The Wake

University economics professor Leonid Horwicz recently received the Nobel Prize for lifelong work in his field, but no one seems to know why. Is Horwicz’s theory too esoteric for the Average Joe, or is the media deciding that Horwicz’s work isn’t important? According to professor Narayana Kocherlakota, head chair of the University of Minnesota economics department, the basis of Horwicz’s theory is not only simple, it is essential to understanding what people will do in any instance of interacting parties. Professor Kocherlakota defined two terms that Horwicz was responsible for bringing into the field of economics: mechanism, and incentive constraint.

A mechanism is the rules of interaction between parties, where each individual must input the information that they possess into an order for a desired outcome. Incentive constraint is what verifies that every individual tells the truth regarding the information that they put into the mechanism. For example, let’s say a bridge is being built and that both a high cost contractor and a low cost contractor are vying for the job. What’s to keep the high cost contractor from saying, “Hey, I’m the cheapest among my competitors, build the bridge with me and I’ll save you money?” What stops the high cost contractor from lying is the incentive constraint? These are pretty broad ideas, but Horwicz simplified them into a unified formula, a “computer program,” that can find in a given situation the most beneficial decision. He simplified an entire section of human interaction into an equation, which is terrifying.

The seeming lack of knowledge concerning Horwicz’s accomplishments should be put in context with the public’s knowledge of economics in the first place. While everyone may not understand the intricacies of his work, Horwicz had a significant impact on his field and those studying human interactions have him to thank for simplifying the process.