S IZA DP No. 3956 E I R E S R E P A Lessons from the Laureates P N O William Breit I Barry T. Hirsch S S U C S I D January 2009 Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor Lessons from the Laureates William Breit Trinity University Barry T. Hirsch Georgia State University and IZA Discussion Paper No. 3956 January 2009 IZA P.O. Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 E-mail: [email protected] Any opinions expressed here are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 3956 January 2009 ABSTRACT * Lessons from the Laureates This paper uses as source material twenty-three autobiographical essays by Nobel economists presented since 1984 at Trinity University (San Antonio, Texas) and published in Lives of the Laureates (MIT Press). A goal of the lecture series is to enhance understanding of the link between biography and the development of modern economic thought. We explore this link and identify common themes in the essays, relying heavily on the words of the laureates. Common themes include the importance of real-world events coupled with a desire for rigor and relevance, the critical influence of teachers, the necessity of scholarly interaction, and the role of luck or happenstance. Most of the laureates view their research program not as one planned in advance but one that evolved via the marketplace for ideas. JEL Classification: B3, B2, A1 Keywords: Nobel economists, economic thought, autobiography Corresponding author: Barry T. Hirsch Department of Economics Georgia State University Atlanta, Georgia 30302 USA E-mail: [email protected] * This essay was originally published as “Lessons from the Laureates: An Afterword,” in William Breit and Barry T. Hirsch, eds., Lives of the Laureates: Twenty-three Nobel Economists, Fifth Edition (Cambridge, Mass: The MIT Press, 2009). The Nobel Economists Lecture Series at Trinity University was originated by William Breit in 1984 and overseen by him through much of its history. Lessons from the Laureates A goal of the Nobel Economists Lecture Series at Trinity University has been to enhance our understanding of the link between biography, and most especially autobiography, and the development of modern economic thought. Each of the twenty-three lectures, organized around the theme “My Evolution as an Economist,” provides source material for this endeavor. The purpose of this afterword is twofold. The first section identifies common themes as well as some disparate views expressed by the laureates in describing their development as economists. Among these are the importance of real-world events coupled with a desire for rigor and relevance, the critical influence of teachers and scholars during the laureates’ formative years, the necessity of scholarly interaction and a lively intellectual environment, and the role of luck or happenstance in their lives. Most, but not all, of the laureates view their research program as having been largely unplanned, evolving via the marketplace for ideas and taking form as a coherent body of thought only after the fact. There are exceptions, however. In summarizing these themes, we rely heavily on the words of the laureates, taken from their Trinity University lectures. The second section assesses the difficult question of whether or not biography is important for understanding the development of modern economic thought. Ultimately, we cannot provide a definitive answer to this question. One can neither observe nor simulate in any methodical fashion the appropriate counterfactual—how economic thought would have developed absent these individuals and their particular life histories. The inability to answer this question in a definitive way, though, does not imply that it should be ignored. These twenty-three essays provide ample source material for reasoned speculation on the significance of biography in the evolution of economic thought. 1 Common Themes and Disparate Voices Few individuals begin life expecting or desiring to be an economist. This same generalization holds true among Nobel economists. The laureates came to economics based on the influence of particular teachers or scholars, because of the intellectual challenge and rigor of economics, or because economics was perceived as being relevant for real-world issues. Several of the laureates cite their favorable reaction following exposure to formal economics. Four examples follow: Rare is the child, I suspect, who wants to grow up to be an economist, or a professor. . . . Cutting my teeth on The General Theory, I was hooked on economics. Like many other economists of my vintage, I was attracted to the field for two reasons. One was that economic theory is a fascinating intellectual challenge, on the order of mathematics or chess. I liked analytics and logical argument. . . . The other reason was the obvious relevance of economics to understanding and perhaps overcoming the Great Depression and all the frightening political developments associated with it throughout the world. . . . Thanks to Keynes, economics offered me the best of both worlds. (James Tobin) In the first semester of my sophomore year I took required courses in accounting and microeconomics. The former was, in reality, bookkeeping—and mindless bookkeeping at that. I loathed it. But microeconomics had everything: rigor, relevance, structure, and logic. I found its allure irresistible. The next semester I changed my major to economics and never turned back. Thus my first stroke of luck. I sometimes break out in a cold sweat thinking about what might have happened had I taken a modern accounting course and an institutional economics course. (William Sharpe) My choice of Colorado College was more eventful then I could have forecasted. . . . In my junior year, I took a readings class in economic growth from Ray Werner. . . . We read Ricardo, Smith, and Arthur Lewis. . . . The professor also loaned me his copy of Paul Samuelson’s Foundations of Economic Analysis (which I still own) to read as an extra bonus. Samuelson’s Foundations had a major impact on me. It demonstrated to me that economics could be as rigorous and empirically relevant as physics. . . . At the same time, it showed that economics had empirical content through the theory of revealed preference. I saw a counterpart in social science to the hard science I had experienced in