Vernon L. Smith

Vernon Lomax Smith (born January 1, 1927) is an American economist and professor of business economics and law at Chapman University.

He was formerly a professor of economics at the University of Arizona, professor of economics and law at George Mason University, and a board member of the Mercatus Center.

Smith received his bachelor's degree in electrical engineering from Caltech in 1949, an M.A. in economics from the University of Kansas in 1952, and his Ph.D. in economics from Harvard University in 1955.

His Ph.D. thesis title was A theoretical and empirical inquiry into the economic replacement of capital equipment.

Smith's first teaching post was at the Krannert School of Management, Purdue University, which he held from 1955 until 1967, attaining the rank of full professor.

"In the Autumn semester, 1955, I taught Principles of Economics, and found it a challenge to convey basic microeconomic theory to students. Why/how could any market approximate a competitive equilibrium? I resolved that on the first day of class the following semester, I would try running a market experiment that would give the students an opportunity to experience an actual market, and me the opportunity to observe one in which I knew, but they did not know what were the alleged driving conditions of supply and demand in that market."

In framing the experiment, Smith varied certain institutional parameters seen in the first classroom economics experiments as conducted by Edward Chamberlin: in particular, he ran the experiments for several trading periods, to give the student subjects time to train.

At Caltech, Charles Plott encouraged Smith to formalize the methodology of experimental economics, which he did in two articles.

Smith also taught as a visiting associate professor at Stanford University (1961–1962) and there made contact with Sidney Siegel, who was also doing work in experimental economics.

Smith moved with his family to Massachusetts and got a position first at Brown University (1967–1968) and then at the University of Massachusetts (1968–1972).

Smith also received appointments at the Center for Advanced Study in the Behavioral Sciences (1972–1973) and Caltech (1973–1975).

Much of the research that earned Smith the Nobel Memorial Prize in Economic Sciences was conducted at the University of Arizona between 1976 and 2001.

In 1976, "Experimental Economics: Induced Value Theory" was published in the American Economic Review (AER).

It was the first articulation of the principle behind economic experiments.

Six years later, these principles were expanded in "Microeconomic Systems as an Experimental Science," also in the AER.

This paper adapts the principles of mechanism design, a microeconomic system developed by Leonid Hurwicz, to the development of economic experiments.

In Hurwicz's formulation, a microeconomic system consists of an economic environment, an economic institution (or economic mechanism), and an economic outcome.

The economic environment is simply the preferences of the people in the economy and the production capabilities of the firms in the economy.

The key insight in this formulation is that the economic outcome can be affected by the economic institution.

The mechanism design provides a formal means for tests of the performance of an economic institution, and experimental economics, as developed by Smith, provided a means for formal empirical assessment of the performance of economic institutions.

The second main contribution of the paper is to the technique of induced values, the method used in controlled laboratory experiments in economics, political science, and psychology, which allows experimental economists to create a replica of a market in a laboratory.

Subjects in an experiment are told that they can produce a "commodity" at a cost and then sell it to buyers.

The seller earns the difference between the price received and its cost.

Buyers are told that the commodity has a value to them when they consume it, and they earn the difference between the value of the commodity to them and its price.

In 2001, Smith left Arizona for George Mason University.

Along with Daniel Kahneman, Smith shared the 2002 Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics and his work in the field of experimental economics.

He worked to establish 'laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms'.

From 2003 to 2006, he held the Rasmuson Chair of Economics at the University of Alaska Anchorage.

Smith is the founder and president of the International Foundation for Research in Experimental Economics, a Member of the Board of Advisors for The Independent Institute, a Senior Fellow at the Cato Institute in Washington D.C. In 2004 Smith was honored with an honorary doctoral degree at Universidad Francisco Marroquín, the institution that named the Vernon Smith Center for Experimental Economics Research after him.

He was also a founding board member of the Center for Growth and Opportunity at Utah State University.

As of 2023, Smith also sits on the Advisory Board for Florida Atlantic University's Madden Center for Value Creation.

Smith was born in Wichita, Kansas, where he attended Wichita North High School and Friends University.

Grover Bougher, Vernon's mother's first husband, who worked as a fireman on the Santa Fe railroad, died in an accident.

The life insurance money provided by the Santa Fe railroad was invested in a farm which became the sole means of survival for Vernon's family during the tough years of the Great Depression.

His future interests were influenced by his childhood at the farm.

In 2008, Smith founded the Economic Science Institute at Chapman University in Orange, California.

Smith has served on the board of editors of the American Economic Review, the Cato Journal, Journal of Economic Behavior and Organization, Science, Economic Theory, Economic Design, and the Journal of Economic Methodology.

He also served as an expert for the Copenhagen Consensus.

Smith began his work in experimental economics at Purdue University.

As Smith describes it: