Sir James A. Mirrlees

A mathematical prodigy, James Mirrlees spent most of his rural Scottish childhood in solitude, solving the tricky problems he found in a never-ending pile of books. At Cambridge, he realized that his mathematical skills could help solving real world-problems and decided to enter the world of economics. Mirrlees became a pioneer of information economics, working for example with Nobel Laureate Peter Diamond on economic transactions with limited or asymmetric information. His specialty: transactions "between you and the government," more commonly known as paying taxes.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (shared), 1996

Mirrlees’ most important achievement was establishing an optimal income taxation theory, building on the work of his co-laureate William Vickrey. "Some people are very productive and have a rather high wage rate," Mirrlees explained. "Other people will not be able to earn such a high wage rate, in many cases because they can’t quite do something a higher-level lawyer or a computer programmer can do." But in a world of income inequalities, how can you create a tax system that’s fair and at the same time incentivizes people to be productive?

The desire to create a system that generates as much economic wellbeing as possible is a common one, with ideas rooted in the real world, but the question of how to do this is, according to Mirrlees, a mathematical one. And he was the ideal candidate to find an answer. Utilizing his complex methodological approach, he argued that there’s an important trade-off between equality and efficiency, and that it’s too easy to simply take the most from people with the highest incomes.

What could an optimal tax system look like?

Though the numerical results of his model came out with relatively flat tax rates compared to the tax systems in use, Mirrlees knew his assumptions had changed due to new information available. "We’ve learned more since then, and if you use a more realistic view, most of the tax systems you come up with are u-shaped,” he said. “You have higher marginal tax rates for low incomes and higher marginal tax rates for high incomes, but lower ones in the middle."

James Mirrlees not ready for retirement

Mirrlees had been living in Hong Kong since 2002. One reason he decided to leave Britain was that there was a fixed retirement age at the University of Cambridge, where he was a professor, and he wasn’t ready to retire. Plus, he thought it was a great opportunity to get close to the Chinese economy which was at that time developing fast. "I’ve always been very interested in developing countries,” he said. “Nobody would call Hong Kong a developing country now, but it was very close then."

It has been roughly 40 years since the Cultural Revolution ended with the death of its leader Mao Zedong in 1976. Slowly but steadily, China has opened itself up to the world economy. The key to development is the production of labor-intensive goods with cheap labor, developing agriculture and giving the land back to its people.

Today, the International Monetary Fund lists China as the world’s second largest economic power. Nevertheless, the figures are a little different when looking at the UN Human Development Index, which ranks countries according to life expectancy, education and per capita income. But Mirrlees noted that wages are rising. Though growth rates are very hard to predict precisely, he assumed that urban wages in the big Chinese cities would change dramatically. However, he underlined that it’s not simply about whether people will be enjoying higher incomes.

How did China become one of the world’s top economies?

Mirrlees saw many things from a different perspective. Events that are not everyday news in Europe have become more important to him, like territorial disputes in the South China Sea or the struggle between Japan and China. He also thought a lot about the situation of Chinese citizens and frequent human rights abuses. "In the 1990s, there was growing freedom for intellectuals in the country. That’s certainly not true now," he said.

Living in Hong Kong is different from living in mainland China. Mirrlees found himself in the middle of an interesting, and potentially dangerous, development. While China is trying to gain more and more influence in its administrative region, he said that "A lot of the people I talk to have a very strong sense of being Hong Kongers. I wouldn’t be surprised if they would very definitely vote, given the opportunity, for a maximum degree of independence."

The Eurozone; the "sick man" of Europe

Mirrlees, who was Scottish by birth and who, in 1998, kneeled before the Queen, was living far from home. But of course he knew what was going on. He was a member of the Council of Economic Advisors to the Scottish Government and, as such, he was involved in discussions about the independence referendum in 2014. "It may take a little while," he said.

When talking about the Eurozone however, Mirrlees thinks the Euro was a bad deal right from the start. According to him, if there is a solution for the Eurozone, it includes severe measures like the cancellation of austerity policies, wealth taxation and reducing taxes for average citizens. "I don’t know why they’ve found it so hard to do something sensible about taxes," he says.

The Euro - a very bad deal

When asked what has made him most proud, Mirrlees struggled to find an answer. Pride is not a natural word for him to use. He remembered how his childhood environment was deeply rooted in the Presbyterian tradition, where pride was almost the worst of sins. The father of two explained how he felt "great pleasure" when solving the problem of optimal income tax - but there’s a different, rather personal story to tell, a story of true accomplishment and joy. "What I particularly remember about the Nobel Prize ceremony is my daughter sitting in the audience," Mirrlees said with a huge smile on his face. "I’d never seen anyone look so absolutely happy and delighted. And that was a very special moment."