LETTERS
Nobel notes

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Allen 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.

The 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.

H. M. Weingartner, SB'50, AB'50, AM'51
Nashville, Tennessee

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The 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.

First, 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.

Second, 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 now.

Furthermore, 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.

And so, as Paul Harvey would say, now you know the rest of the story.

Jay R. Baker, SB'59, SM'60
Rockville, Maryland

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In re "Wealth of Notions": I trust that Mr. Sanderson was not in one of Mr. Scholes's Bus 337 classes.

Mr. 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.

M. G. Brandon, MBA'77
Acton, Massachusetts

Allen 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!

The 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.

Economics 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 Lucas.

Mr. 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.

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