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M.I.T. Macroeconometric models. Reading list and final exam. Modigliani, 1973

 

Core macroeconomic theory was taught in a sequence of four half-semester courses at M.I.T. In this post we encounter the third course of the sequence (typically taken in the fall term of the second year of residency) that was dedicated to Keynesian macroeconometric models and taught by Franco Modigliani in 1973.

In the same folder is a qualifying exam for 14.454, Macro IV which would be a waiver examination given before the term begins. There is no year indicated on this exam, but the content of the questions clearly matches that of the empirical macro course 14.453 offered in 1973. In the fall term of 1973, the quantitative macro and the dynamic macro switched their order which is probably the reason for the confusion about the course number at the start of the term.

Economics in the Rear-view Mirror thanks Juan C. A. Acosta who copied the course syllabus and final examination that are found in the Franco Modigliani Papers (Box T7) at the Duke University Economists’ Papers Project and has graciously shared them for transcription here. 

___________

14.453 MACRO THEORY III
Fall 1973, 2nd Half

I – ECONOMETRIC MODELS

Tinbergen, J. Statistical Testing of Business Cycles, Theory II. Business Cycles in the U.S.A.
Klein, L. R. & A. S. Goldberger. An Econometric Model of the United States, 1955; Impact Multipliers & Dynamic Properties of the K-G Model, 1959.
Suits, D. B. “Forecasting and Analysis with an Econometric Model”, AER, March, 1962. Reprinted in Readings in Business Cycles.
Hymans, S. H. & H. T. Shapiro. The Michigan Quarterly Econometric Model of the U.S. Economy, 1973.
_____________, Revision as of June, 1973 – Mimeo
Green, G. R., M. Liebenberg, A. A. Hirsh. “Short and Long Term Simulations with the OBE Econometric Model” in Econometric Models of Cyclical Behavior, Studies in Income and Wealth, Vol. 36.
Fair, R. C. A Short Run Forecasting Model of the United States Economy, 1971.
Adams, G. F. & David M. Rowe, “Forecasts and Simulations from the Wharton Econometric Model”, Multilith.

ECONOMETRIC FORECASTING SYSTEM

1 – DR1 Quarterly Model
2 – Operations Overview

Fromm, G. & L. R. Klein. “A Comparison of Eleven Econometric Models of the United States”, AER, Papers and Proceedings, May, 1973, pp. 385-393.
Fair, R. C. “Forecasts from the Fair Model and Comparison of the Recent Forecasting Record of Seven Forecasters – July, 1973”. Princeton University – Multilith. 
Tsurumi, H. “A Comparison of Econometric Macro Models in Three Countries”, AER, May 1973.
Moriguchi, C. “Forecasting and Simulation Analysis of the World Economy”, AER, May, 1973.

THE MPS MODEL

Equations in the MIT-Penn-SSRC Model of the United States, January, 1973.
Data Directory, January, 1973.
Ando & Modigliani, “Econometric Analysis of Stabilization Policy,” AER, May, 1969.
Ando, A. K. “Basic Structure of the MPS Model” –Multilith.
Modigliani, F. “The Channels of Monetary Policy in the FMP Econometric Model of the U. S.” – Multilith.

