Mechanism design shows how to attain more efficient outcomes while taking into account the two sides’ different motivations. One possible scheme: A “cap-and-trade” system that creates financial incentives to reduce emissions by assigning a cost to polluting. The government establishes a cap to limit emissions. The emissions allowed under the new cap are then divided up into individual permits that give producers the right to emit that amount. Companies are free to buy and sell these permits. Those who can reduce emissions at a low cost do so, then sell their permits at a profit to companies that continue to pollute. Those high polluters thus have an incentive to reduce their own emissions.
In this case, mechanism design uses government regulation to create a market solution when the market, on its own, doesn’t work very well. Such Hurwicz-inspired mechanisms may be useful in creating innovative solutions to some of the thorniest problems in public policy—reducing the inequities in the U.S. health care system, or regulating the ever-expanding telecom industry.
Hurwicz translated the lessons of oppression into a now global belief system that is equal parts economics and philosophy, and that helps solve specific problems in the real world. Among the many things he’s learned: People can rise above their self-interest.
In his 1988 paper called “But Who Will Guard the Guardians?,” Hurwicz wrote: “Somewhere at a finite end in the chain of guardians, there may be guardians (individual or collective) who are in sympathy with the rule (game-form) that makes certain behavior illegal, e.g., whose ethical standards rule out corrupt behavior, and who have the ability (through power, financial assets, personal charisma or status, combined with the population’s respect for it), as well as the inclination to act so as to discourage improper behavior of the guardians of lower order.”
He describes how, in a truly democratic society, corrupt politicians can be halted by concerned and selfless voters—he calls them “intervenors”—who act to right the system. The same is true, Hurwicz postulates, in business, where a handful of righteous individuals can rebalance an equation thrown off kilter by dishonest peers.
“Just as despair can come to one only from other human beings,” proclaimed Elie Wiesel, who was interned at Auschwitz during World War II and won the Nobel Peace Prize in 1986, “hope, too, can be given to one only by other human beings.”
Both Hurwicz and Wiesel, in their own ways, are saying something similar.
