George A. Akerlof
George A. Akerlof is an economist and is an American national. He is world famous due to his works in the field of Economics. He was awarded the Nobel Prize in 2001, which was shared by Michael Spence and Joseph Stiglitz. He received this award in recognition of his acclaimed work on markets studied from the perspective of asymmetric information. He wrote his theory of information asymmetry in 1970 in his famous paper, “The Market for Lemons: Quality, Uncertainty, and the Market Mechanism.” The paper is about the imperfect information in the used cars’ market. His other famous work is ‘efficiency wage hypothesis’. This paper describes that the efficiency goals of employers determine the wages, besides other determinants like the forces of supply and demand. He is Professor at Georgetown University. Formerly, he was Professor at the University of California, Berkeley. His wife, Janet Yellen, is also an economist of American origin, a widely recognized personality, and held various important positions in her career (“Everything You Need to Know about Mr. Janet Yellen”). Their son, Robert Akerlof, is Professor at the University of Warwick.
Education and Profession
Born in New Haven, Connecticut, in 1940, George Akerlof completed his early education from Lawrenceville School in 1958. Later, he secured admission to the Yale University from where he completed his graduation. He then went to Massachusetts Institute of Technology to get a degree of Ph.D. in 1966. He found an aptitude for teaching in himself and, therefore, he decided to pursue a career in teaching. He joined the University of California, where he became a famous figure very soon. He was honorably awarded the title, “Goldman Professor of Economics.” He also taught at the London School of Economics. Akerlof served as a distinguished professor at the University of California during most of his career, spending many valuable years at the institution. Currently, he is part of the faculty of Georgetown University as the Professor of Economics.
Akerlof was widely acclaimed for his work named The Market for Lemons. It was published in the quarterly journal of Economics. This paper described the dynamics of asymmetric information in the market for the used cars. The main argument presented by Akerlof in this paper was that many transactions in the marketplace could not take place or be completed due to lack of information on either the buyer side or on the seller side. The lack of information causes uncertainty to either side of the transaction and lowers the quality of the product. He argues that this leads to a loss in efficiency. The buyers fear that they might get a low quality of malfunctioned item for paying more for it. They do not want to pay extra amount of money for a low quality item. Their fear arises due to uncertainty about the quality of the product. They do not have credible information of the quality of product they are going to purchase against a specific amount of money. Therefore, they are not assured of the profitability or, at least, benefits of that particular purchase. Akerlof argues that all this ambiguity and inconvenience arises due to the lack of information about the transaction. On the other hand, the seller also suffers from the same kind of uncertainty, and the reason is again the lack of necessary information he or she needs to complete the transaction. The seller do not want to sell their goods that are of premium quality for lower prices. Due to uncertainty and unawareness of the buyers, the sellers receive lower price bids for their possessions. Akerlof studied this problem and named it the lemon problem. He studied this problem in the context of the market for used cars. Since the used cars have been in possession of their owners for varying lengths of time, it cannot be said with certainty what their current functional condition is. The buyer is not sure of the quality of the car while purchasing it, because the complete check-up requires that the car is sent to some well-equipped workshop or the factory to get a certificate of quality for its current condition, which is not possible usually at the time of buying process (“Can You Buy a Good Second-Hand Car?”). This difficulty in knowing the exact quality of the car reduces certainty and quality of the car in buyer’s perception. Therefore, the buyer is not willing to pay as much money as he or she could have paid for a car with certified quality. The seller is also not willing to give away the asset for low price, as the seller knows about the quality of car relatively more than the buyer. It is obvious as the car has been in his or her custody and therefore the pros and cons would be more visible to him or her as compared to the buyer. Hence, the seller’s uncertainty lies in the tension and dissatisfaction which he or she undergoes due to unwillingness of selling the car for a low price bid by the potential sellers.
