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  Written by
  Allen R. Sanderson


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Wealth of notions
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Finally, 22 economists whose ideas have at least one point in common: they all won the Nobel Prize. Here, in translation, are the theories that made Chicago famous.



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.


Daniel L. McFadden, a visiting associate professor in economics (1966-67), shared the 2000 prize with James Heckman for their work in microeconometrics, which combines the theory of individual, household, and firm behavior with data and statistical methods to produce empirical results in new research areas, many with quite practical applications and purposes. In particular, McFadden was cited "for his development of theory and methods for analyzing discrete choice."

That means, in effect, that McFadden has modeled individual behavior and responses to incentives as people select a mate (or elect to remain single), choose where to live, decide what career path to follow, and figure out how to get to work each day. One application of his work led to the design of San Francisco's Bay Area Rapid Transit system, another to the provision of housing and phone service for the elderly, and a third to the valuation of natural resources, including losses from natural and unnatural disasters.


A TASTE OF CHICAGO

MAROON IN THEIR BLOOD

THE CHICAGO MACHINE

WILL THE CIRCLE BE UNBROKEN

 


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  DECEMBER 2001

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