   2. See http://nobelprize.org/economics/laureates/2002/smith-lecture.pdf.   (0 COMMENTS)

William Vickrey and james mirrlees shared the 1996 Nobel Prize in economics “for their fundamental contributions to the economic theory of incentives under asymmetric information.” One of the most important economic principles is that incentives affect people’s behavior. It is also true that government officials virtually never know as much about the people their policies affect as the people affected know about themselves. In economics, the fancy term for this fact is “asymmetric information.” How, then, does a government that is conscious of its ignorance set up incentives so that people will act in ways that are useful, not only to themselves but also to others? William Vickrey spent his career studying this issue, in areas ranging from income taxation to auction design to subway fares and highway tolls. In the process, he made some striking discoveries. Consider income taxation. Vickrey, himself a strong believer in using the tax system to take from the rich and give to the poor, saw that such forced transfers would reduce people’s incentive to work. His 1964 textbook, Microstatics, was one of the first economics textbooks to take this issue seriously. He wrote: There still remains the fact that money income from gainful work is subject to an income tax while imputed income from leisure is not taxed…. Accordingly, an income tax tends to make individuals choose leisure in preference to gainful work to an uneconomical extent. (p. 261) For that reason, Vickrey favored fairly low marginal tax rates on high-income people. And what should the marginal tax rate on the highest-skilled person be? In 1987, Vickrey, drawing on work by Mirrlees, wrote: A somewhat disturbing result is that if the distribution of skills has a known upper limit, the marginal tax rate should fall to zero at the top of the scale where there is only one taxpayer left, the argument being that there is no point to deterring him from earning the last dollar of income, since if he does not earn it there will be no revenue from it. (p. 1024) Supply-side economist Arthur Laffer could not have said it better. Vickrey also did early work in the theory of sealed-bid auctions. He showed that a second-price auction, whereby the highest bidder gets the item but pays only the price bid by the second-highest bidder, causes the good to be allocated to the person who values it most. The reasoning is as follows. The highest bidder knows that he can bid the true value of the item to him because he will not have to pay that value if he wins. This gives him an incentive to bid what the item is truly worth. Every bidder has this same incentive. So every person ends up bidding the true value of the item to him, and the item thus goes to the person who values it most. Under the standard first-price auction, by contrast, the person who values the good most might underbid and actually bid less than someone who values it less. Second-price auctions are now called Vickrey auctions. Tolls on roads and bridges were common in nineteenth-century America and were discussed in economics textbooks of the time. But that insight was lost to the modern era until Vickrey brought it back, showing that tolls that were higher during times of peak use would lessen congestion. Always an empirical as well as a theoretical economist, Vickrey gave the following reasoning about the tolls (in 1963 dollars) he advocated for Washington, D.C.: It turned out that for each additional car making a daily trip that contributes to the dominant flow, during the peak hour, an additional investment of $23,000 was projected. In other words, a man who bought a $3,000 car for the purpose of driving downtown to work every day would be asking the community, in effect, to match his $3,000 investment with $23,000 from general highway funds. (Vickrey 1963, p. 456) Vickrey’s solution—higher tolls at peak times—would have obviated the need for many new highway-widening projects because many drivers, faced with tolls that reflected the true cost of such projects, would instead use carpools or buses. Those left would enjoy relatively uncongested roads but would pay for them. Vickrey even suggested a futuristic technology that has become standard: “equipping all cars with an electronic identifier.” As early as 1948, Vickrey suggested pricing solutions for hotels and airlines that look a lot like the “yield management” that modern airlines practice. Vickrey was born in Victoria, British Columbia, but moved to the United States at an early age. He earned his B.S. in mathematics from Yale in 1935, his M.A. in economics from Columbia University in 1937, and his Ph.D. in economics from Columbia in 1947. He spent his career as a professor at Columbia and died three days after winning the Nobel Prize. Selected Works   1939. “Averaging of Income for Income Tax Purposes.” Journal of Political Economy 47: 379–397. 