Reason: What happened in between?
Smith: My socialist tendencies were starting to fade as I learned more about economics, first at the University of Kansas and then at Harvard. Then I began teaching at Purdue in 1955 and starting doing experiments in 1956. That really changed completely the way I thought about markets.
At Harvard I had been taught by Ed Chamberlain, the author of The Theory of Monopolistic Competition. He had a little classroom demonstration he did the first day of his class. It was designed to show that competition was not in fact workable.
In the fall of 1955, I was teaching principles of economics at Purdue. One night I woke up and I got to thinking about Ed Chamberlain's experiment. If you wanted to show that markets don't work, I thought, you ought to give them a fairer shot than he did. I thought I'd find out how they trade on the New York Stock Exchange, because if there's a competitive market anywhere, that ought to be it. I got a book on the stock market that contained all the details on how the trading took place.
The following spring, I conducted my first experiment, which lasted about six minutes. I offered no real payoffs. I just told students to think of themselves as making money-the difference between the value and price if you're a buyer and the difference between price and the cost if you're the seller. It converged on a competitive equilibrium. I repeated it and the same thing happened.
I thought there must be something wrong with the experiment. How can this be? There's not complete information, and at that time we all knew you needed that for efficient markets. Every semester after that, I'd do experiments with more and more students, and I'd change some of the parameters.
When I gave talks away from Purdue about what I was up to, I could see there were a lot of people who questioned whether this was even economics. "Why would anyone do this?" they'd say. You certainly couldn't make a living doing experimental economics. You had to do the sort of work that would get you promoted. That's when I learned something important. In economics every paper begins with a previous paper, not with a problem of the world. No one questions your right to do something if it's already been done. I did my first experiment January 1956, and the first paper about it was published in 1962.
These days, experimental economics is a growing subfield with international scope. Even Harvard and Yale have some people doing it. They've been very late to get on board, of course. If it's at Harvard and Yale, you've got to wonder if maybe it isn't time to get out, if it isn't over.
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