George Akerlof is a world famous economist hailing from the United States of America. He is best known for being awarded the Nobel Prize in 2001 for his ground breaking research on markets categorized by asymmetric information, an honor he shared with fellow economists A. Michael Spence and Joseph E. Stiglitz.
Akerlof was born on 17th July, 1940, in New Haven, Connecticut. He completed his primary and secondary education from the Lawrenceville School in 1958, after which he got admitted in Yale University. After completing his B.A. from the institute, Akerlof pursued a Ph.D. degree from MIT, a feat he realized in 1966. He then entered the teaching profession, becoming instructor at the University of California where he was also awarded the title of Goldman Professor of Economics. Akerlof went on to teach at the London School of Economics as well.
Akerlof rose to widespread prominence with his article, The Market for Lemons, which was published in the Quarterly Journal of Economics in 1970. The paper delved in to the dynamics of asymmetric information, drawing an analogy between the market for used cars and lemons. Akerlof concluded that due to a disjoint in information between buyers and sellers about product quality, a considerable number of mutually beneficial transactions do not take place, leading to a loss in efficiency. Buyers are skeptical of purchasing substandard items, whereas sellers who in fact possess premium quality goods are unwilling to give them away on the cheap.
Akerlof however did not come out as an advocate of government intervention, instead putting his faith in free markets to solve problems created by asymmetric information. For instance, in the case of used cars, he suggested that warranties are an effective measure of increasing customer confidence, as it gives them a certain degree of assurance that the car is of reliable quality and will function for a reasonable period of time. Moreover, warranties are also only offered by those sellers who know that they possess a high quality vehicle which will function properly. Akerlof extended his study of asymmetric information to credit and health insurance markets as well.
George Akerlof also made some notable contributions to the field of New Keynesian Economics. Alongside fellow economist and wife, Janet Yellen, he studied businesses possessing a reasonable degree of market power who chose not to use it to influence prices as a response to changes in demand. Such businesses were ‘near rational’, Akerlof argued, as they followed a rule of thumb pricing policy of keeping the price constant which didn’t see them lose out on much profit compared to a situation of reactionary pricing. However, he claimed that if quite a number of firms applied such a strategy, then the overall economy would be affected as a consequence. Periods of money supply growth increases would be accompanied by a surge in real output, whereas short run falls in the money supply growth would be followed by reductions in real output.
Akerlof, as illustrated by his more recent works, is also intrigued by the high poverty and crime rates associated with blacks in the United States. He asserts in his paper that black Americans have the option of either accepting the dominant culture to realize economic goals or revolt against in, jeopardizing their prospects in the process. Contrary to widespread belief, Akerlof claims that the incentives are higher for them to choose the second option.
George Akerlof served as senior economist on President Nixon’s Council of Economic Advisors in 1973-1974. In 2001, he reached the pinnacle of his achievements by winning the Nobel Prize.