Who you gonna call? When solving thorny problems that combine theory and empirical analysis, Chicago economists rely on colleague Kevin Murphy as their go-to guy.
It’s kind of an unwritten rule among Chicago economists. If you have a difficult problem, a really hard problem, you have to try to solve it for at least three days—three concentrated, focused, uninterrupted days—before you call Kevin Murphy.
Robert Topel, the Isidore Brown and Gladys J. Brown professor in urban and labor economics, had such a problem, a programming issue involving job search and human capital. “Very complex,” he says, “with lots of conditions.” He had struggled with it for substantially more than three days, thought he had it licked, or at least come close, and he was proud of how he had gotten there. So, just to be sure, he called Murphy.
“Kevin answers, I explain, he starts talking me through it,” says Topel. “On the whole, I had done quite well. But before long Kevin mentions a few subtle aspects of the problem that I hadn’t seen. As we talk, I’m thinking, ‘Good old Kevin.’ I imagine him sitting at his kitchen table, pencil in hand, scribbling equations on a napkin. He’s dropped everything to help me with my problem, and in ten minutes he’s explaining aspects of it to me that I would never have seen. Then I hear a splash, and a squeal, then another splash, and it dawns on me: There’s no pencil, no paper. Kevin’s holding the phone to his left ear with his shoulder while he’s giving his kid a bath.”
That kid is now 21, a junior at the University of Wisconsin, but one thing that has matured along with him is his father’s reputation for instant and boundless insights, an uncanny ability to see any economic problem from a new, clarity-providing angle. As a consequence, if you ask anyone who knows him about Kevin Murphy, PhD’86, the George J. Stigler distinguished service professor in economics and the Graduate School of Business, they all respond the same way.
“He’s brilliant, very brilliant, and I don’t use that term often,” says colleague Gary Becker, AM’53, PhD’55, winner of the 1992 Nobel Prize in economics. “Kevin is unusually brilliant. He’s technically very good, catches on quickly, has a good imagination. He’s innovative and he has a good nose for ideas. He is at the top ranks in economics. Among those his age, nobody is better.”
“Kevin is far and away the smartest guy in the field,” says Freakonomics author Steven Levitt, the Alvin Baum professor in economics and the College. “Often, the better you get to know these guys, the less ingenious they seem. It’s just the opposite with Kevin. Not only is he widely regarded as the smartest economist on earth, but he can also fix your refrigerator.”
“He’s the world’s biggest bundle of human capital,” says Topel. “He’s the smartest guy, the clearest thinker, and the nicest guy I ever met, in the most unlikely package.”
That package is strikingly unprofessorial. “I’m not a fancy guy,” says Murphy, 48, “not your typical academic.” An athlete in his high- school days—he was thinner then—he has, over the years, taken on the look of a former football player, maybe a linebacker, gone slightly to seed. He drives a pickup truck, buys his clothes at Sam’s Club, wears a baseball cap at all hours—a vestige of his years coaching Little League—both outdoors and in. He teaches, speaks at conferences, and has testified before Congress wearing cap, jeans, and sneakers. He has been photographed wearing a tie, but not recently, and there are rumors that the tie was added later, using Photoshop.
“I have a tie,” he insists. “Gary gave me one.” He bought another in an airport on the way to a meeting. “I have four of them,” he boasts, after a moment’s thought, “and a suit.”
“It’s not like I go home and read books for enjoyment,” he told a writer for the GSB alumni magazine last winter. “I don’t do a lot of that stuff.” Instead he makes furniture, some of it quite elaborate. “Woodwork,” explains Becker. “He made me a nice holder for my books,” he adds, referring to the two-volume first edition of Adam Smith’s Theory of Moral Sentiments, presented to him at the April opening of the GSB’s Becker Center.
Murphy’s house, 36.5 Mapquest miles southwest of the GSB in New Lenox, Illinois, is filled with his handiwork: elegant wooden cabinets, tables, and shelves, each carefully crafted but with one tiny, deliberate flaw. “I think it adds that handmade touch,” he says, “something personal. I also enjoy pointing them out.”
For years he and his family—wife Arlene, son Chris, daughters Erin and Ellen, and two Jack Russell terriers—lived about 16 miles to the east in the suburb of Flossmoor, where he joined the school board, “the most frustrating thing I’ve ever done,” and coached Little League. Earlier this year they moved farther out, to a heavily wooded subdivision outside New Lenox. In late summer, you can’t see another house from his backyard. Power tools and lumber take up three of the slots in his four-car garage, and the fourth is at risk. His next big home project is to furnish a new study, but that has to wait for the logs, remnants of a dead walnut tree out back, to dry before he cuts them into boards.
