Inside the Economist’s Mind: Conversations with Eminent Economists

Published by EH.NET (April 2007)

Paul A. Samuelson and William Barnett, editors, Inside the Economist’s Mind: Conversations with Eminent Economists. Malden, MA: Blackwell Publishing, 2006. xxxvi + 419 pp. $30 (paperback), ISBN: 1-4051-5917-0.

Reviewed for EH.NET by Michael Szenberg, Pace University and Lall Ramrattan, University of California, Berkeley Extension.

The editors place the knowledge to be gained from this book in a reflective perspective. They raise mirrors reflecting the ideas of eminent economists presented in the volume, and these mirrors, like those of the Hubble Space Telescope, focus them in sizable bits for the digestion of the readers. The scope of the materials, from Keynesians to Real Business Cycle (RBC) through Rational Expectation (RE) theory reveals the editors’ preference for foundational material to build on and for learning from the sources. The interviews are meticulously balanced for along with the ideas of Franco Modigliani we get the ideas of Milton Friedman. Wassily Leontief’s input-output analysis is juxtaposed with Robert Aumann’s game theory contributions. The ideas of Robert Lucas and Thomas Sargent on RE are balanced with the ideas of James Tobin’s “Yale school of macroeconomics” and Christopher Sims’ statistical work on RBC. Martin Feldstein who advocates practical tax policies is balanced by Paul Volcker, who advocates non-borrowed reserve monetary policies. David Cass on sunspot equilibrium, Janos Kornai on the critique of socialism, Robert Shiller on finance, and Jacques Dreze on the evolution of economic thought spotlight deep insights into their respective fields. Reflecting on the scope of the book, we find rays of spontaneous thought from minds that breathe and dream of economics.

The editors take a generalist approach to the subject, bringing particular concepts in economics under one umbrella of thought. This idea is explicit in statements such as that “This book adds up to more than the sum of its parts” (p. xiii), and “We economists do primarily work for the peers’ esteem, which figures in our own self-esteem” (p. ix). One way to surface the generalist approach is to present the subject matter from many angles. The free-wheeling interviews for the volume bear evidence of this way of thinking. We are told that “the leaders of the field can openly reveal any matters that they may wish to share with the profession, whether personal, religious, or political” (p. xii). The generalist approach is also exemplified by the inclusion of contributors who do not hesitate to use mathematics as a language, and to represent thoughts that are backed up by analogies from the physical sciences. Some of the main examples in the book include Wassily Leontief, who invented the input-output analysis, which “played an important role in the clarification of general equilibrium theory” (p. 15); the analogy of such a method with production processes is obvious. In the same vein, Robert E. Lucas, Jr. is well-known for his mathematical treatment of business cycle theory through his RE hypothesis. Janos Kornai is a pioneer of mathematical programming and anti-equilibrium. Franco Modigliani built mathematical models of Keynesian economics. Milton Friedman, the distinguished leader of the monetarist school, was a trained mathematician. Paul Samuelson needs no introduction as a mathematical economist. His Foundations of Economic Analysis (1947) is the exemplar of the generalist viewpoint, where similarities among the various areas of economics are generalized. He wrote: “I once claimed to be the last generalist in economics” (Samuelson 1986, 800).

One outstanding feature of the interviews in this collection is their representation of methodological operationalism. Consistently, operational theories support a concept with a set of processes as evidenced by Samuelson who derived “operationally meaningful theorems” in economics (Samuelson 1947, p. 3). Operationalism makes a theory useful, and even layers it with truth-values, namely, the ideas that a theory must explain or predict reality. Franco Modigliani’s Keynesian model was found highly operational when the Federal Reserve Board implemented it as the first generation of the FRB-MIT-Penn-SSRC Model (MPS), which operated during 1969-1995.

The operational aspect of Paul Volcker’s nonborrowed reserve policy figured highly in the early design of that model. The financial sector of the MPS was the largest, being built up by strata of financial equations reflecting unborrowed reserve requirements, discount rates, and the nominal money supply. As the interviewer puts it, Paul Volcker embraced “‘practical monetarism’ operationally” (p. 178). The response from a change in unborrowed reserves to GNP works through lags and is subject to some delayed effects. Those adaptive lagged structures were overhauled in 1995 into the current Federal Reserve Board U. S. model in order to reflect new expectation elements.

