By Mike Lillich

Former Krannert professor Vernon Smith (center), the 2002 Nobel laureate in economics, talks with Rick Cosier, Krannert School dean and Leeds Professor of Management (left), and Provost Sally Mason during a reception on campus to honor Smith.

Vernon Smith, the Nobel Prize-winning economist and former Krannert faculty member who launched his groundbreaking research at the school, returned last winter to help dedicate a Krannert laboratory named in his honor. The seventh-floor Krannert computer laboratory, formerly known as KRAN 701, is now the Vernon L. Smith Experimental Economics Laboratory.

Smith, known as the father of experimental economics, shared the 2002 Nobel Prize in economic sciences with Daniel Kahneman. Smith began his academic career at Krannert in 1955, staying at Purdue for 12 years. He subsequently taught at Brown University, the University of Massachusetts, the California Institute of Technology, and the Univer-sity of Arizona. He is currently a professor at George Mason University.

According to Prof. Emeritus George Horwich, economics, who was Smith's colleague when he was at Purdue, Smith began his experiments in economics with his students when he came to Purdue in 1955. Borrowing techniques from psychology lab experiments, Smith created virtual markets by designating half his class as buyers and half as sellers of fictitious goods. Smith gave the buyers and sellers different ranges of prices and had the students interact freely and negotiate trades until price and quantity achieved equilibrium,
or in economic terms, "made a market."

"This was the first time anyone had demonstrated experimentally how markets form," Horwich said. "It was a form of empirical verification of economic theory."

After his initial work, Smith began experimenting with more complex markets, Horwich said.

"For example, Vernon designed experiments to test market monopolies and markets where there were only two or three different sellers and many buyers," Horwich said. "His work killed the old myth that economics can't be simulated in a laboratory. All of the experiments demonstrated that, left to their own, markets will reach an equilibrium, except under exceptional circumstances. Thanks to Vernon's experiments, those circumstances now can be identified.

"What Vernon has accomplished is an economic revolution." Horwich said. "He took the theory of market behavior out of the ivory tower and showed us how to simulate what is going on in the real world."

At the University of Arizona in 1985, Smith established and became research director of the university's Economic Science Laboratory. Taking advantage of computer technology, he and his associates continued to perform more and more sophisticated experiments to simulate increasingly complex markets.

Today, there are more than 40 experimental economics laboratories all over the nation.

Smith holds a bachelor's degree in electrical engineering from the California Institute of Technology, a master's degree in economics at the University of Kansas, and a PhD from Harvard University. Purdue awarded Smith an honorary doctorate in management in 1989.

He said at the time: "What made Purdue so powerful an experience for me was that I really was free to do my own thing. It wasn't just the administration, but also my colleagues - who didn't for a moment think that, because I wanted to do experiments, my opportunities or resources should be limited."