Despite the lumberjack look, he is a card-carrying, certified academic. In 1997 he won the John Bates Clark Medal, given every two years to an outstanding economist under 40. Last fall he was named one of 25 recipients of the MacArthur award—a $500,000, unsolicited, no-strings-attached prize popularly known as the “genius” grant.
When Murphy won the MacArthur, a writer for the GSB student paper asked him how to distinguish between a genius and a really smart person. “A really smart person will come up with what you would come up with,” Murphy answered, “only faster. A genius will come up with something that you would never come up with, no matter how long you worked on it.”
“Some guys are great at that,” he elaborates, “guys like Gary Becker and Milton Friedman [AM’33]. They’re outstanding at seeing beyond what other economists are able to see. Those guys are the stars of the show in my opinion. Or Steve Levitt. He’s quick and he’s smart, but he’s also able to think of things that other people wouldn’t think of. Look at the things he’s done and ask, if Steve hadn’t done it, would it have gotten done? And the answer for most of it is, no.”
“I am not sure,” he says, “that under that definition, I would qualify.”
This modesty, friends say, is real, largely genetic, but enhanced by his upbringing. His father was an electrician who liked woodworking. One of three children, and the only son, Murphy grew up in Inglewood, a tough, blue-collar suburb of Los Angeles. One of his sisters became a nurse; the other does urban planning.
Murphy entered the business world at 14 when he took an after-school job sorting soda bottles in a small L.A. grocery store, working his way up to bagging groceries. Before too long he was a stock clerk. He bought produce, cut meat, “did all kinds of stuff.” He stuck with the grocery business all the way through college, working full time while taking classes at the University of California, Los Angeles.
“College was a sideline for me,” he says. He only got interested once he “started to have some success and meet people in economics.”
One of those people was Bob Topel. As a graduate student and teaching assistant at UCLA in 1978, he graded Murphy’s first economics exam, written when he was a freshman. “It was beautiful,” he recalls. “I was stunned. As I read it I kept thinking, ‘Who is this guy?’”
A few days later Topel met with the professor, Michael Ward. Before Topel could mention the exam, Ward started telling him about this “big lunk” who had wandered into his office and started asking complicated questions, things you would expect from one of the better graduate students, then walked over to the blackboard, worked them out himself, said thanks, and wandered off. “Bob,” said Ward, “who is this guy?”
Before long, Murphy was taking graduate classes in economics, math, and statistics. As a junior he was almost thrown out of a famously intimidating graduate price-theory course. In a profile written for the Journal of Economic Perspectives after Murphy won the Clark Prize, Finis Welch—one of Murphy’s teachers at UCLA and now president of Welch Consulting Economists—described how the teacher routinely traumatized students with questions designed to “make them think like economists.” When Murphy answered three in a row, like an economist, he was accused of having taken the course before. “Did not,” he replied. “Did too,” the professor insisted. “Did not,” Murphy returned. This went on long enough to become legend.
His favorite teachers at UCLA—Ward, AM’72, PhD’78; Welch, PhD’66; and Ben Klein, AM’67, PhD’70—had all trained at Chicago. When Murphy graduated in 1981 he had offers from all over, but his mentors “pointed me here” for graduate school. He never left. “In terms of economics,” he insists, “there’s no place in the world like Chicago. The belief that economics can be applied to the study of real-world issues is just so much a part of the place. If you want to be an economist, I don’t think there’s anyplace close.”
As a grad student he worked primarily with the late Sherwin Rosen, AM’62, PhD’66, but also with Becker and Topel. By his second year he had a GSB appointment as a lecturer. But as he began finishing up his dissertation on “Specialization and Human Capital”—an exploration of the market forces behind workers’ decisions about “pre-market” education and on-the-job training and the subsequent rewards for those who acquired specialized skills—his teachers noticed a curious byproduct of Murphy’s modesty: he loathed the lonesome task of writing. “We had to prod him to finish his dissertation,” Topel says. The dissertation was, of course, “brilliant,” but never published.
It was a difficult problem, but as usual, Murphy had already found an answer—working with other people. “I think most people get a better product that way,” he explains. “You pool insights and eliminate oversights. First-rate coauthors make working on projects more fun and rewarding. Plus, writing is a pain.” Since earning his PhD and joining the faculty in 1986, he has written every one of his 60-plus published papers with a former teacher, a close colleague, or students.
