2 Nobel Prize winning economics theories that you should know about
There is hardly anyone in the world who isn’t acquainted with the most prestigious honour offered in the field of academics. Yes, we are talking about the Nobel Prize. As many of you know, since its inception, Nobel Prize has been conferred in the fields of physics, chemistry, medicine (or physiology), literature and peace. However, in 1968, in honour of Alfred Nobel (founder of the Nobel Prize), the central bank of Sweden called Sveriges Riksbank added the memorial prize in the field of economics.
Since then, as many as 86 economists have received this distinguished award for their exemplary contribution in the field of economics, two among them being Indians: Amartya Sen and Abhijit Vinayak. Well, these are things that you already know, right? Today, let us help you explore two Nobel Prize winning economic theories.
Public Choice Theory
One of the most popular and easily relatable Nobel Prize winning economic theory, the Public Choice Theory was postulated by James M. Buchanan Jr. in 1962, in partnership with Gordon Tullock. It was years later in 1986 that they received the Nobel Prize for developing both the contractual and constitutional bases to support the theory of socio-political and economic decision-making. As some of you can already understand, the theory attempts to lay down the factors that largely influence all kinds of public decisions. In fact, the duo made sure that he involved everyone in it, including the mass, elected officials, political committees, as well as bureaucrats.
Their theory is simple assessing how public-sector officials make their decisions. For this they merged insights from economics as well as political science. They went on to explain, that contrary to popular belief, public servants (such as police) almost always act in the public’s best interest, while politicians and bureaucrats mostly tend to act in their self-interest, similar to capitalists.
You can read more about this theory in the award-winning non-fiction that Buchanan and Tullock co-authored The Calculus of Consent: Logical Foundations of Constitutional Democracy. Today, this theory continues to help predict the motives of all public sector officials at large.
Game Theory
This theory is based on non-cooperative games and how participants engage in strategic interactions in the middle of them. In case you’re wondering, what non-cooperative game is all about, it is a kind of game in which the players enter into non-binding agreements. Thereafter, once the game is on, each of the players makes their decisions based on how they expect their opponents to behave. The trick here is that while doing so, they have zero knowledge about how they are actually going to behave, and base their moves depending on their interactions.
The Game Theory which developed in the 1990s, was a result of years of research and analysis by three notable economists, namely John C. Harsanyi, John F. Nash and Reinhard Selten, who all won the Nobel Prize together in 1994.
But how did they all come together? Well, in 1950, Nash’s doctoral dissertation described a method, what later came to be known as the Nash Equilibrium. This was a method to predict the result of non-cooperative games based on equilibrium. Few years later, Selten applied Nash’s findings to study how strategic interactions between participants impact their performances. Thereafter, Harsanyi in turn applied the combined theory to similar scenarios (having incomplete information) and analysed the outcomes. Towards the late 20th century, the three brilliant minds collaborated and pioneered the equilibria in the theory of non-cooperative games and named it the Game Theory.