Perspectives on Mechanism Design in Economic Theory

1. AN HISTORICAL PERSPECTIVE Economics began with Xenophon=s AOeconomicus@ (c 360 BCE), in which Socrates interviews a model citizen who has two primary concerns. He goes out to his farm in the country to monitor and motivate his workers there. Then he goes back to the city, where his participation in various political institutions is essential for maintaining his rights to own this farm. Such concerns about agents' incentives and political institutions are also central in economic theory today. But they were not always. Two centuries ago, economics developed as an analytical social science by focusing on production and allocation of material goods, developing methodologies of national-income accounting and price theory. Questions about resource allocation seemed particularly amenable to mathematical analysis, because flows of goods and money are measurable and should satisfy flow-balance equations and no-arbitrage conditions. From this perspective, the classical economic problem was that people's ability to satisfy their desires is constrained by limited resources. The classical economic result was that unrestricted free trade can achieve allocative efficiency, in the sense that reallocating the available resources cannot improve everyone's welfare.