Nobel Laureates In Economics

"The stock market has forecast nine of the last five recessions."

"Carry the notion of the individual to its limit and you get a monstrosity, just as you do if you carry the notion of a group to its limit."

"Before Rousseau, people made the mistake of treating children as merely adults shrunk small. The Bible and Freud go farther and tell us that an adult is merely a child grown large. Man is imperfect, and so is woman. And so is We, Incorporated, who paternalistically put restraints upon ourselves. Not even an individual's perfections are his alone; like his imperfections, they are group-made. We entered a world we never made, and leave one we did not unmake."

"Libertarians fail to realize that the price system is, and ought to be, a method of coercion. Nature is not so bountiful as to give each of us all the goods he desires. We have, by the nature of things, to be coerced out of such an expectation. That is why we have policemen and courts. That is why we charge prices which are high enough relative to limited money, to limit consumption."

"Complete freedom is not definable once two wills exist in the same interdependent universe. We can sometimes find two situations in which Choice A is more free than Choice B in apparently every respect and at least as good as B in every other relevant sense. In such singular cases I will certainly throw in my lot with the exponents of individualism. But few situations are really of this simple type; and these few are hardly worth talking about, because they will already have been disposed of so easily. In most actual situations we come to a point at which choices between goals must be made: Do you want this kind of freedom and this kind of hunger, or that kind of freedom and that kind of hunger? I use these terms in a quasi-algebraic sense, but actually what is called "f reedom" is really a vector of almost infinite components rather than a one-dimensional thing that can be given a simple ordering."

"And make no mistake about it: Smith was right. Most of the interventions into economic life by the State were then harmful both to prosperity and freedom. What Smith said needed to be said. In fact, much of what Smith said still needs to be said: good intentions by government are not enough; acts do have consequences that had better be taken into account if good is to follow."

"I will tell you a secret. Economists are supposed to be dry-as-dust, dismal fellows. This is quite wrong, the reverse of the truth. Scratch a hard-boiled economist of the libertarian persuasion and you find a Don Quixote underneath. No lovesick maiden ever pined for the days of medieval chivalry with such sentimental impracticality as some economists long for the return to a Victorian marketplace that is completely free. Completely free? Well, almost so. There must, of course, be the constable to ensure that voluntary contracts are enforced and to protect the property rights of each molecule which is an island unto itself."

"In every actuarial situation of mathematical probability, no matter how large the numbers in the sample, we are left with a finite sample: in the appropriate limit law of probability there will necessarily be left an epsilon of uncertainty even in so-called risk situations."

"Economic theory is a mistress of even too tempting grace."

"In the absence of perfect certainty, the futures prices needed for making the requisite wealth-like comparisons are simply unavailable. So it would be difficult to make operational the theorist’s desired measures. But operational practicality aside, if the theorist specifies in detail the dynamic technology of his model, he will meet none of the pitfalls that come from an attempt to summarize his model by various crude aggregations. The contradictions that result from over-crude aggregation should never be confused with the technical relations that hold at the firm and family level or with the market capitalizations which hold in competitive security and asset markets."

"Perhaps all we can expect of a public body, charged with grave responsibilities, is that it should in its public utterances make out cases stronger than it really believes in. Or perhaps, because its opposition deals in overly strong criticisms, it may for political reasons and for understandable psychological reasons provide overly strong rebuttals. Or perhaps it is the case that the authorities believe that there are no sensible reasons to doubt the following view: The way to maximize growth, to maximize the long-run degree of achieved employment, to maximize equity among the various social groups that could be affected by price level changes is, in the absence of important cost pressures and even more in their presence, for the Federal Reserve to insist upon the attainment of essentially stable long-run price levels."

"As old problems are conquered, we expect to turn up new problems. A discipline lives on its unsolvved problems; and so, for better or worse, economics is likely to be a lively subject for as many years ahead as man can see."

"Remember that our goal is not the abolition of all business cycles--even if that were feasible, it might not be desirable. Instead we aim to wopie out persistent slump or unsought inflation. If only capitalism had succeeded in the past in this more modest goal, how different would have been the course of human history!"

"Econometrics may be defined as the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference."

"Dynamic process analysis also liberates economists from the necessity of having separate theories of the “turning-points” in addition to theories of cumulative upward and downward swings. Even a simple theory of inventory cycles, or acceleration-multipliers, can explain all four phases of an idealized cycle. At its best, dynamic analysis can enrich our understanding of possibilities without leading to credulity in new, over-narrow, monistic dogmas concerning the cyclical process."