Wassily Leontief’s Input-Output model is another good example of an operational model. Tables of data of required inputs for production were used in planning and economic base multiplier analysis, even though the data input is of an exhaustive nature. Efforts are being made to build large-scale econometric models to represent Robert Lucas’ RE hypothesis. Already, Thomas Sargent (1979, p. 20) has demonstrated the operational feasibility of smaller RE econometric models.

The editors do not appraise the ideas expressed in the volume as to their applicability for the twenty-first century. A lack of such an assessment of the contributions could be forgiven if the ideas were only theoretical. But our review implies that the ideas covered in this volume have some ability to predict and have been validated thus far in their confrontation with reality. For instance, a recent appraisal of Samuelson’s ideas (Szenberg et al., 2006) envisages a high likelihood of survival in the twenty-first century. Having recently reviewed the works of Franco Modigliani (see Szenberg and Ramrattan, 2007), we can say that his ideas represent a progressive research program. Milton Friedman’s ideas about the Chicago View also have progressive tendencies, particularly since the RE hypothesis has given it new life. We have seen more applications of input-output analysis in the post-Keynesian direction, a still budding research program, and anti-equilibrium has been developing in the direction of non-Walrasian equilibrium.

The fruits of erudition in this book are to be recommended. Besides the foundation that the editors have laid for future generations, the general reader can learn of the creative process in economics by reading through these interviews. This can be accomplished by absorbing the stories the economists tell of how they meandered out of the economic thought they have inherited in order to discover new ideas. If one is looking for answers to how economists discover great thoughts, this book is a place to start looking. For instance, Wassily Leontief dispels the notion that his input-output analysis grew out of Marx’s schema. Although, he was educated in Marxism in Russia, his motivation came more from Quesnay’s Economic Table, and from classical demand and supply motivations. He wrote to “register the facts in a systematic way … I read systematically all economists beginning with the seventeenth century. I just read and read, so I had a pretty good background in the history of economic thought, and my feeling is that I understand the state of the science” (p. 16). In another instance, Robert Lucas tells how moving from a positive to a normative perspective helped him to develop the RE hypothesis: “How should people use the information available to them to form expectation? But these should? always be an economist’s first question. My Dad was wrong to think that socialism would deliver milk efficiently, but he was right to think about how milk should be delivered” (p. 60, italics original). In a third instance, Franco Modigliani tells how he discovered the MM hypothesis. He had studied the Keynesian investment concept as a graduate student, “which explained investment in terms of the interest rate, seen as the cost of capital, the cost of funds invested. I was then under the influence of the views of the corporate finance specialists that the cost of funds depended upon the way in which the firm was financed … I gradually became convinced of the hypothesis that market value should be independent of the structure of financing” (p. 97). In yet another instance, Paul Samuelson explained the influence of Frank Knight and Jacob Viner on his formative mind. He recalled texts circulated by Knight of how Say’s Law and market clearing failed during a rare depression. He also explained that “the 1930s graphics of trade theory by Lerner, Leontief, me, and Meade was in its essence already in a 1931 LSE [London School of Economics] Viner lecture.” He then set out to “lift the level of mathematical techniques during the second third of the twentieth century” (p. 184).

The readers will find this a source book for comprehensive thought on the deep matter of economics. No one interested in the modern economy should fail to read it, though, our recommendation is not to read it at one sitting.

References:

Paul A. Samuelson, 1986. Collected Scientific Papers of Paul A. Samuelson, Volume 5. Kate Crowley, editor, Cambridge, MA: MIT Press.

Thomas J. Sargent, 1979. Macroeconomic Theory. New York: Academic Press.

Michael Szenberg and Lall Ramrattan, 2007. Franco Modigliani: A Mind That Never Rests: An Intellectual Biography. New York: Palgrave Macmillan.

Michael Szenberg, Lall Ramrattan and Aron A. Gottesman, editors, 2006. Samuelsonian Economics and the Twenty-First Century. New York: Oxford University Press.

Lall Ramrattan is an Instructor with the University of California, Berkeley Extension. Michael Szenberg is Chair and Distinguished Professor of Economics in the Lubin School of Business at Pace University.