Oppenheimer’s classroom. Lewis’s Theory of Economic Growth appealed to my liberal arts training. . . . My junior year readings class led me to decide on 2 economics as a career. . . . I could have my science and my social science too. (James Heckman) I relished the unbending rigor of mathematics, physics, and engineering, but then, as a senior, I took an economics course and found it very intriguing—you could actually learn something about the economic principles underlying the claims of socialism, capitalism, and other such “isms”? Little did I know, but I was intrigued. Curious about professional economics, I went to the Caltech library, stumbled on Samuelson’s Foundations of Economic Analysis, and later that year, von Mises’s Human Action. From the former, it was clear that economics could be done like physics, but from the latter there seemed to be much in the way of reasoning that was not like physics. I also subscribed to the Quarterly Journal of Economics, and one of the first issues had a paper by Hollis Chenery on engineering production functions. So economics was also like engineering. I had not a hint then as to how much those first impressions would be changed in my thinking over the decades to follow. (Vernon Smith) For at least some, economics appears to be chosen because alternative paths are closed or unappealing: I gather that the sponsors of this set of lectures hope to see how one’s thinking is tied to one’s environment. I am not a very good example. I began by showing you that I became an economist when I really wanted to be an engineer, became a university teacher because there was nothing else for me to do, and became an applied economist because that was my mentor’s subject. The next phase of this story continues in the same vein. I am not complaining; fate has been kinder to me than to most other persons. I am merely recording what happened. (W. Arthur Lewis) I was not an immediate success in Australia. My English was not very good and my Hungarian university degrees in pharmacy and philosophy were not recognized in Australia. It was clear that I would have to do factory work, which I did on and off for three years. Often I was unemployed because my manual skills were very deficient. I typically could not keep any factory job for more than a few days. Sometimes I would keep a job for a couple of weeks, but this was the exception. . . . I enrolled at the University of Sydney as an evening student. I did so as a student in economics. . . . I loved the logical elegance of economic theory. (John Harsanyi) Nor do all Nobel economists embrace fully the label “economist”: 3 I am not sure that I ever did become an economist. I started as a statistician and have ended as a time series econometrician. . . . It soon became clear to me that economists think differently than mathematicians. Rather than dealing with carefully defined objects obeying precise rules, economists considered large numbers of independent decision makers who based their decisions on changing experiences including learning, information, and institutions. These decision makers were assumed to be rational and sometimes super-rational to an impossible extent. When put into a microeconomic framework their behavior could be satisfactorily described to a mathematician, but I did not recognize my own economic behavior. In aggregate, these decision makers formed markets and became captured by mysterious forces, such as supply and demand, arbitration, and the invisible hand, which produced charmingly simple rules but of dubious reality. (Clive Granger) The desire for relevance is an important theme in the lectures. As indicated in the earlier quote from Tobin, for the older generation of Nobel laureates it was the Great Depression that triggered an interest in economics. Tobin as well as other laureates make this point forcefully: Keynes’s uprising against encrusted error was an appealing crusade for youth. The truth would make us free, and fully employed too. . . . [E]conomic knowledge advances when striking real-world events and issues pose puzzles we have to try to understand and resolve. (James Tobin) Yes, 1932 was a great time to be born as an economist. The sleeping beauty of political economy was waiting for the enlivening kiss of new methods, new paradigms, new hired hands, and new problems. Science is a parasite: the greater the patient population the better the advance in physiology and pathology; and out of pathology arises therapy. The year 1932 was the trough of the Great Depression, and from its rotten soil was belatedly begot the new subject that today we call macroeconomics. (Paul Samuelson) Soon there will be no more active economists who remember the 1930s clearly. The generation of economists that was moved to study economics by the feeling that we desperately needed to understand the depression will soon have retired. Most of today’s younger and middle-aged macroeconomists think of “the business cycle” as a low-variance, moderately autocorrelated, stationary, stochastic process taking place around a generally satisfactory trend. That is an altogether different frame of mind from the one with which I grew up in the profession. (Robert Solow) 4 Although the Great Depression is long past, the desire for relevance remains crucial among recent Nobel laureates. Edmund Phelps characterizes his research as a response to a prevailing orthodoxy that lacked relevance, leaving too little room for realistic human behavior and uncertainty. For example: But having read Hayek’s Prices and Production (2nd ed., 1935) and Keynes’s General Theory, I could sense that the neo-Keynesian research, though intriguing and possibly useful in some ways, had utterly abandoned the modernist emphasis on incomplete information and imperfect knowledge in favor of some new method or methodology with which I was not at all comfortable. Instinctively, as Keynes would have said, I understood that the neo-Keynesian models, in abstracting from these things, inadvertently left no role for humans to play. There could be no beliefs as distinct from what is true, no expectations as distinct from what is or will be, no mental stimulation and challenge, no problem solving, no creativity, and no discovery. (Edmund Phelps) Gary Becker is one of several laureates who looked for relevance with respect to social