A family of chemists
George Arthur Akerlof was born in New Haven, Connecticut, on June 17, 1940. His father, Gösta Åkerlöf, born in Sweden in 1898, had come to the United States on a fellowship and was a chemist on the Yale faculty; his mother, Rosalie, had been a chemistry graduate student when they met at a departmental picnic. During the Second World War his father worked on the Manhattan Project in Dayton, Ohio, and the family later moved to Pittsburgh, Washington and Princeton as his father’s research jobs came and went. His older brother, Carl, became a physicist.
Science was the family ideal, and George felt like the outsider. While his father and brother spent Saturdays in the laboratory, he was drawn to history and, as far as a child can be, to economics. At eleven or twelve he had what he later called one of his first significant economic thoughts: if his father lost his job and the family stopped spending, another father would lose his job, and the economy would spiral downward. He had, he wrote, grasped the foundation of Keynesian economics, and the causes of unemployment would dominate his career.
German Jewish roots
Akerlof’s Jewish heritage comes through his mother. Her father and mother were both of German Jewish descent, and her family was an academic one. His great-grandfather, born in Oakland, California, studied medicine in Germany and became a professor of medicine at Cooper Medical College in San Francisco, later part of Stanford. His grandfather also trained in Germany and established what Akerlof describes as the first clinic in cardiology in the United States at Johns Hopkins, but was denied tenure there because of his Jewish ancestry; he moved to the University of Minnesota to chair its department of pharmacology.
Akerlof has written about this family history with candour, noting both its practical cost, his grandfather’s blocked career, and its cultural legacy, a tradition of science passed down through three generations. His father’s side was Swedish, with roots in Dalarna and Stockholm.
Yale, MIT and a young economist
After the Lawrenceville School, Akerlof went to Yale, where he spent his first two years largely on the Yale Daily News, pushing it to cover student issues and the civil rights sit-ins in the South. When he was not elected to the paper’s board, he devoted himself to economics and mathematics, graduating in 1962. At the Massachusetts Institute of Technology he studied with Robert Solow and found classmates such as Joseph Stiglitz and William Nordhaus, receiving his PhD in 1966.
He joined the University of California, Berkeley, as an assistant professor that year. In his first year there, helped by his colleague Tom Rothenberg, who guided him in choosing the topic and turning it into a paper, he wrote “The Market for ‘Lemons’”, the work for which he was later awarded the Nobel Prize. In the same year he produced the first model of staggered wage and price setting, in which contracts are renewed at different times, an approach that later became the basis of influential models by Stanley Fischer and John Taylor used to analyse monetary policy.
The market for lemons
Akerlof’s idea is simple. In the used-car market, sellers know whether their car is good or a “lemon”, a defective car; buyers cannot tell. So buyers will pay only an average price. That price is too low for owners of good cars, who keep them off the market, which lowers the average quality of cars for sale, which lowers the price buyers will pay, which drives out still more good cars. In the extreme the market can collapse, or shrink to nothing but lemons. When one side knows much more than the other, Akerlof showed, a market can fail even if everyone would gain from trade.
Journal editors rejected the paper two or three times, considering the issues too trivial for a serious journal. It was finally published in the Quarterly Journal of Economics in 1970. The Royal Swedish Academy of Sciences later called it the single most important study in the literature on the economics of information, a simple but profound and universal idea with widespread applications. Akerlof showed the same problem in credit markets in India, where village lenders charged twice the interest rates of cities, in the difficulty older people faced buying individual health insurance and in discrimination against minorities in the labour market.
How the idea protects buyers today
A key insight of the lemons paper is that people have strong reasons to find ways around hidden information, and that many familiar institutions exist to do exactly that. Akerlof pointed to dealers’ guarantees, brand names, chain stores, franchising and licensing. Warranties, money-back guarantees, independent inspections, vehicle history reports, consumer protection rules and professional licenses are all ways of giving buyers information or assurance they could not otherwise get.
