A
TASTE OF CHICAGO
In the outermost circle are three distant relations-Nobelists
who were at Chicago on a short-term research or faculty appointment
and who are generally associated with another institution or
school of thought.
Kenneth
J. Arrow, a research associate in economics in 1947-48
and an assistant professor the following year, shared the 1972
Nobel with John R. Hicks of Oxford for "pioneering contributions
to general economic equilibrium theory and welfare theory."
Let's
start with general equilibrium theory. If OPEC were to cut oil
production, the price of gasoline would rise, and automobile
owners would reduce consumption. The end result: higher prices
and lower quantities demanded in the gasoline market. Understanding
how much gas prices would go up and the quantity demanded down
constitutes partial equilibrium analysis. But the price jump
would also affect the demand for public transportation and automobiles,
the level of state gas tax receipts and Disney World's revenues,
the market for insulation, and employment prospects for oil
refinery workers. So general equilibrium theory focuses on the
ultimate determination of all prices, including wages. Arrow
showed through his "existence theorems" that in a
complex, interdependent economy there can, in fact, be a stable
equilibrium such that the quantity of goods and services supplied,
including labor, will equal the quantities demanded across those
same markets.
On
to "welfare economics," which in economic jargon is
not about reducing income inequality or poverty, but is concerned
with overall allocation of resources in a society and the extent
to which that expresses or reflects its preferences. In Social
Choice and Individual Values (1951) Arrow unveiled his "impossibility
theorem" (a.k.a. "the voting paradox"). Since
then he and other welfare economists have tried to demonstrate
the conditions under which the sum of individual preferences
in majority-rule voting may not reflect the society's preferred
choice in the aggregate; thus treating society as simply a sum
of its individual, independent parts can lead to faulty public-policy
decisions.
Lawrence
Klein, who spent a year at Chicago as a researcher
in economics (1942-43), won the 1980 Nobel "for the creation
of econometric models and application for the analysis of economic
fluctuations and economic policies." After completing his
dissertation under Paul Samuelson at MIT he came to Chicago,
joining a group of talented scholars and future laureates-Haavelmo,
Koopmans, Arrow, and Simon among them-who hoped to construct
an econometric model of the American economy.
Klein
builds large-scale macroeconometric models, most with a decidedly
Keynesian flavor, and most recently in international arenas
and developing economies. Such models are used extensively by
the financial sector, corporations, government agencies, and
university researchers here and abroad to forecast a number
of variables in an economy-short-term fluctuations in aggregate
output (GDP), employment, inflation, investment, consumption,
savings, and the international sector-and how public-policy
changes such as spending or taxation, or a shock such as an
oil price increase, affect those variables. There's general
agreement on the models' goals: achieving stability in employment
and prices, promoting economic growth, and testing underlying
economic theories. The debate is over the models' efficacy.
Chicago remains skeptical.
©2001 The University
of Chicago® Magazine