issues: During my senior year at Princeton, however, I was losing interest in economics and began to think that I should go into something else. Economics seemed excessively formal to me. . . . Economics appeared incapable of helping me understand the issues in which I had an interest: inequality, class, race, prestige, and similar issues that were important for society. . . . I remained unhappy— unhappy by what seemed to me a disconnect between what economists would talk about in textbooks and elsewhere and what I wanted to talk about. . . . [At Chicago] Milton Friedman became the greatest influence of any individual on my development as an economist. Attending his graduate course in price theory was just exciting, and I would eagerly wait for that course to come twice a week. . . . Here I saw economics as a tool and not simply as a game played by clever academics. . . . [It] showed me what I thought was not possible. You can do economics and do it in a rigorous way and nevertheless talk about important problems. (Gary Becker) The above quote from Becker shows how Friedman opened his eyes about the relevance of economics. Most who were students at the University of Chicago mention the charismatic 5 importance of Friedman in their lives. Personality matters. But none of the Nobel laureates, even Friedman, is more renowned for their personality than for their scientific work. Becker is far from alone in recognizing the influence of a great teacher or particular individual. Myron Scholes, James Buchanan, and Edward Prescott are among the others: McMaster turned out to be a fortuitous choice. Because it was such a small school, Professor McIver, a University of Chicago graduate in economics, worked closely with me in my studies. He directed me to read and understand the work of many classic economists, including the more contemporary teachings of Milton Friedman and George Stigler. . . . Because of my enjoyment of economics and my planned return to business, I decided on business school, not law school. Although my family wanted me apply to other schools, such as Harvard, I wanted to go only to the University of Chicago, where Stigler and Friedman were teaching and conducting research. (Myron Scholes) I am not a “natural economist” as some of my colleagues are, and I did not “evolve” into an economist. Instead I sprang full blown upon intellectual conversion, after I “saw the light.” . . . I was indeed converted by Frank Knight, but he almost single-mindedly conveyed the message that there exists no god whose pronouncements deserve elevation to the sacrosanct, whether god within or without the scientific academy. Everything, everyone, anywhere, anytime—all is open to challenge and criticism. There is a moral obligation to reach one’s own conclusions, even if this sometimes means exposing the prophet whom you have elevated to intellectual guruship. (James Buchanan) With this collaboration, I understood the comment he [Lucas] made after I defended my dissertation. He was telling me to use dynamic economic theory to model aggregate phenomena. With this collaboration I became a Bob Lucas student and an economist. To return to the theme of this lecture, Bob Lucas is the most important person in my development as an economist. Having been at the right place at the right time was another stroke of luck. The principle guiding my research is the importance of theory interacting with measurement. I came to the conclusion that there was no hope for the approach being used in macroeconomics of empirically searching for the policy invariant laws of motion of the economy. I had read the Lucas critique. Something else was needed. Given this, I stopped teaching what was then called macroeconomics and began using dynamic equilibrium models to study aggregate economics as practiced by Bob Lucas. (Edward Prescott) 6 Tobin emphasizes the important role played by his graduate school professors, but suggests that much of this learning occurred outside the classroom: I see in retrospect that our professors left most of our education to us. They expected us to teach ourselves and learn from each other, and we did. They treated us as adult partners in scholarly endeavor, not as apprentices. I am afraid our graduate programs today try too hard to convey a definite and vast body of material and to test how well students master what we know. (James Tobin) Nearly all the laureates identify a particular work environment, usually but not always a university economics department, as a critical factor in their evolution as an economist. Stigler, Lawrence Klein, and Sharpe are particularly emphatic on this point: So to understand the conditions under which modern work in economics has emerged, one must look at the conditions of training and work of the modern scholar. Those conditions are no substitute for creativity, but they have become an indispensable condition for creativity to be exercised. . . . There is good reason for believing that economics is a social science in quite another sense from the indisputable one that it concerns itself with mankind in social relationships. It appears also to be a social science in the literal sense that it is a science in which it is difficult to do creative work if one is not in a congenial intellectual environment. (George Stigler) A truly exceptional group of people was assembled in Chicago during the late 1940s. I doubt that such a group could ever be put together again in economics. From our closely knit group, four Nobel laureates have emerged, and two others came from the next bunching of Cowles researchers—partly at Chicago and partly at Yale. We worked as a team and focused on a single problem—to put together an econometric model of the American economy (a second attempt after Tinbergen’s of the 1930s)—using the best of statistical theory, economic theory, and available data. After about four or five years of intensive research built up around this theme, the team dispersed to new openings in academic life. (Lawrence Klein) The Rand [Corporation] of 1956 was a truly unique organization. . . . Employees were free to work any hours they chose, within wide limits. Office doors were open, intellectual discussions on the most wide-ranging topics were de rigueur, and everyone was expected to spend one day per week on research of strictly personal interest. 7