Dr. Vernon Smith on Adam Smith 101

Growing up on a farm in Wichita, Kansas in the 1930s, experimental economist and Nobel laureate Vernon Smith developed a curiosity for how things work – from plowing fields to hunting rabbits. In the 1940s, he thought he’d arrived when Boeing paid him to do electrical work on WWII fighter jets. However, this was just the beginning of a lifelong intellectual adventure and career spent "under the hood" of a system more complex than the most advanced aircraft: markets. Economists have spent centuries developing Adam Smith’s insight on the human drive to “truck, barter and exchange” into a rigorous discipline with predictive power. Coming from Caltech, Vernon Smith applied his training in hard science to a question that had eluded economists until his laboratory experiments demonstrated what Adam Smith had originally intuited. The elder Smith hypothesized that self interest was a sufficient force for markets to "calculate" prices that result in the largest gains from trade. In 2002, Vernon won the Nobel Prize in economics for validating the market's capacity to determine efficient equilibrium prices, despite the individual traders' incomplete information about production costs and the value of a good to consumers. Simulating market conditions with computer software and human participants, Vernon showed how the collective action of buyers and sellers – possessing only knowledge of their own circumstances – resulted in gradual bargaining to an efficient price. Bob is privileged to have Vernon in studio for the full hour to explain the importance of price signals – a key component of Adam Smith’s invisible hand – and to make modern missionaries for free markets. Listen in to hear from one of the greatest living economic minds, and call in with your questions to (424) BOB-SHOW.