Last week, Al Gore's receipt of the Nobel Peace Prize quickly turned heads and reignited the heated ideological debate over global warming. Yet, at the same time, three men who have studied an equally polarizing issue slipped under the radar. They were the winners of the 2007 Nobel Memorial Prize in Economic Sciences.

Leonid Hurwicz, Eric Maskin and Roger Myerson were awarded the prize for their work in mechanism design theory, which applies a mathematical approach to study how the constraints of the real world influence free markets and what practices and institutions, both market- and government- oriented, can help markets become more effective in the context of reality.

The debate around market intervention is heated and often turns to ideology instead of facts and models, with classical economists claiming that rational individuals are always more capable of making decisions than a detached government. Under classical economics, markets are supposed to efficiently allocate resources, but these theories rely on rigid premises that, in practice, do not always shape up. One of the most problematic of these assumptions is that individuals have all the information necessary to make rational decisions, which is clearly not true. People have incentives to hide information from others in an attempt to gain an advantage. For example, a company such as Enron with poor profit performance would naturally attempt to hide as much information from shareholders as possible to elevate its share price. This could also apply to a town where a single seller is the only source of a product, and can hide its true value .

When market participants do this, it becomes difficult to make fully informed decisions that will lead to the best consensus or market equilibrium, and savvy information control or strategy often shapes decisions rather than the true dictates of supply and wants, contradicting the goal of classical economics.

In the case of Enron, the company was still able to continue funding financially weak projects while investors funneled money into the company instead of superior investments, leading to economic loss as a result of information control. Our small-town salesman could sell his products above equilibrium prices, preventing customers from getting the bargain they would in a free market.

The market can also fail when the actions of individuals affect others against their will, or when people find themselves unmotivated to provide services that will be used by many people, such as highway systems and police forces. Sometimes the market itself can solve problems, such as the emergence of the internet, where consumers compare prices from sellers around the world. There are cases, though, in which individuals do not have the desire to single-handedly solve these problems, so a larger power is needed to do so.

The role of government intervention then is to attempt to correct these flaws. Mandatory information sources, such as financial statements, credit scores or even nutrition facts on food help provide all parties as much information as possible to make rational decisions. Without this free flow of information, they are acting blindly and could not possibly work in their own interest or that of an efficient market. Our government's regulation of financial markets empowers shareholders to access information about the companies they own in an attempt to prevent Enron-style scandals. The government also steps in to break up monopolies, prevent polluters from causing harm to others without consent and provide services that cannot be achieved on an individual level, such as road networks and military defense.

The work of these three economists reminds us both what the study of economics is for and how we apply it to public policy. Although the foundation of economics is the free market, it is intellectual laziness to simply assume that the free market is perfectly functioning at all times. Yes, it has shown to be the most reliable and efficient way to allocate resources, but as with all things involving humans, it too has its flaws. These economists have taught us that with a disciplined, mathematical approach rather than ideology, we can identify and understand what they are. As a society, we must work to develop solutions to these problems, because only then will a truly free market emerge.

Manning is an economics and finance senior.

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