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University of Minnesota Regents Professor Emeritus of Economics Leonid Hurwicz won the Nobel Prize in economics Monday, Oct. 15, for revolutionizing the way people consider how to bring about desired economic change.

University professor wins Nobel Prize

Leonid Hurwicz's work puts the human factor into economic theory

By Deane Morrison

From M, winter 2008

When he got the call at 6 a.m., Leonid Hurwicz thought it was a joke. But the caller couldn't have been more serious: Hurwicz, a University Regents Professor Emeritus of Economics, had just won the Nobel Prize in Economics. Along with fellow Americans Eric Maskin of Princeton University and Roger Myerson of the University of Chicago, Hurwicz reaped the honor for theories that help set rules for transactions ranging from auctions to elections. At 90, Hurwicz is the oldest Nobel winner in history, according to the Royal Swedish Academy of Sciences. Asked if he suspected a Nobel Prize was in the offing, he replied that he'd been on the short list for 30 years. University President Robert Bruininks was thrilled when he heard the news. "Professor Hurwicz has influenced in a very significant and transformative way the study of economics and the application of economics to important issues on an international scale," he says.

"Leo was and is a Renaissance man," Chari recalls. "The very first time I met him, he engaged me in a long discussion about the intricacies of the dialects of Tamil, my native language, which is one of the languages of South India."

A quiet revolutionary

A colleague describes Hurwicz as somebody who revolutionized the way people think about how to bring about desired economic change, sweeping away old ways of thinking that relied on central planning without regard to incentives for individuals.

Harnessing human drives

With mechanism design, Leonid Hurwicz showed mathematically that the rules for economic interactions ("mechanisms") must be set ("designed") so as to take advantage of natural human motivations in order to achieve a successful outcome.

For example, if I want to sell you a car, we could haggle all day. Or, we could design our interaction this way: We agree to simultaneously announce how much we think the car is worth and to set the price at the halfway point. As long as you value the car more than I do--as a buyer should--we'll both profit.

In a real-world application of mechanism design principles, University economists found that a free market could never lead to a workable scheme to reduce air pollution. That's because by themselves, private companies have no way to determine what their share of cost and effort should be. But when an outside agency--the federal government--stepped in and set percentage reduction standards, companies were able to reduce their emissions accordingly, or pay other industries to take on their share.

Mechanism design explains why planned economies such as the former U.S.S.R's. tend to fail: They give workers too little incentive to work hard. But free market systems may also fall to poor incentive design. For example, an insurer may go bust if the only people who buy policies are those who anticipate trouble.

"Before Leo, people said, 'Let's just ask people to achieve outcomes, such as how much steel to produce or how many shoes to make,'" says V.V. Chari, the University's Paul Frenzel professor of liberal arts and economics professor. But, says Chari, one can achieve the desired outcomes only if people are provided with the right kind of incentives.

VIDEO

Watch a video of Professor Hurwicz's reaction to winning the Nobel Prize.

"That was a fundamental breakthrough in thinking about economics policy and economic reform." In practice, he says, Hurwicz's work gives a much better understanding of why centrally planned economic mechanisms such as communism fail so often. The main reason is they do not take adequate account of the incentives people face. "He explained in mathematical, but commonsense, terms when we should expect markets to function well and when we should expect them to function poorly," says Chari. "He introduced two words that revolutionized all of economics when he insisted that every economic mechanism should be 'incentive compatible.' That is, it should provide people with the right kind of incentive to use the information they have in the best possible way."

Leonid Hurwicz wearing the regents professor medal awarded in 1969.
The University named Hurwicz a regents professor, its highest faculty honor, in 1969.
(Photo courtesy of University of Minnesota Archives.)

His theory of "mechanism design" goes to the heart of the interactions (mechanisms) people engage in to achieve their objectives. The competitive market system, for example, works well in many cases, but when coping with problems like pollution or how to provide for the public good, markets fail. In such situations, mechanism design excels in the creation of alternatives. Hurwicz's work has indirectly affected a wide range of economic policies; for example, it influences the way the government auctions off bandwidths to cellular companies. The theory is that the highest bidder, having invested much, will have an incentive to provide top-notch service. Hurwicz's work also had a big effect on the way people think about development problems in very poor countries. "We've shifted focus away from the role of governments in solving the problems of poor countries to a focus on the rule of law, stable property rights, and provision of incentives to farmers, businesspeople and others to act in ways that further the social interest," explains Chari. "The way Leo taught us to think has changed the world." Hurwicz has received many honors before, most notably the National Medal of Science in 1990. At the University, he was the graduate adviser to Daniel McFadden, who won the economics Nobel in 2000.

The long road to Stockholm

Born in Moscow, Hurwicz left Russia in 1919 in a horse-drawn wagon when his family, fearing political persecution, fled to their native Poland. "It was something you could make a Dr. Zhivago movie about," Hurwicz muses. He studied at the University of Warsaw, graduating with a law degree in 1938. The legal education was his father's idea. Besides attending law school, Hurwicz indulged his real interests by studying physics and entering the conservatory as a piano student. Then, during a second-year course in economics for his law degree, he discovered a new love. Law degree in hand, he entered the London School of Economics. His English was rudimentary, and the classes he understood best were taught by Nicholas Kaldor, a renowned Hungarian economist. "He had a worse accent than I did, but I could understand it, so I took all the courses he was teaching," says Hurwicz.

"Leo was and is a Renaissance man," Chari recalls. "The very first time I met him, he engaged me in a long discussion about the intricacies of the dialects of Tamil, my native language, which is one of the languages of South India."

In 1939 he went to Geneva for further study, but Hitler's invasion of Poland forced Hurwicz, a Jew, and his family to flee again. His parents and brother left Warsaw only to be interned in Soviet labor camps. Hurwicz spent several anxious months in Switzerland and Portugal, then emigrated to the United States. He completed his studies at the University of Chicago and Harvard, and his family eventually joined him. He taught meteorology at the University of Chicago from 1942 to 1944, and hired, sight unseen, economics undergraduate Evelyn Jensen, a farm girl from Wisconsin, as his teaching assistant. In July, the two, along with their children Sarah, Michael, Ruth, and Maxim, celebrated their 63rd anniversary. "The hardest part of marriage is the first 63 years," Hurwicz quips. Hurwicz arrived at the University of Minnesota in 1951, recruited by legendary economist and presidential adviser Walter Heller. The two created an independent spirit and identity for economists at the university, recruiting talented young economists and teaching students the technique and beauty of economics. The department's national standing owes a huge debt to Hurwicz. "I would say he's responsible almost single-handedly for its high reputation," says economics professor emeritus John Chipman. He is known for his knowledge of fields ranging far beyond economics. "Leo was and is a Renaissance man," Chari recalls. "The very first time I met him, he engaged me in a long discussion about the intricacies of the dialects of Tamil, my native language, which is one of the languages of South India." Narayana Kocherlakota, chair of the Department of Economics, was ecstatic at Hurwicz's selection. "Leo's research and teaching have been at the center of life in the Department of Economics for nearly 60 years," he says. "We are delighted to offer our congratulations to our longtime colleague and friend for this recognition of his extraordinary and foundational research."
This article contains material from "Intelligent Designer," by Douglas Clement, which appeared in the fall 2006 issue of Minnesota Economics.

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