1947. Agenda for Progressive Taxation. New York: Ronald Press. 1948. “Some Objections to Marginal Cost Pricing.” Journal of Political Economy 56: 218–238. 1955. “A Proposal for Revising New York’s Subway Fare Structure.” Journal of the Operations Research Society of America 3: 38–68. 1960. “Utility, Strategy and Social Decision Rules.” Quarterly Journal of Economics 74: 507–535. 1961. “Counterspeculation, Auctions, and Competitive Sealed Tenders.” Journal of Finance 16: 8–37. 1962. “Auctions and Bidding Games.” In Recent Advances in Game Theory. Princeton University Conference, pp. 15–27. 1963. “Pricing in Urban and Suburban Transport.” American Economic Review 52, no. 2: 452–465. 1964. Microstatics. New York: Harcourt, Brace, and World. 1987. “Progressive and Regressive Taxation.” In John Eatwell, Murray Milgate, and Peter Newman, eds., The New Palgrave: A Dictionary of Economics. London: Macmillan. Vol. 3, pp. 1021–1025. 1992. “Today’s Task for Economists.” American Economic Review 82: 1–10. 1993. “My Innovative Failures in Economics.” Atlantic Economic Journal 21: pp. 1–9.   (0 COMMENTS)

Separately but almost simultaneously with William Stanley Jevons and Carl Menger, French economist Leon Walras developed the idea of marginal utility and is thus considered one of the founders of the “marginal revolution.” But Walras’s biggest contribution was in what is now called general equilibrium theory. Before Walras, economists had made little attempt to show how a whole economy with many goods fits together and reaches an equilibrium. Walras’s goal was to do this. He did not succeed, but he took some major first steps. First, he built a system of simultaneous equations to describe his hypothetical economy, a tremendous task, and then showed that because the number of equations equaled the number of unknowns, the system could be solved to give the equilibrium prices and quantities of commodities. The demonstration that price and quantity were uniquely determined for each commodity is considered one of Walras’s greatest contributions to economic science. But Walras was aware that the mere fact that such a system of equations could be solved mathematically for an equilibrium did not mean that in the real world it would ever reach that equilibrium. So Walras’s second major step was to simulate an artificial market process that would get the system to equilibrium, a process he called “tâtonnement” (French for “groping”). Tâtonnement was a trial-and-error process in which a price was called out and people in the market said how much they were willing to demand or supply at that price. If there was an excess of supply over demand, then the price would be lowered so that less would be supplied and more would be demanded. Thus would the prices “grope” toward equilibrium. To keep constant the equilibrium toward which prices were groping, Walras assumed—highly unrealistically—that no actual exchanges were made until equilibrium was reached. If, for example, people who wanted to buy ketchup wanted more than sellers were willing to sell, then they would buy none at all. This assumption limits the usefulness of Walras’s simulated process as an aid to understanding how real markets work. Walras’s sole academic job was as an economics professor at the University of Lausanne in Switzerland. This location was not ideal: because the dominant thinking in economics at the time was in Britain, it was difficult for Walras to affect the rest of the profession. Also, because his students were more interested in becoming lawyers than in becoming economists, Walras did not have disciples. Although his impact on economics was limited during his lifetime, it has been much greater since the 1930s. Historian of economic thought Mark Blaug wrote that Walras “may now be the most widely-read nineteenth century economist after Ricardo and Marx.”1 Walras’s father, the French economist Auguste Walras, encouraged his son to pursue economics with a particular emphasis on mathematics. After sampling several careers—he was for a while a student at the school of mines, a journalist, a lecturer, a railway clerk, a bank director, and a published romance novelist—Walras eventually returned to the study and teaching of economics. In that scientific discipline Walras claimed to have found “pleasures and joys like those that religion provides to the faithful.” Walras retired in 1902 at age fifty-eight. Selected Works   1954. Elements of Pure Economics. Translated and annotated by William Jaffe. London: Allen and Unwin.   Footnotes 1. Mark Blaug, Great Economists before Keynes (Atlantic Highlands, N.J.: Humanities Press International, 1986), p. 262.   (0 COMMENTS)