Sanderson's interesting article, "Wealth of Notions"
(December/01), omitted at least one other economics Nobelist who
had an affiliation with Chicago, albeit not becoming a member
of the Chicago School of Economics. I refer to the 1985 winner,
Franco Modigliani, who was affiliated with the Cowles Commission
in 1948 as a consultant, according to his Nobel autobiography.
Nobelist himself credits a teacher of mine (which Franco also
was), Jacob Marschak, with having been a source of knowledge,
insight, and inspiration to him before coming to Chicago. Indeed,
it was Marschak, a longtime U of C economics professor who brought
Modigliani to the Cowles Commission.
M. Weingartner, SB'50, AB'50, AM'51
article "Wealth of Notions" by Allen Sanderson, which
gave short summaries about the 22 Nobel laureates in economics
connected with the University of Chicago, was a terrific idea
and, considering the severe space limitations, was generally well
done. However, in the case of Freidrich Hayek, the one laureate
about whom I happen to have read a good bit, a couple of very
salient and interesting facts were omitted.
Hayek's position at the U of C was as a professor in the Committee
on Social Thought (as noted in the article), rather than in the
Department of Economics, because the faculty of that department
would not accept his appointment and so President Hutchins, who
was determined to have Hayek at Chicago, was forced to find a
place for him on the Committee.
the likely reason that the economics faculty spurned Hayek was
that he (along with his teacher Ludwig von Mises) was a leading
proponent of the Austrian School of Economics-which rejects the
concept of general equilibrium as providing a useful description
of a real world economy or as even being a useful approximation
to the real world. But that assumption (general equilibrium) underlies
all (or almost all) of mainstream microeconomics both then and
Austrian Economics had demonstrated that central government planning
of an economy is doomed to failure (so much for any validity to
mainstream macroeconomics), and that includes, in particular,
the Federal Reserve System and central planning of a country's
money supply. You can imagine what the monetarists at Chicago
thought (and still think) of that idea.
so, as Paul Harvey would say, now you know the rest of the story.
R. Baker, SB'59, SM'60
re "Wealth of Notions": I trust that Mr. Sanderson was
not in one of Mr. Scholes's Bus 337 classes.
Sanderson described a call option from the standpoint of the purchaser
of the option. He then suggests that the option be discarded if
the stock rises in price. This would mean throwing away something
that had become more valuable.
G. Brandon, MBA'77
Sanderson responds: Mr. Weingartner is correct in that Franco
Modigliani certainly spent time at the Cowles Commission (1949-54),
after holding a fellowship in political economy here in 1948.
The "Clintonesque" question becomes: What do we mean
by here, and did his affiliation as "consultant" fall
under our traditional definition of a research or faculty appointment?
Inasmuch as Mr. Modigliani held concurrent professorial appointments
during his Cowles days, first at the University of Illinois
(1949-52) and, from 1952 until 1960, at the Carnegie Institute
of Technology (now Carnegie Mellon University), his Chicago
relationship appears more tangential than those of other Cowles
members-and subsequent laureates-whose work I reviewed. But
we would certainly be proud to include him; in fact, the University
awarded him an honorary doctorate in 1967. I say we follow Mr.
Weingartner's nomination and count him!
Nobel committee cited Modigliani's "pioneering analyses
of saving and of financial markets." The first contribution
falls under the heading of macroeconomics, where he developed
a theory of savings patterns, now known as the life-cycle hypothesis.
This approach is complementary to Milton Friedman's permanent
income hypothesis and other theories and models that seek to
explain individual saving and consumption decisions over time.
His second contribution is firmly in the realm of microeconomics.
In the late 1950s he and future Chicago laureate Merton Miller
laid the cornerstones of corporate-finance theory, known in
the literature as the Modigliani-Miller theorems.
at Chicago has always been characterized by diversity of opinion
and scholarship. The precise location of Mr. Hayek's appointment
at Chicago had more to do with what was considered economic
research at the time and in recognition of the type of work
he was doing rather than his particular views, as Mr. Baker
suggests. His assertion that monetarists at Chicago would be
uncomfortable with the proposition that the Federal government
or the Federal Reserve would actually serve to stabilize and
improve an economy's performance is incorrect, as should come
across in my summaries of the work of Milton Friedman and Robert
Brandon is an astute reader and perhaps an even better investor.
To reduce the risk of a large decline in a stock's price, a
person can purchase a "put" option, giving him or
her the right to sell the stock at some date in the future.
If the market price then rises, the investor discards the option
and sells the stock at the higher actual price; if the price
drops, then he or she would exercise that "put" and
sell the stock at the fixed option price. I should have written
"sell" not "purchase" in my explanation
of Myron Scholes's contributions.