Berkeley’s 18th Nobelist discusses the prize based on his fundamental research

By Jeff Holeman, Public Affairs

George Akerlof talked about winning the Nobel Prize in economics and about his research at a news conference on Wednesday. Noah Berger photo

11 October 2001 | Still in disbelief four hours after winning one of the world’s most prestigious honors, George Akerlof talked about winning the Nobel Prize in economics and about his research, which is described as a fundamental of economic theory.

At a campus press conference on Wednesday, the Berkeley economics professor said he was still trying to digest the news he received in a 6:17 a.m. phone call from Sweden.

“I guess I didn’t know whether it was a joke or not,” Akerlof said. “I guess it isn’t, because all of you are here. It might take me a few days to believe it.”

Chancellor Robert Berdahl said it was a historic moment for the campus. Akerlof is Berkeley’s 18th Nobel Prize winner and its second economics prize winner in a row. Professor Daniel McFadden won the prize in economics in 2000.

“This is becoming a habit, and we hope this habit is one we can’t break,” said Berdahl.

Alan Auerbach, chair of the economics department in the College of Letters and Science, said if you polled economists on who should win the award, Akerlof’s name would be right at the top.

“It’s probably hard to imagine a more popular choice than George,” said Auerbach, who first encountered Akerlof’s research while a first-year graduate student.

Auerbach said Akerlof developed his ideas on asymmetrical information in his landmark 1966 paper, “The Market for Lemons,” on the role in the market for used cars. The study described how markets fail when buyers and sellers — as seen in used car markets — operate using different information. The seller has information on the condition of the car; the buyer can only hope that it is not a lemon.

Insights Akerlof developed by analyzing the used car market can be applied to other markets in which an information imbalance is at work. One good example is the health insurance industry. When a person without medical insurance develops a serious illness and wants to buy insurance, he might not disclose his condition to prospective insurers. The companies’ financial viability, however, depends on having a balance of healthy and ill clients. Such information imbalances can cause a market to break down.

“In the years since that paper,” Auerbach said of Akerlof’s work, “we’ve realized how pervasive these problems are and how important this research has been — extending to medical insurance and problems within the labor market.”

Akerlof said Berkeley held a special place in his heart: not only because his great-grandfather was an alumni of one of Berkeley’s first graduating classes, but because of the support and collaboration his Berkeley colleagues have offered.

“Berkeley has always been a wonderful place for students and faculty, a real resource for the state of California,” Akerlof said. “Ever since it was founded, Berkeley has set the agenda for what California really means. That pursuit of teaching students and of ideas at the deepest level has been the hallmark of this university.”

On his first day at Berkeley in 1966, Akerlof met faculty member Tom Rothenberg, who inquired about his research interests. Akerlof said he mentioned a long list of ideas; near the bottom of it was his “market for lemons” concept. Rothenberg encouraged him to go for that one, because it had such promise.

Akerlof’s research continues to focus on finding economic solutions to real-world problems, such as unemployment and underdevelopment, and to look to the social sciences for insights. He said that while behavioral economists link economics and psychology, he is interested in drawing, as well, from sociology, anthropology, and other fields.

“We shouldn’t have individual social sciences, each with its own approach,” he said. “We should have one unified social science. Insomuch that economics does not do that, we are remiss.”

Akerlof also spoke of how the work of economists can help improve public policy. He noted that economists such as his wife, Berkeley professor Janet Yellen, who chaired the U.S. Council of Economic Advisers under former President Bill Clinton, use research like his and his co-winners to improve the nation’s economy and combat poverty.

During his wife’s tenure in Washington, he said, “I saw every evening at our dinner table how economics can be used on a daily basis and how it affects our lives.”

Akerlof shares the 2001 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel with Joseph Stiglitz of Columbia University and Michael Spence of Stanford University. The three will split the $945,000 prize that comes with the award, which will be presented in a ceremony in Stockholm.