ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Wednesday, October 9, 1996 TAG: 9610090023
SECTION: BUSINESS PAGE: B8 EDITION: METRO
DATELINE: NEW YORK
SOURCE: SALLY JACOBSEN ASSOCIATED PRESS
The Nobel Prize in economics went Tuesday to a pair of professors who were cited for explaining how governments as well as consumers use incomplete data to make decisions.
William Vickrey, professor emeritus at Columbia University with unorthodox ideas - among them that ``it's insane to try to balance the budget'' - shared the Nobel economics prize with James Mirrlees, who teaches at Cambridge University in Britain.
Vickrey and Mirrlees will split the $1.12 million prize for innovative studies on ``asymmetric information.''
Their theory, used to explain human behavior, refers to the way in which everyone - from governments and giant corporations to small businesses and individuals - makes decisions, based on varying kinds of data.
Put simply, ``asymmetric information'' means someone knows something that someone else doesn't. A person seeking medical coverage may have health problems, but the insurer doesn't know it. A buyer won't know as much about a used car as the seller. And a government doesn't know the earnings abilities of the citizens it wants to tax.
Although Vickrey and Mirrlees conducted separate studies decades apart, the Royal Swedish Academy of Sciences in Stockholm, Sweden, said their work led to a better understanding of economic activity, including tax programs, auctions, insurance and credit markets.
``It's very gratifying ... very warming,'' said Vickrey, 82, a naturalized American citizen and native of Vancouver, British Columbia.
``I was amazed,'' Mirrlees, a 60-year-old native of Scotland, told a news conference at Cambridge. ``It's very surprising. I wanted to make sure I wasn't being teased'' when he received the call from the Royal Swedish Academy.
The annual prize is the third of the six Nobels to be awarded this year. The Nobel Memorial Prize in Economic Science is awarded by the Swedish Central Bank in honor of inventor Alfred Nobel.
Vickrey said he intends to use the windfall to ``make the most of the opportunity to keep spreading some of my heretical ideas.''
He has gone against popular wisdom by advocating the government take on more, not less, debt.
``The insane pursuit of the holy grail of a balanced budget in the end is going to drive the economy into a depression,'' he told a news conference.
A bigger national debt, he said, will help those saving for retirement.
``The great increase in longevity has produced a surge in the desire to accumulate assets for retirement,'' he said. ``It has outpaced the ability of the private sector to produce assets, so we need a larger government debt. ... It's insane to try to balance the budget.''
He also has campaigned unsuccessfully to change New York subway fares, proposing they be based on time of day and length of trip rather than the current flat rate.
For their time, the studies carried out by Vickrey and Mirrlees were revolutionary in the field of economics.
``This is a very important contribution,'' said prize committee member Karl-Gustaf Loefgren. ``These men set up the formal methodology. ... It's not very often that you get new chapters into textbooks.''
Allen Sinai, chief global economist at Primark Decision Economics in New York, said, ``What they did was path-breaking.'' And David Cutler, associate professor of economics at Harvard University, said the work has ``many, many, many extremely important directions.''
Traditional economic theory held that all sides had the same information but had different preferences, which influenced decision making.
The prize winners showed that wasn't the case and developed ways to reach agreements when the parties don't have the same information.
Vickrey has done much research on auctions, including sales of Treasury bonds, and how they can best be designed to generate economic efficiency. In the late 1940s, he drew up a model showing how taxing incomes can be designed to balance efficiency and equity.
A quarter of a century later, interest in the model was revived when Mirrlees studied problems associated with how high to set income taxes without discouraging workers and investors or fostering tax evasion.
LENGTH: Medium: 87 lines ILLUSTRATION: PHOTO: 1. AP Professor James Mirrlees rests on a post outsideby CNBCambridge University. color
2. William Vickrey, an 82-year-old retired Columbia University
professor, won a Nobel Prize in economics for explaining how a lack
of information shapes business decisions. He also advocates the
government take on more debt and will use the windfall to ``keep
spreading some of my heretical ideas.'' color