Adam Smith Archives

The 2007 Nobel Prize in Economics was awarded to Leonid Hurwicz, Eric Maskin, and Roger Myerson “for having laid the foundations of mechanism design theory”. But what on earth is “mechanism design theory”? Adam Smith’s classical metaphor of the invisible hand refers to how the market, under ideal conditions, ensures an efficient allocation of scarce resources. But in practice conditions are usually not ideal; for example, competition is not completely free, consumers are not perfectly informed and privately desirable production and consumption may generate social costs and benefits. Furthermore, many transactions do not take place in open markets but within firms, in bargaining between individuals or interest groups and under a host of other institutional arrangements.