"Needless to say, the partial equilibrium assumptions involved in the domestic demand schedules and the neglect of aggregative relations constitute a serious defect of such a model except as a rough first approximation to the answers in especially favorable cases. Good economic theory will recognize these limitations rather than be predisposed to neglect them."

"I think the acceptance of "mathematical expectation of utility" or its "arithmetic mean" was an unthinking carryover from the mathematical theory of the law of large numbers as applied to asymptotic processes."

"Figure 12-6 pulls together in a simplified way the main elements of income determination. Without saving and investment, there would be a circular flow of income between business and the public: above, business pays out wages, interest, rents, and profits to the public in return for the services of labor and property; and below, the public pays consumption dollars to business in return for goods and services. Realistically, we must recognize that the public will wish to save some of its income, as shown at the spigot Z. Hence, businesses cannot expect their consumption sales to be as large as the total of wages, interest, rents, and profits."

"In the preface to the reissue of Risk, Uncertainty and Profit, Frank Knight makes the penetrating observation that under the conditions envisaged above the velocity of circulation would become infinite and so would the price level. This is perhaps an over-dramatic way of saying that nobody would hold money, and it would become a free good to go into the category of shell and other things which once served as money. We should expect too that it would not only pass out of circulation, but it would cease to be used as a conventional numeraire in terms of which prices are expressed. Interest bearing money would emerge. Of course, the above does not happen in real life, precisely because uncertainty, contingency needs, non-synchronization of revenues and outlay, transaction frictions, etc., etc., all are with us. But the abstract special case analyzed above should warn us against the facile assumption that the average levels of the structure of interest rates are determined solely or primarily by these differential factors. At times they are primary, and at other times, such as the twenties in this country, they may not be. As a generalization I should hazard the hypothesis that they are likely to be of great importance in an economy in which there is a “quasi-zero" rate of interest. I think by this hypothesis one can explain many of the anomalies of the United States money market in the thirties."

"The general method involved may be very simply stated. In cases where the equilibrium values of our variables can be regarded as the solutions of an extremum (maximum or minimum) problem, it is often possible regardless of the number of variables involved to determine unambiguously the qualitative behavior of our solution values in respect to changes of parameters."

"The existence of analogies between central features of various theories implies the existence of a general theory which underlies the particular theories and unifies them with respect to those central features. This fundamental principle of generalization by abstraction was enunicated by the eminent American mathematician E. H. Moore more than thirty years ago. It is the purpose of the pages that follow to work out its implication for theoretical and applied economics."

"I was lucky to enter economics in 1932. Analytical economics was poised for its take-off. I faced a lovely vacuum that young economists today can hardly imagine. So much remained to be done. Everything was still in an imperfect state. It was like fishing in a virgin lake: a whopper at every cast, but so many lovely new specimens that the palate never cloyed."

"Just as Hegel is said to have understood his philosophy for the first time when he read its French translation, Vilfredo Pareto could have learned what it was he meant exactly to say when he read Bergson's 1938 classic."

"Science is not art. Yet, despite the lack of complete identity between art and science, there is much in common among different creative processes."

"Herein lies the secret of the General Theory. It is a badly written book, poorly organized; any layman who, beguiled by the author's previous reputation, bought the book was cheated of his five shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares' nests or confusions. In it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties; and certainly he is at his worst when expounding its relations to its predecessors. Flashes of insight and intuition intersperse tedious algebra. An awkward definition suddenly gives way to an unforgettable cadenza. When finally mastered, its analysis is found to be obvious and at the same time new. In short, it is a work of genius."

"The General Theory caught most economists under the age of 35 with the unexpected virulence of a disease first attacking and decimating an isolated tribe of south sea islanders. Economists beyond 50 turned out to be quite immune to the ailment. With time, most economists in between began to run the fever, often without knowing or admitting their condition."

"La soumission aux données de l'expérience est la règle d'or qui domine toute discipline scientifique."

"In fact, without any exaggeration, the current mechanism of money creation through credit is certainly the "cancer" that's irretrievably eroding market economies of private property."

"Too many theorists have a tendency to ignore facts that contradict their convictions."

"A theory is only as good as its assumptions. If the premises are false, the theory has no real scientific value. The only scientific criterion for judging the validity of a scientific theory is a confrontation with the data of experience."