No one, least of all his coauthors, objects. Murphy insists he gets most of his ideas while chatting with them. “Gary and I talk almost every day,” he explains. “You’ll be thinking about things and here’s an idea, here’s an idea. But the one you end up working on is when you talk to somebody else and they say, ‘Yeah, that seems interesting. I thought about that too.’ Then you go back and forth and you build up to the point where there’s actually an idea, where there’s the beginning of a research program, of a paper.”
His pre-market education, it seems, had taught him the value of specialization. As a shy but affable 25-year-old grad student, Murphy confessed to Topel that his goal at that stage in life was “to become the world’s best coauthor.” By the time he was 35, he was there.
It happened quickly and on multiple tracks. In the early ’90s Murphy and various coauthors—including Welch, Becker, Murphy’s students Chinhui Juhn, PhD’91, and Brooks Pierce, AM’84, PhD’90—published a series of papers on the relationships between the demand for skills, such as a college education, and increased wages. The number of college graduates mushroomed in the early- to mid-1970s, thanks to the baby boom, enhanced by draft deferments for college students during the Vietnam War. This sudden increase in the supply of educated workers triggered a dramatic fall in the returns for going to college.
Over time, this drop in returns reduced the demand for college training, and by the late 1970s enrollments had dwindled. Murphy and colleagues were the first, and most convincing, to show that the rewards for a college education had rebounded in the 1980s. Throughout that decade, highly skilled workers made steady gains, and the more education they had, the bigger the benefits.
One consequence was the substantial, and until then unrecognized, growth in income inequality. Increased demand for those with skills had boosted upper-level, white-collar salaries, while real wages for blue-collar workers with fewer skills declined. Murphy and colleagues clearly tied this growth in wage inequality to growth in the demand for skilled labor. Another consequence was that college tuitions went up.
This work “catapulted him to the attention of economists,” says Becker. The American Economic Association cited it when awarding when Murphy the Clark Medal. As Welch argued in his post-medal profile, Murphy had “moved the discourse about wage inequality from political rhetoric to a search for explanations, founded on, of all things, supply and demand.”
It wasn’t his only success. Between 1987 and 1993 Murphy, Topel, and Juhn looked at the flip side—the impact of steady supply and decreasing demand for less skilled workers. With a series of papers on unemployment, long spells of joblessness, and labor force withdrawal, they brought new clarity to how economists, and eventually the federal government, thought about the ranks of the jobless. Optimism about the falling rate of unemployment was misplaced, they argued. It was not a sign of strength. Out-of-work males, typically the least skilled for whom wages had fallen, had not found jobs; they had simply left the labor force. They were no longer even looking.
Murphy also teamed up with Becker and others on a series of theoretical papers examining how human capital, education, and specialization affected economic growth in developing countries. They tried to understand why some countries, such as South Korea, develop rapidly while others with comparable technology fail to grow, and how a “big push” from the government could jump-start the process.
Although Welch singled out Murphy’s 1994 paper with Rosen and Jose Scheinkman, on “Cattle Cycles,” as his personal preference, Murphy, the protean coauthor, will not pick a favorite. He admits, however, that his work with Topel culminating in their book, Measuring the Gains from Medical Research: An Economic Approach (2003), and in “The Value of Health and Longevity” (Journal of Political Economy, 2006) seems to have garnered the broadest interest, to have the “most legs.”
In that research they found that from 1970 to 2000, increased longevity and improved quality of life, much of it thanks to medical research, added nearly $3.2 trillion per year to total wealth in the United States, equal to about half the total gross domestic product. On average, they found, people would be willing to pay about $500 to reduce their probability of death by one in 10,000. Even a modest one-percent reduction in cancer mortality would be worth about $500 billion to current and future Americans. “The social returns to investment in new medical knowledge,” they argue, “are enormous.”
One of their conclusions—that “current expenditures on medical research are extremely small relative to both the economic value of historical improvements in health and relative to the potential gains from even small progress against major categories of disease”—made them very popular in certain circles. “We get a lot of invitations to speak,” says Topel. “The American Cancer Society, the American Heart Association, the American Society of Clinical Oncology, all of them.”
“We hear from a lot of people who are interested in more research funding,” adds Murphy. “We’re high on that list, the wouldn’t-it-be-good-for-us-to-have-more-funding bandwagon.”
The way they got there is a textbook example of how modern economists go about their business. “People think that economics always has to do with money, that Wall Street is somehow the hub of economics,” Murphy explains. “That’s not quite right. Economics is about applying some pretty basic principles to a range of areas and trying to inject a little creativity. It’s a way of modeling people’s behavior and how outcomes are determined in society, whether they be political outcomes or family outcomes or health outcomes. It’s a way of thinking and a set of tools and principles that allow you to evaluate a wide set of problems all in the same way.”
