NEW TRENDS IN ECONOMICS

Economists
Adam Smith & Alvin E. Roth - Lloyd S.
Shapley

Sauumye Chauhan & Valentina Chechur

Adam Smith
Adam Smith was an 18th-century philosopher renowned
as the father of modern economics, and a major proponent
of laissez-faire economic policies. In his first book, "The
Theory of Moral Sentiments," Smith proposed the idea of
the invisible hand—the tendency of free markets to
regulate themselves by means of competition, supply and
demand, and self-interest. Smith is also known for his
theory of compensating wage differentials, meaning that
dangerous or undesirable jobs tend to pay higher wages to
attract workers to these positions, but he is most famous
for his 1776 book: "An Inquiry into the Nature and
Causes of the Wealth of Nations."

Smith’s 1776 work, "An Inquiry Into the Nature and

Causes of the Wealth of Nations," also shortened as "The
Wealth of Nations," documented industrial development
in Europe. While critics note that Smith didn't invent
many of the ideas that he wrote about, he was the first person to compile and publish them in a
format designed to explain them to the average reader of the day. As a result, he is responsible
for popularizing many of the ideas that underpin the school of thought that became known as
classical economics.

Other economists built on Smith's work to solidify classical economic theory , which would
become the dominant school of economic thought through the Great Depression.

Laissez-faire philosophies, such as minimizing the role of government intervention and taxation
in the free markets, and the idea that an "invisible hand" guides supply and demand are among
the key ideas Smith's writing is responsible for promoting. These ideas reflect the concept that
each person, by looking out for him or herself, inadvertently helps to create the best outcome for
all. "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect
our dinner, but from their regard to their own interest," Smith wrote.

By selling products that people want to buy, the butcher, brewer, and baker hope to make money.
If they are effective in meeting the needs of their customers, they will enjoy the financial
rewards. While they are engaging in their enterprises for the purpose of earning money, they are
also providing products that people want. Such a system, Smith argued, creates wealth not just
for the butcher, brewer, and baker, but for the nation as a whole when that nation is populated
with citizens working productively to better themselves and address their financial needs.
Similarly, Smith noted that a man would invest his wealth in the enterprise most likely to help
him earn the highest return for a given risk level. Today, the invisible-hand theory is often
presented in terms of a natural phenomenon that guides free markets and capitalism in the
direction of efficiency, through supply and demand and competition for scarce resources, rather
than as something that results in the well-being of individuals.

"The Wealth of Nations" is a massive work consisting of two volumes divided into five books.
The ideas it promoted generated international attention and helped drive the move from land-
based wealth to wealth created by assembly-line production methods driven by the division of
labor. One example Smith cited involved the work required to make a pin. One man undertaking
the 18 steps required to complete the tasks could make but a handful of pins each week, but if the
18 tasks were completed in assembly-line fashion by ten men, production would jump to
thousands of pins per week.

In short, Smith argues that the division of labor and specialization produces prosperity. “It is the
great multiplication of the productions of all the different arts, in consequence of the division of
labor, which occasions, in a well-governed society, that universal opulence which extends itself
to the lowest ranks of the people,” states Smith in “The Wealth Of Nations."
Alvin E. Roth & Lloyd S. Shapley
The Sveriges Riksbank Prize in Economic
Sciences in Memory of Alfred Nobel 2012
was awarded jointly to Alvin E. Roth and
Lloyd S. Shapley. The main purpose of
this article is to describe Roth and
Shapley’s research on “the theory of stable
allocations and the practice of market
design” that justifies the concession of
such honor.

Al Roth was born in New York on

December 18, 1951. He graduated from
Columbia University in 1971 (when he
was 19 years old!) with a degree in Operations Research. He obtained his Ph.D. in Operations
Research from Stanford University in 1974 under the supervision of Robert B. Wilson. His first
two jobs were at the Departments of Economics at the University of Illinois (from 1974 to 1982)
and at the University of Pittsburgh (from 1982 to 1998). In 1998 he moved to Harvard University
with a joint appointment from the Economics Department and the Harvard Business School. He
has stayed there until the beginning of 2013 when he moved to the Economics Department at
Stanford University. During this period at Harvard University he has been supervising a large
group of Ph.D. students, most of who are now working at the best universities in the USA and
Europe. Al Roth thesis was on von Neumann and Morgenstern stable sets. His research interests
have been wide and moved very consistently to include axiomatic bargaining, experimental
economics, learning in non-cooperative games, the theory of stable allocations in matching
markets, and market design. According to the Royal Swedish Academy of Sciences the prize has
been awarded to him for his research on the last two areas, although he has fundamental
contributions in the other ones. See for instance, Roth (1979), Roth and Ockenfels (2002), and
Erev and Roth (1998).

Lloyd Shapley was born in Cambridge (New England) on June 2, 1923. After serving in the
Army Air Corps in Chengdu, China, during the Second World War, he went to Harvard
University where he graduated in 1948 with a degree in Mathematics. He obtained his Ph.D. in
Mathematics from Princeton University in 1953 under the supervision of Albert W. Tucker. He
has had only two affiliations: at RAND Corporation (from 1954 to 1981) and at the Departments
of Mathematics and Economics at the University of California, Los Angeles, since 1981. Lloyd
Shapley thesis was on additive and non-additive set functions. He has made fundamental
contributions in all areas of Game Theory; for instance to the theory of the Core, the Shapley
value, repeated and stochastic games, the potential of a game and the theory of stable allocations
in matching markets.

The concession of the 2012 Nobel Prize to both Al Roth and Lloyd Shapley may be seen as
recognizing two complementary sides of a research: Lloyd Shapley for the theoretical
contributions to the theory of stable allocations in two-sided matching problems and Al Roth for
the applications of this theory to improve the functioning of institutions solving two-sided
assignment real-life problems.

The theory of stable allocations consists of a family of models that study assignment problems in
which two disjoint sets of agents (or a set of agents and a set of objects) have to be matched. For
example, men to women, workers to firms, students to schools, or patients to live donor kidneys.
A matching is stable if no subset of agents can improved upon their proposed matches by re-
matching only among them. Stability is an essential property if matching is voluntary. The
practice of market design consists of applying those two-sided matching models to specific
assignment problems with the aim of proposing improvements on how they are solved. Their
work primarily applies to markets that do not have prices, or at least have strict constraints on
prices. The laureates’ breakthroughs involve figuring out how to properly assign people and
things to stable matches when prices are not available to help buyers and sellers pair up.