"Anyone who dares to speak about an aether is regarded as an ignorant and backward mind and he can only lose his credibility in scientific circles, although in reality those who criticize him use the same concept of intermediate medium in other words, whether it be fields, an associated fluid, a probability fluid, a pilot fluid, a quantum fluid, etc."

"Any author who uses mathematics should always express in ordinary language the meaning of the assumptions he admits, as well as the significance of the results obtained. The more abstract his theory, the more imperative this obligation. In fact, mathematics are and can only be a tool to explore reality. In this exploration, mathematics do not constitute an end in itself, they are and can only be a means."

"Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the Battle of Austerlitz. If I do that, I'm getting tacitly drawn into the game that he is Napoleon Bonaparte. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique."

"Lucas’s “Mechanics” Lectures caught the profession by surprise. His argument enraged some economists and startled or puzzled others. It was his first word on the subject of growth. It seemed to have come completely out of the blue. And even though his interest in the possibility of market failure seemed curiously in tune with fifty years of the Keynesian tradition, it was unfamiliar enough when expressed in the vernacular of Freshwater economics that the lectures at first caused more consternation than anything else, and in most quarters they were studiously ignored. A few young researchers, however, were galvanized into immediate action. The notion that trade and migration must be strongly linked to economic growth was hardly new. Nor was the insight that cities must be central to economic progress. Perhaps the real news from Lucas’s lectures was his identification of lock-in as a potentially serious puzzle."

"Lucas says: "You don't know anything," and in his more humble moments: "I don't know anything either, and therefore the government shouldn't do anything." Well, there is no well-defined criterion of the government's not doing anything. What he says the government should do and calls doing nothing is doing something very different from what the government has been doing for the last 40 years. Why is making a radical change of regime suddenly doing nothing? You see, we have had a regime that can be associated with the most successful period of capitalism in recorded history. Suddenly, he calls for a constant money growth rule. How, possibly, can one conclude that? I say, if he doesn't want "to do anything", then we should keep doing what we have been doing, for we haven't been doing that badly. To make a radical change in regime all of a sudden, gives us what we have now; a new depression. Right? We have a new regime now, or maybe we have if it is not overturned, partly because these guys come along saying that compensatory policy, that is Keynesian policy, got us in all kinds of trouble. But it didn't get us in all kinds of trouble. In effect, they say that if you don't know what you are doing, you should do something entirely different from what you have been doing. I don't understand why that is a conservative or risk-avoiding policy."

"He didn't really discuss my interpretations and criticisms of new classical economics. Instead he took the opportunity of the review to say that Keynesian economics was discredited by the stagflation of the '70s, as he and Sargent had already argued in their polemical piece "After Keynesian Economics" at the Nantucket conference in 1978. The idea seems to be that we were very wrong about the 1970s and therefore had no standing to criticize the new classical macroeconomics. Of course, I do not agree with that interpretation of the events of the last 15 years. In that review article Lucas didn't explain anything new. He just restated his point of view."

"A lot of the Lucas critiques were the sort of thing that some of us used in debunking Friedman's positivism on the stable money supply. I thought that Lucas's Nobel Prize was richly deserved and even overdue. But it was not because of the boldness and the correctness of the New Classical theory and rational expectations (that there is some kind of expected value that a group mind gets as a result, and which is in some sense "correct"). I don't believe in macro efficiency of securities markets. I believe in their micro efficiency. Convertibles are priced about right. Black-Scholes derivatives are priced about right, because you can make a lot of money in correcting any deviation. You can't make money in a bubble, by fighting the bubble. You will lose your shirt. That means the bubble can go on, and bubbles go in both directions. Usually maybe they do not last as long in the downward direction because the correction is more severe. In fact, the supply shocks of the 1970s which made either fiscal or central policy very difficult to administer, gave poor performance to the macro system. And since the Keynesians had implicitly been boastful about the good performance, if you take credit for the sun you got to expect to be blamed for the rain. And not only was that puncturing the reputation of Keynesianism, but it was puncturing the self-esteem of economists and of Keynesian economists in particular. Because we always are looking in the mirror of the public to form our impression of how important we are."

"I think Lucas is an extremely capable man, and an undisputed intellectual leader of the school. On top of that, I think he's a very interesting and impressive human being. But I disagree with him, and I think I also disagree with his interpretation of his results. I have many, many objections."

