Marginal Revolution

What do I think of the Cowles Commission?

Angry at the Margin asks in the comments:

I'm curious to know what you think of these authors, beyond the fact that they achieved mainstream success, given that the Economics that came out of the Cowles Comission is more or less the exact opposite of the Economics coming out of GMU.

Here goes:

1. Tjalling Koopmans.  He is a father of operations research and certainly worthy of a Nobel Prize, although perhaps in mathematics (if they had one).  His work on optimal routing theory remains central to transportation management and he also laid some foundations for quantum chemistry.  True, he doesn't really appeal to my inner Austrian but he was an awesome intellectual figure and he also helped us win WWII.  We should all bow down and pay homage to Tjalling Koopmans.

2. Kenneth J. Arrow.  His reputation now far surpasses that of Samuelson's and he was more philosophical to boot.  Where to start?   He understood his own impossibility theorem better than did the commentators plus he is the father of modern health care economics and that is maybe 1/10th of his total contribution!  People who know him also claim he is the greatest polymath they ever met.

3. Gerard Debreu.  He is the father of general equilibrium theory and also, as a philosopher of time, the real successor to Proust, as he once explained in an interview.  His extremely minimalistic approach to economics is better when it comes from the star than from the second-tier imitators but of course a real star he was.  I think of him as the father of economic science fiction and no I don't mean that as a snub.

4. James Tobin.  About fifteen years ago I realized he was in fact one of the deepest Keynesian thinkers.  He also proposed the Tobit model and laid the foundations for modern portfolio theory.  He lives in an intellectual world different from my own but he is clearly deserving of his Nobel Prize several times over.

5. Franco Modigliani.  He is one of the guys who could have won more than one Nobel Prize.  That's one for the Modigliani-Miller theorem (the implications of being able to chop up and carve up assets), one for the lifecycle hypothesis, and perhaps even another for his 1944 article on liquidity preference, which showed the concept was probably not enough to drive the Keynesian model except for the unusual case where liquidity preference was infinitely strong.  Sadly this piece remains neglected by modern purveyors of the liquidity trap idea.

6. Herbert Simon.  Bounded rationality and behavioral economics have already taken the profession by storm; his insights on computation, neurology, and artificial intelligence have not yet been incorporated into the mainstream in an effective manner, so his long-run influence will only increase.

7. Lawrence Klein.  I can't say I am a fan of his macro modelling approach, but I'll admit I haven't spent much time with his work.

8. Trygve Haavelmo.  He pioneered how to attack identification problems in econometrics; among other things without him there would be no Steve Levitt and no Freakonomics.  He didn't just get the Nobel Prize because he was a Scandinavian.

9. Harry Markowitz.  The father of modern portfolio theory, enough said. 

Amazing, isn't it?  I still think the profession as a whole overdoes theory (even today) and undervalues breadth and real world experience, but these are nonetheless thinkers to be revered.  Arrow and Simon are, by far, the two who have influenced me the most.  It's also fair to say that GMU economics often extends in other directions, but except perhaps for Herbert Simon these are well-mined thinkers by the rest of the mainstream so not every economist need run in their direction.

The Cowles Foundation Monographs in Economics

You'll find them here, free and on-line, courtesy of Division of Labor and Michael Greinecker.  The most famous is Kenneth Arrow's Social Choice and Individual Values but there are many classics in the series; in fact the hit rate is remarkably high even if they are not all recommended for the general reader.  Here is Wikipedia on the Cowles Commission, and by the way it is pronounced "coals."  Here is much more background, including links to photos.  Here is the current home page of an institution which is no longer distinctive precisely because it triumphed.  How is this for a casual sentence:

Several Cowles associates have won Nobel prizes for research done while at the Cowles Commission. These include Tjalling Koopmans, Kenneth Arrow, Gerard Debreu, James Tobin, Franco Modigliani, Herbert Simon, Lawrence Klein, Trygve Haavelmo and Harry Markowitz.

Economic update

On Intrade.com, the probability of a formal recession (two successive quarters of negative growth) in 2008 has fallen from the 70 percent range to the 30 percent range.

Some time ago I had proposed "the N word" economic indicator, namely that things would be really bad if lots of people were talking about the idea of nationalizing the banks.  That hasn't happened and indeed the people who predicted widespread solvency problems seem to have been wrong.

Paul Krugman has had numerous good posts on the Ted spread as an indicator of ongoing problems in financial markets.  I'll say this: during the Great Depression no one had to cite a spread to convince anyone that things were going very badly. 

Economic knowledge is always subject to revision, but so far the evidence points in the direction of a mild recession, in the informal sense, and that The Great Moderation is still with us.

Do local currencies do any good?

You know, like BerkShares, the local "currency" in Massachusetts.  Tim Harford is skeptical:

True, community currencies may very gently encourage trade with locals rather than strangers. But the gains from more trade with locals are more than offset by the losses from less trade with strangers.

See the full post for much more.  I am more positively inclined than is Tim.  First, local currencies blossom when the nominal money supply is too low and wages and prices are sticky downwards.  A boost in the real money supply is needed and the private sector will do it -- albeit at high transactions costs -- even if the government will not.  That's why so many of these local currencies blossomed in the 1930s but then disappeared.  They did good but then they were stamped out or ceased to be necessary.

Second, private currencies can serve as a form of price discrimination.  By accepting private currency from your local customers, and indeed only your local customers, you can charge them a lower net price and without being very public about it.  That's useful if the local economy is in the dumps.  Note that as the local community recovers, this motive for the local currency goes away as well.  It also implies that local currencies will be most popular with merchants who hold excess inventory and have some market power.