The same logic shapes insurance and finance. If only the people most likely to fall ill buy health insurance, premiums rise, healthier people drop out and the market can spiral, which is why insurers and governments design rules that pool people together. Lenders, investors and regulators worry about the same adverse selection when they decide what borrowers and companies must disclose. Together with Michael Spence and Joseph Stiglitz, with whom he shared the 2001 prize, Akerlof laid the foundation for a general theory of markets with asymmetric information that now forms the core of modern information economics.
India, Washington and the problem of unemployment
In 1967–68 Akerlof spent a year at the Indian Statistical Institute in New Delhi, where Stephen Marglin led a project to schedule water releases from the Bhakra-Nangal dam so that farmers planting new wheat varieties could count on irrigation. Akerlof’s part ended when he found that the reservoir’s inflows could not be predicted, and he wrote instead on federal-state fiscal policy in India; back in California he later spent a year studying Hindi-Urdu. Observing how the caste system interposed itself between supply and demand helped him think about why labour markets in Western countries also fail to clear, and over the next twenty years he developed efficiency wage theories of unemployment, in which employers pay above the market wage because fairly paid workers are more motivated and productive. In 1973–74 he was a senior economist at the White House Council of Economic Advisers.
In 1977, working at the Federal Reserve Board, he met the economist Janet Yellen. They married in June 1978, spent two years at the London School of Economics, and returned to Berkeley in 1980, where he became Goldman Professor of Economics; their son Robert, now also an economist, was born in 1981. Akerlof and Yellen wrote many papers together on efficiency wages and on why sticky wages and prices give monetary policy real effects, and later on poverty and on the causes of rising out-of-wedlock childbearing. When Yellen joined the Federal Reserve Board in 1994 and later chaired the Council of Economic Advisers, Akerlof moved to Washington as a senior fellow at the Brookings Institution.
Identity, fairness and fraud
Akerlof has repeatedly pushed economics to take account of how people really behave. With Rachel Kranton he founded identity economics, arguing in a 2000 paper that people’s sense of who they are, and the social norms attached to it, shapes their economic choices, with implications for poverty, gender, discrimination and education. With William Dickens and George Perry he argued that at very low inflation there may be a lasting trade-off between inflation and unemployment, a result with implications for central banks.
In 1993, with Paul Romer, he published “Looting: The Economic Underworld of Bankruptcy for Profit”, which showed how, under certain conditions, owners of companies can profit by deliberately driving them into bankruptcy at public expense. His work on “reproductive technology shock”, arguing that contraception and legal abortion had changed social expectations in ways that disadvantaged some women and increased out-of-wedlock births, drew attention, and approval, from both sides of the abortion debate.
Later career
Akerlof returned to Berkeley in 1999 and became Koshland Professor of Economics, emeritus from 2010. When Yellen returned to the Federal Reserve, he moved again to Washington, serving as a visiting scholar at the International Monetary Fund from 2010 to 2014 and joining Georgetown University’s McCourt School of Public Policy as a university professor in 2014.
He describes himself as persistent to the point of obsession, once writing at least fifty drafts of a single line of papers over twenty years. He has said that his career mirrored what he wanted for his student newspaper: an economics more closely linked to real policy problems and less tied to the official model and its assumptions.
Legacy
Akerlof’s lemons paper is one of the best-known papers in economics because it names something everyone recognises: the fear of being cheated when the other side knows more. By showing that this fear can destroy markets, he explained why societies invest in warranties, brands, inspections, disclosure rules and insurance regulation, and why those institutions matter for ordinary buyers, borrowers and patients.
His broader legacy is an economics that takes fairness, identity, norms and deception seriously. Many of the questions he raised, about unemployment, discrimination, financial fraud and how people really decide, remain at the centre of research and policy.
Sources & further reading
George A. Akerlof, Biographical, NobelPrize.org · Information for the Public: The Prize in Economic Sciences 2001, NobelPrize.org · Press release: The Prize in Economic Sciences 2001, NobelPrize.org · George Akerlof, Jewish Virtual Library · George Akerlof, Wikipedia · Researched from the sources above and checked against them. Spotted an error? Tell us.
A life of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.