"In the 1970s, Lucas and disciples take it up a notch, arguing that we should assume rational expectations: people make the best predictions possible given the available information. But in that case, how can we explain the observed stickiness of wages and prices? Lucas argued for a “signal processing” approach, in which individuals can’t immediately distinguish between changes in their wage or price relative to others — changes to which they should respond by altering supply — and overall changes in the price level. [...] In the 1980s, the Lucas project failed — pure and simple. It became obvious that recessions last too long, and there are too many sources of information, for rational confusion to explain business cycles. Nice try, with a lot of clever modeling, but it just didn’t work."

"How could such a difficult, technical intellectual structure acquire the force first of a crusade, then of a dogma? [...] First, Lucas's approach to macroeconomics seemed to offer a way to heal a deep wound in the heart of economic theory. [...] When Lucas seemed to be able to do was derive business cycles from microeconomic model. [...] Second, the technicality and difficulty of Lucas's theory [...] was, in the world of academic economic, an asset rather than a liability. [...] Finally, we cannot ignore the role of political bias in making rational expectations macroeconomics attractive."

"Lucas's name, unlike Friedman's, is hardly a household word. He is neither a prolific writer nor easy to read; although he can write clear, forceful English when he chooses, he prefers to express himself through dense mathematics, leaving it to others to popularize his ideas. Where Friedman used his academic notoriety as a stepping stone to a wider public role, Lucas has in recent years seemed to retreat to safe, increasingly technical issues of theoretical economics. And yet for most of the 1970s there was little question that Robert Lucas was having more impact on economic thought, both through his own writings and through the extraordinary devotion of his intellectual disciples, than any other working economist. Above all, he became identified with a much stronger form of Friedman's argument against active monetary policy. Where Friedman argued that such policy would in practice do more harm than good, Lucas argued that in principle it could do nothing but harm."

"The Keynesian econometric methodology developed by Klein and associates was criticized by Lucas in his 1976 “Critique of Econometric Policy Evaluation” on the grounds that microfounded structural equations should contain expectations of future variables. Since the parameters of these expectations should depend on the parameters of the rules followed by the policy authorities, Lucas argued that the rational expectations assumption would invalidate the practice of using fixed parameter models as policy guides. The profession responded to the Lucas critique in two different ways. The first, introduced to economists in the book Rational Expectations and Econometric Practice, was to develop appropriate econometric methods to estimate parameters in rational expectations environments. The second, explained most clearly in Kydland and Prescott’s (1996) article, “The Computational Experiment,” was to develop a new methodology,calibration, that lowered the standards of what it means for a model to be successful by requiring that a good model should explain only a limited set of empirical moments."

"When I was on the economics faculty in Chicago, I had a sign in my office that said, “No smoking, except for Bob Lucas.” It was worth enduring the smoke to talk to Bob but not to any other economist-smoker. This behavior accorded with my view that his selection for a Nobel Prize was a great idea, one that had been anticipated by most economists for several years."

"A key element in all Keynesian models is a ‘trade-off between inflation and real output: the higher is the inflation rate; the higher is output (or equivalently, the lower is the rate of unemployment)."

"The Keynesian Revolution was, in the form in which it succeeded in the United States, a revolution in method. This was not Keynes’s intent, nor is it the view of all of his most eminent followers. Yet if one does not view the revolution in this way, it is impossible to account for some of its most important features."

"In the present decade, the U.S. economy has undergone its first major depression since the 1930’s, to the accompaniment of inflation rates in excess of 10 percent per annum. These events have been transmitted [...] to other advanced countries and in many cases have been amplified. These events did not arise from a reactionary reversion to outmoded, 'classical' principles of tight money and balanced budgets. On the contrary, they were accompanied by massive government budget deficits and high rates of monetary expansion, policies which, although bearing an admitted risk of inflation, promised according to modern Keynesian doctrine rapid real growth and low rates of unemployment. That these predictions were wildly incorrect and that the doctrine on which they were fundamentally flawed are now simple matters of fact, involving no novelties of economic theory. The task now [...] is to sort through the wreckage, determining which features of that remarkable intellectual event called the Keynesian Revolution can be salvaged and put to use and which others must be discarded.”"

"For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, non-economists."

"I guess everyone is a Keynesian in a foxhole."

"So I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy."

"I do not see how one can look at figures like these without seeing them representing possibilities. Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's? If so, what exactly? If not, what is it about the "nature of India" that makes it so? The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else."