James Mirrlees: Scottish economist who won a Nobel Prize for his work on ‘optimal taxation’

He leaves a legacy of breakthroughs in economic thought which are influential even today

Matt Schudel
Thursday 06 September 2018 17:33
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Mirrlees with his daughter Catriona before he collected his award in Stockholm in 1996
Mirrlees with his daughter Catriona before he collected his award in Stockholm in 1996

James Mirrlees, the Nobel Prize-winning Scottish economist who has died aged 82, was praised by Nicola Sturgeon for his “great intellect” and “wonderfully dry sense of humour”.

His legacy is of theories of economic incentives, which have been applied to taxation, insurance and the allocation of public services.

The longtime professor of Nuffield College, Oxford University, died at his home in Cambridge.

Dr Mirrlees, who shared the 1996 Nobel Prize with William Vickrey of Columbia University, approached economics from a background in mathematics. He was particularly fascinated by ideas first put forth by Vickrey and others concerning “information asymmetry”, in which one party in an economic transaction is privy to knowledge the other does not have.

“That just means not knowing as much as you would like,” Mirrlees explained.

He sought to explore the implications of information asymmetry and how it affected individual behaviour and economic policy.

A simple example of the concept would be when someone offers a used car for sale. The seller has a greater understanding of the condition of the automobile than the buyer. The idea has been used to understand costs and benefits in real estate, health insurance, investing, welfare and employee motivation.

“My subject has always been economics and human welfare,” Mirrlees said after winning the Nobel Prize.

He was perhaps best known for his work on “optimal taxation”, for which he developed a mathematical model to define a balance between what he called equity and efficiency. In other words, he sought to find a point where government taxation would provide a shared benefit to society without being an onerous burden on individual workers.

The happiest day in his life, he said, was not the day he learned that he was to receive the prize (he thought that call a prank and had to call Sweden himself to confirm) but another day in 1968, when he “finally cracked the optimal tax problem ... It came in a flash and was very satisfactory.”

Tax codes were traditionally based on income levels, graduated to assess a higher tax rate on people who earned more money. Mirrlees was interested in discovering if there was a point of diminishing returns when high taxes would reduce the motivation of productive workers.

His theories were seized on by people across the political spectrum, from those who supported higher taxes to provide increased government services to those who advocated of a “flat tax” rate that would be the same at all levels of income.

“Every member of the House Ways and Means Committee and every lobbyist has been practising Jim Mirrlees' tax theory for years as they have argued about the efficiency of various tax policies,” former US Treasury Secretary Lawrence H Summers said in 1996. “He provided the first mathematically rigorous treatment of efficiency and equity that is central to modern economic policy debate.”

But his statements on economic policy were open to interpretation. He suggested that the highest tax rates in Britain – which exceeded 80 per cent when he developed his theories – could cause top earners to grow discouraged and stop working hard.

On the other hand, he said taxes “could reasonably be higher, particularly for middle-income earners” and could easily exceed 50 per cent without affecting productivity.

“It could become a disincentive,” he said, “but you could use the revenue for health services, education, and welfare payments.”

His private views, he said in 1996, were in line with Britain’s liberal Labour Party “because of a desire for egalitarianism, not for any great fondness for public ownership”.

James Alexander Mirrlees was born in Minnigaff in Scotland in the mid-1930s. His father worked in banking, and his mother was a homemaker.

He studied mathematics at Scotland's University of Edinburgh, graduating in 1957, then enrolled at the University of Cambridge in England, obtaining degrees in mathematics and economics before receiving his doctorate in economics in 1963.

He joined the Oxford faculty in 1968 and was considered an inspired teacher. He had interim appointments at MIT, Yale University and the University of California at Berkeley. He advised Asian and African governments on economic policy before returning to Cambridge in 1995. He later had a faculty appointment at the Chinese University of Hong Kong.

His wife of 32 years, Gillian Hughes, died in 1993. His survivors include his wife since 2001, the former Patricia Wilson, two daughters from his first marriage, a stepson, and four grandchildren.

Mirrlees had a reserved nature and enjoyed spending his free time playing the piano and reading detective novels. He had a sunny confidence in the economy and in the ability of people to adapt to changing times.

“People will get employed doing other things,” he said. “That is the faith of economists, which non-economists find hard to believe: there will be other jobs somewhere else.

© Washington Post

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