Akerlof argued that the low quality products devalue the high quality products. When buyers are convinced that market has low quality goods as well as those of high quality, their uncertainty about the goods does not allow them to pay for high prices. The consequence is obvious that the high quality goods will vanish from the market leaving behind only the “lemons”, the low quality goods, for the consumers. Akerlof supported the free market concept and tried to present a workable solution for the problem. He did not suggested a government intervention to solve the problem. He believed in the power of market and he sought a solution that would work naturally with the mechanism of markets. Akerlof proposed that the market for used cars can be made free of uncertainty by the use of warranty papers. He said that a warranty paper will assure the buyer that the product is in good condition and can be used for the desired purposes. The buyer will be assured of the fact that the certifying authority has reviewed the condition of the product and only then has issued a permit that the product can be sold to somebody else. The warranty paper will also make it clear to the buyer that the product is free of faults. The buyer can get an idea of the level of quality of the product that has been put on sale. George Akerlof discussed also this problem and the related solution in respect of other markets such as credit and health insurance markets.
Other notable contribution of George Akerlof was to the discipline of New Keynesian Economics. New Keynesian Economics emphasizes that wages and prices are less adjusting to the economic fluctuations that are short-term. Akerlof worked with one of his fellow economist and his wife on this subject. He studied that certain businesses besides having sufficient power to influence the prices of commodities in a market do not intend to raise or decrease the prices. They do this to maintain the prices constant to keep a steady output of profits. This approach is rational in its nature. Their pricing policy is not reactionary. This practice seems to be much reasonable, mature, and confident in view of the volatile nature of most businesses in the market wherein entrepreneurs instantly respond to the market fluctuations and set the prices in reaction to the circumstances. However, George Akerlof’s contribution in this regard is also valuable and worth-focusing. He argues if all or most of the businesses in a market start acting on the same policy of keeping prices constant, the overall economic output will be affected (“How and Why Economics Forgot Keynes’ Warnings on Panics”). He says that real output will experience a surge with periods of increases in money supply growth. Similarly, the real output will suffer a reduction when money supply growth is characterized by short run falls.
George Akerlof holds a distinguished opinion in the issue of the crimes committed by the black Americans. He states that these people have different options for realizing their economic goals. They can either become part of the country’s prevailing culture or they can act in a rebellious spirit. Akerlof’s opinion in their issue is that they have more practical reasons to opt for the second choice. He indirectly urges the government to take necessary steps to change their way of thinking. This can only be done by creating appealing opportunities for this community and striving to give them their rights in full practicality.
Among other notable works, Akerlof worked with a fellow to make an addition of the social identity to the formal economic analysis. Their efforts created a new field named identity economics. To this end, Akerlof used concepts from psychology and other fields to argue that a person’s social identity is linked to the social norms he or she follows and give value to those norms (Identity Economics). People abide by the social norms of the society where they live. These norms prioritize how individuals should behave and initiatives be taken. This way, Akerlof tried to expand the scope of economics and wrote his ideas in his paper named ‘economics and identity’.
George Akerlof is a Nobel Laureate in Economics who has worked on diverse projects in Economics. He has contributed to the field of Economics by illuminating the minds of brilliant students in universities, providing consultancy to organizations, and writing invaluable pieces of research that has influenced the opinions of experts and policy makers. His most notable work remains to date is studying the market and its mechanism from the perspective of asymmetric information. His work concludes that low quality goods squeeze the market of high quality goods and do not allow the buyers to appreciate the high-priced goods for the better use of resources. People become confused and find it risky to invest money for a product the credibility of which is not assured of by an authority. People are always willing to pay for new, verified products, even more than they have at times. However, they are not willing to pay money for products with less credibility. George Akerlof has made many contributions to economics. He stated that the incentives for the black Americans to indulge in criminal activities are much more than simply abiding by the law and live a peaceful life. This is because they are not getting equal opportunities. Akerlof said the prices if kept constant in an economy will suppress the spirit of free market. The government intervention will provide the security to the weak businesses and individuals. Akerlof tried to broaden the scope of Economics by incorporating concepts of other sciences into it. His works have been admired by experts of different fields of study.
Akerlof argued that the prices and wages remain stagnant and sticky in economies with short-term fluctuations. This slow adaptability affects the real output.
“Can You Buy a Good Second-Hand Car?, Can You Buy a Good Second-Hand Car?” The Economist. 2019.
“Everything You Need to Know About Mr. Janet Yellen.” Time, 2019.
“How and Why Economics Forgot Keynes’ Warnings on Panics.” Financial Times, 2019.
Identity Economics: How Financial Decisions Are Driven by Our Sense of Self. 2019.
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