The Evolution of Economic Science: Individual and Firm Behavior
James Poterba, MIT Mitsui Professor of Economics; George Akerlof, PhD '66, Koshland Professor of Economics, University of California, Berkeley; Avinash Dixit, PhD '68, John J. F. Sherrerd '52 University Professor of Economics, Emeritus, Princeton University; Jerry Hausman, John and Jennie S. MacDonald Professor of Economics, MIT; Oliver Williamson, '55, Edgar F. Kaiser Professor, Emeritus, Haas School of Business, University of California, Berkeley; Paul L Joskow, President, Alfred P Sloan Foundation
Description: The astonishing contributions MIT has made to the world of economics emerged from "a melting pot of analytical tools and mathematical methods, mixed with a healthy interest in real world questions, grounded in real world problems," says James Poterba, crystallizing many of the themes of the symposium, and its inaugural session. As they discuss the evolution of the profession and their own work, a distinguished group of economists also attest to MIT's unique role as a place of research, teaching, and influence in the larger world.
"Without the right economics, we will get the wrong economic policy," says George Akerlof, who finds fault with some "norms of economic thinking," including the very way economists attack a problem, and publish in journals. Akerlof describes how John Maynard Keynes' General Theory of Employment, Interest and Money was boiled down "to three easy equations" that became the basis for all macroeconomic models today. This reduction "spawned a great tragedy for which today we're paying a great price," because it did not address Keynes' concern about irrational exuberance, "which explains why we get booms and busts, especially the sort that lead to economic calamities." Akerlof worries that his profession may have evolved with certain biases and lacks the "empirical checks" to ensure "an economics that really serves the public."
Avinash Dixit credits not just "stellar teachers" but fellow MIT students at "Friday lunchtime bridge games" for his economics education. He celebrates in particular MIT's style of economic modeling, which he characterizes as not just "frontier research," but an "art." The MIT approach distills a central question, discarding all else to drill into specifics. Dixit holds up Paul Samuelson's Exact Consumption"Loan Model of Interest, which addressed the problem of overlapping generations working and saving, and retiring and spending their savings. MIT prot_g_es built on Samuelson's insights. Dixit invokes for instance Peter Diamond's Model of National Debt -- "an absurdly simple model of complex reality, but its very simplicity allowed us to understand the key economic mechanisms at work." While "some economists from other research styles dismiss these as 'toy models,'" says Dixit, "these practitioners of the MIT style wear that label proudly."
Microeconometrics has had a big impact on economic policy and in people's lives, Jerry Hausman says, gathering and analyzing data on large numbers of people over significant periods of time, in such areas as consumer behavior and work life. The field can usefully pursue slippery questions of equilibrium, the push"pull of cause, effect and feedbacks among different economic variables. For instance, data describing the relation between individuals' education and their earnings can be fed into a regression model that demonstrates a powerful positive coefficient _ strong evidence of the "returns" to education. Hausman cites as well his research that persuaded cellphone companies they would profit more over time by subsidizing the price of phones and selling people long"term contracts.
Note: Paul L. Joskow begins, reading the remarks of Oliver Williamson, who was detained by weather. Joskow also provides commentary on Williamson's remarks.
Although Oliver Williamson took no economics courses while earning his undergraduate degree at MIT, he learned an important lesson: engineering and economics differ as they move from theory to applications. While both fields assumed an absence of frictions in theory, engineers developed applications and models that made provision for friction, and economists maintained the illusion of perfection. Williamson deployed this insight to develop his theory of transaction cost economics. He notes, "My engineering training provided grounding that made it easy for meto recognize all feasible forms of organizations are flawed in relation to a hypothetical ideal." To understand real world organizations and relationships, it was important to detect imperfections, and build them into the models. "Transaction cost economics gave us a framework to understand phenomena such as vertical integration, vertical market restrictions, long"term contracts, regulation, deregulation, the use of debt and equity and so on that thereafter provided a basis for shaping public policy toward business."
About the Speaker(s): James Poterba is also the president of the National Bureau of Economic Research and a Fellow of the American Academy of Arts and Sciences and the Econometric Society. He is the president of the National Tax Association, a vice president of the American Economic Association, and has served as a director of the American Finance Association.
Poterba's research focuses on how taxation affects the economic decisions of households and firms. His recent work has emphasized the effect of taxation on the financial behavior of households, particularly their saving and portfolio decisions. He has been especially interested in the analysis of tax"deferred retirement saving programs such as 401(k) plans and in the role of annuities in financing retirement consumption.
Poterba served as a member of the President's Advisory Panel on Federal Tax Reform in 2005. He is a trustee of the College Retirement Equity Fund (CREF), and a former member of the MIT 401(k) Plan Oversight Committee. He edited the Journal of Public Economics, the leading international journal for research on taxation and government spending, between 1997 and 2006. He is a member of the advisory board of the Journal of Wealth Management. He is a co"author of The Role of Annuity Markets in Financing Retirement (2001), and an editor or co"editor of Global Warming: Economic Policy Responses (1991), among other publications.
Poterba studied Economics as an undergraduate at Harvard, and received the Doctor of Philosophy degree in Economics from Oxford University, where he was a Marshall Scholar. He has been an Alfred P. Sloan Foundation Fellow, a Batterymarch Fellow, a Fellow at the Center for Advanced Study in Behavioral Sciences, and a Distinguished Visiting Fellow at the Hoover Institution at Stanford University.
Host(s): Office of the President, MIT150 Inventional Wisdom
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