On New Years Day, the Nobel Prize-winning economist Vernon Smith turned 90. To mark the occasion, Samuel Gregg wrote an essay for the Stream about Smith and the significance of his work.
Gregg explains Smith’s most famous contribution to economics:
Smith is best known for pioneering “experimental economics.” This involves behavioral experiments in which people are placed in a particular micro-economy in which they can engage in trade, but without knowing the conditions driving supply and demand. Those running the experiments can thus test the validity of particular economic theories, thereby gaining greater knowledge of how economic exchanges actually work.
Over time, experimental economics has established the importance of what Smith and others call “economic institutions,” the formal and informal rules which shape economic life in a given society. Economic institutions, it turns out, really do shape economic outcomes. From laws and regulations to customs and property arrangements, any set of rules will affect (1) the information people have and (2) the incentives that drive them.
Smith’s experiments have also provided considerable evidence that, as he wrote in a 1994 paper, “economic agents can achieve efficient outcomes which are not part of their intention.” So Adam Smith was right. He asserted that in The Wealth of Nations more than 240 years ago.
Adam Smith’s ideas weren’t something Vernon Smith started out eager to prove, since he was, in his words, “raised by a socialist mother, and further handicapped (in this regard) by a Harvard education.” Given, however, what his experiments revealed about what he called “the error in my thinking,” Smith changed his mind. Truth was what mattered — not ego.
Another reason to celebrate Smith’s work: His understanding of how faith and reason work together.
[I]n a lecture entitled “Faith and the Compatibility of Science and Reason” delivered at the Acton Institute’s 2016 summer university, Smith began by describing how he had been raised in a Unitarian household before, during, and after the Great Depression. Eventually and very gradually, Smith stated, he “was ‘re-born’ and baptized a Christian.”
Smith then argued for the essential harmony between religious faith, science and reason. Drawing on the discoveries of twentieth-century physicists such as Albert Einstein and his colleague the Catholic priest Georges Lemaître (father of the Big Bang theory), Smith noted that the basic claims of materialist philosophy have been disproved by reason and scientific inquiry. He also highlighted similarities between (1) the insights attained via modern physics and (2) the language and logic deployed in the Hebrew and Christian Scriptures to describe God as First Cause and the origin of Creation.
Certainly, Smith said, Einstein was right to claim that the theories designed by humans are important tools for comprehending reality. Yet before there is theory, Smith added, there is thought and reason: a logical sequence which, he said, finds its parallel in the Gospel of John’s opening verse, “In the beginning there was the Word, and the Word was with God, and the Word was God” (Jn. 1.1).
Put another way: human reason cannot emerge from unreason. Ultimately it comes from and reflects the light of the Logos himself.We can be confident, Smith concluded, that life is no accident. “We Christians,” he said, “believe it proceeds from a loving act of our God and our Savior, a faith that is compatible with the engineering discoveries we call science.”
Read “Redeeming Economics: The Achievement of Vernon Smith” at the Stream. See also last year’s R&L interview between Victor Claar and Vernon Smith.