The concept of the medical-research study was “pretty simple,” Murphy notes. Look at decisions that people make, and based on those decisions learn how much they value improvements in health and longevity. Then use those values to infer what the value would be for other potential changes in health and longevity, and multiply by historical and anticipated changes in life span.
The concept may be simple, but the tactics include a lot of data mining, some wide-ranging psychology, and buckets of hard-core mathematics. A researcher can’t determine something’s worth simply by asking. “When people tell you they value something a lot,” says Murphy, “that means they want you to think they value it a lot, not that they’re actually willing to make much of an effort to get it.”
So to measure how much people value life extension, he and Topel found examples of what people actually spent, often in roundabout ways, to lengthen their own lives. Maybe they pay more for a safer car, a Volvo instead of a Corvair. They turn down a high-paying but risky job—say, security guard in Baghdad—for a lower-paid but safer alternative, such as being a traffic cop in Winnetka. They quit smoking, eat a healthier diet, make all kinds of decisions that may be costly, in terms of expenditures or personal sacrifice, but are thought to extend life.
Applying those numbers on a national scale is a complex mathematical problem. “At its core,” Murphy says, “economics is mostly about clear thinking,” about using basic principles. The math helps to “lay a foundation under each principle.” It tells how everything fits together, where the rules apply “and where they break down.”
Although they are still “working some” on the economics of health and medicine, Murphy and Topel also have started to “think a little bit harder,” as Murphy puts it, about the process of innovation in health care and the economics of how to speed it up. They’re not taking “a purely mechanical point of view,” he says, but thinking about a world in which “one player intervenes and everybody else optimizes.” For example, a government or philanthropic organization that supports research might establish rules for sharing new knowledge, which may speed the development process. “So that’s the concept. We’re starting to get there.”
He also continues to work with Becker on the value of education, this time looking at nonmonetary returns to schooling, its effect on health or choices of consumer goods. “We’re just starting on this topic,” he stresses. Economists initially focused only on financial rewards: get educated, land a better job, earn more money. But as more people get educated, there’s increased competition for those jobs, says Murphy, and skilled wages tend to drift downward.
What’s becoming clear, however, is that education does more than boost income, says Murphy. It “improves people’s outcomes in a lot of other dimensions.” Again, health is a good example—educated people live longer—but there are also benefits “on the consumption-good side.” As more people get educated, the marketplace responds by catering to them. The product mix shifts toward items that appeal to educated consumers—Blackberries, digital cameras, Freakonomics—which makes it even worse to be less educated because not only do they have less money but the stuff they can buy is drifting away from them.
Even as he studies the hidden benefits of education, Murphy openly aids and abets it. He teaches or coteaches six classes, more than any other GSB or economics faculty member. “Research is kind of what you’re gauged on,” he says, “but I like to teach. It’s important, helping people learn how to use economics, to make better decisions, to change the way they think, help them understand how the world works.”
“Unfortunately, a lot of students get hung up in the math,” he laments. If they don’t follow the math, that becomes their focus. But the math, he says, is “pretty easy to teach, pretty much straightforward.” It’s the concepts that matter, and they are much harder. “They don’t have well-defined edges,” he explains. “They don’t exactly fit.” When it comes to understanding a basic principle, “you only learn the beginning of it in class. You pick it up through practice. It takes a lot of hands-on learning to get real good with the principles.”
“You can see it in your students,” he says. “You can predict what’s going to trip them up.” A test question might look like it fits the principle, but there’s a subtlety to it. On an exam, or in real life, there are often two answers, says Murphy. There’s the “almost-right answer,” which is basically a direct application of the principle, and then there’s “the truly right answer—or at least the best answer that we know of—which is a subtle wrinkle on that first answer. So, pretty quickly, people are able to get to that first answer,” he says. “I think you spend the rest of your life trying to figure out how to get to the second answer.”
He likes to tell a story about a time when his good friend Topel didn’t pick up on one of those subtleties, one Murphy considered obvious. At the time they both lived in Flossmoor and were riding the train together, on the way to a faculty meeting, when it began to rain. Topel, the dapper one, was miffed. He had forgotten his umbrella. When Murphy began to tease him about his distress, Topel retorted that although his dressed-down colleague was wearing shorts and, it goes without saying, a baseball cap, he too would get wet; the rain still mattered. But Murphy had the second—and best, if literally wrinkled—answer. “These aren’t shorts,” he pointed out. “These are my swim trunks.”