mechanism design theory

Last year, three guys won the Nobel Prize for Economics, one from the University of Minnesota, for taking a method of designing board games and applying it to global economics. The idea, mechanism design theory, is a way of constructing the rules of a game in order to achieve a desired outcome. Anyone who plays the game is self motivated, but their incentives are established, albeit indirectly, by the design of the game.

So what makes this so significant? Well, consider the current economic philosophy. Capitalism is run on greed. As Gordon Gekko would say, "Greed is good." And certainly, that is what makes capitalism work. It's a free market which means there is no desired outcome. In fact, there is no preconceived outcome of any kind. The loophole in capitalism, of course, is that it can make people do things they don't want to do.

If you were to embrace mechanism design theory, you could essentially reverse engineer an economy. You could start with the desired outcome, like social welfare or even distribution of wealth, and then design the rules of the game in order to create mutually beneficial incentives. No, it's not THE answer for global economics, but it certainly has applications, particularly in areas of the world in the midst of humanitarian crises because of greed run amok.

What fascinates me is that mechanism design theory is, essentially, a design process. Current design processes are similar to capitalism. We are given a design problem and then asked to explore possibilities without any anticipated outcome, but the power of design is not in the solution. It's in how the criteria are set, how the problem itself is defined. So, mechanism design theory may be able to show us a new design process, one where we identify a problem and begin with a vision of a world with that problem solved. Then, we design incentives that allow people to be self motivated but constantly working toward the solution

from - http://economicsofdesign.blogspot.com/
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