Sir James Mirrlees, a Nobel-prizewinning economist, died on August 29th

WHEN James Mirrlees got the call to say he had won the Nobel prize for economics in 1996, he assumed that a friend was pulling a prank. “Jim politely suggested that it didn’t sound very likely and he’d need some proof,” his wife later recalled. Friends and colleagues say it paints a fair picture of the man: polite and modest in all his dealings; rigorous and evidence-based in his work.

As a youngster, he would have been surprised to be told his future academic field. Born in the village of Minnigaff, in south-west Scotland, at school he had aspired to be a mathematics professor. Two undergraduate degrees in the subject later, from Edinburgh and Cambridge universities, he realised that the question of how to solve poverty in the developing world was “what really mattered”. That meant a career studying economics.

It was only after Oxford University appointed him as a full professor of economics in 1968, at the tender age of 32, that he started the work on asymmetric information and tax for which he won a Nobel prize. Previously, economists had tended to assume that all the parties to transactions had the same information. Anyone who has bought a house knows this is not true. The seller knows more than the buyer about any hidden flaws in the property. Professor Mirrlees showed how some of the problems this causes can be overcome.

In particular, he looked at how asymmetric information can confound the design of income-tax systems. In 1945 William Vickrey (with whom he shared his Nobel prize) had already shown how complex this is. Higher rates for higher earners were thought to promote equality. But they also risk productive workers cutting their hours, because their extra effort is taxed at a higher rate. If the government knew who these workers were and how they would respond to higher taxes, life would be simpler. But governments do not; they only have data on incomes.

In 1968, on what he later called the best day in his life, Professor Mirrlees cracked what became known as the “optimal tax problem”. A paper published in 1971 presented his neat mathematical model. If governments want more productive people to work harder, they must choose tax rates that incentivise them to do so. Data run through his model suggested that a flat marginal rate of 20% would be optimal. As a lifelong Labour voter, he had “expected the rigorous analysis of income-taxation in the utilitarian manner to provide an argument for high tax rates”. Instead, it provided some of the intellectual justification for flattening income taxes across the West in subsequent decades.

Economists who have pored over more detailed data now think that the highest earners could bear higher marginal rates without being put off doing extra work. But no one has proposed a better overarching model of income taxation. His paper influenced many other researchers to apply his ideas about asymmetric information to different areas. “Some say that for the rest of the 1970s and the 1980s economists were simply working out the footnotes from that paper,” explains Hyun Song Shin, a former doctoral student now at the Bank for International Settlements, the central bankers’ central bank.

Professor Mirrlees applied his models to other areas, such as how to deal with moral hazard. Insurers have long struggled with this problem: those they insure are likely to take more risks because they do not bear the losses caused. Professor Mirrlees showed how the problem can be fixed by tweaking the financial terms in the contract. And with Ian Little, also of Oxford University, he developed a new method of analysing costs and benefits that ended up being widely used in development work.

His influence on economics extends well beyond his own research. At Oxford, and towards the end of his career, at Cambridge, he taught over 100 research students across the entire field; they now work in many of the world’s top institutions. He was an extraordinary teacher, telling his students when they had gone wrong but leaving them to find the right questions and answers for themselves. Few doctoral advisers these days allow their students so much freedom. With his passing, they are fewer still.

This article appeared in the Finance and economics section of the print edition under the headline “What really mattered”