II – THE CONSUMPTION FUNCTION

Keynes, J. M. The General Theory of Employment, Interest & Money, Ch. 8 & 9.
Modigliani, F. Lecture Notes on Monetary Theory, Part IV, Section A&B, (especially A.4 to B.2)
Brady, D.S. & Friedman, R. D. “Savings and the Income Distribution”, Studies in Income and Wealth, Vol. X, pp. 247-265.
Duesenberry, J. S. Income, Saving and the Theory of Consumer Behavior.
Modigliani, F. “Fluctuations in the Saving Income Ratio: A Problem in Economic Forecasting”, in Studies in Income and Wealth, Vol. XI, National Bureau of Economic Research, 1949.
_____________, “The Life Cycle Hypothesis of Saving Twenty Years Later”, Multilith.
_____________ and Brumberg, F. “Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data”, in K. Kurihara, (ed.) Post-Keynesian Economics, New Brunswick, 1954.
_____________ and _____________, “Utility Analysis and Aggregate Consumption Functions: An Attempt at Integration”, unpublished.
Merton, R. C. “Optimum Consumption and Portfolio Rules in a Continuous-Time Model”, Journal of Economic Theory, December, 1971.
Dreze and Modigliani, “Consumption Decisions under Uncertainty”, Journal of Economic Theory 5, 1972.
Modigliani, F. “The Life Cycle Hypothesis of Saving, the Demand for Wealth and the Supply of Capital” Social Research, Summer 1966.
_____________, “The Life Cycle Hypothesis of Saving and Inter-country Differences in the Saving Ratio”, in Induction, Growth and Trade, Essays in Honor of Sir Roy Harrod, 1970.
Ando, A. and Modigliani, F. “The Life Cycle Hypothesis of Saving: Aggregate Implications and Tests,” American Economic Review, March, 1963.
Modigliani, F. “Monetary Policy and Consumption: Linkages via Interest Rate and Wealth Effects in the FMP Model”, in Consumer Spending and Monetary Policy: the Linkages, The Federal Reserve Bank of Boston, 1971; and Appendix by Ando and Modigliani, “Consumption and Consumer Expenditure”.
Kaldor, N. Essays in Value and Distribution, London, 1960.
Tobin, J. “Life Cycle Saving and Balanced Growth”, in Ten Economic Essays in the Tradition of Irving Fisher, 1967.
_____________ and Dolde, W. C. “Wealth, Liquidity and Consumption”, in Consumer Spending and Monetary Policy: the Linkages, The Federal Reserve Bank of Boston, 1971.
Mayer, T. Permanent Income, Wealth, and Consumption, 1972.

III – THE INVESTMENT FUNCTION

Keynes, J. M., General Theory, Chapters 11 and 12.
Jorgenson, D. W. “Econometric Studies of Investment Behavior”, Journal of Economic Literature, Dec. 1971.
_____________ and R. E. Hall, “Application of the Theory of Optimum Capital Allocation” in Tax Incentives and Capital Spending, (edited by Fromm).
Bischoff, C. W. “The Effects of Alternative Lag Distributions”, in Tax Incentives and Capital Spending, G. Fromm, ed., Brookings Institution, 1971.
Ando, Modigliani, Rasche & Turnovsky, “On the Role of Expectations of Price and Technological Change in an Investment Function”. Multilith.
Eisner, E., and M. I. Nadiri, “Investment Behavior and Neoclassical Theory.” Review of Economics and Statistics. Vol. 50, August 1968.
_____________, “Neoclassical Theory of Investment Behavior: A Comment.” Review of Economics and Statistics, Vol. 52, May 1970.
Bischoff, C. W., “Hypothesis Testing and the Demand for Capital Goods,” The Review of Economics and Statistics, August 1969.
_____________, “Business Investment in the 1970’s: A Comparison of Models”, Brookings Papers on Economic Activity, 1, 1971.
Nadiri, I. M. “An Alternative Model of Business Investment Spending”, Brookings Papers on Economic Activity, 3, 1972.
Kalchbrenner, J. H. “A Model of the Housing Sector”, Chapter 6, in Savings, Deposits, Mortgages and Housing, Studies for the Federal Reserve-MIT-Penn Economic Model, (eds. Gramlich and Jaffee), 1972.
Ando and Modigliani, “Consumption and Consumer Expenditure”, pages 9-17, (APPENDIX A), Multilith.

IV – FINANCIAL MARKETS

Tobin, J. “A General Equilibrium Approach to Monetary Theory”, JMCB, February, 1969.
Brainard, W. and J. Tobin. “Pitfalls in Financial Model Building”, AER, May, 1968.
Ando and Modigliani. “Some Reflections on Describing Structures of Financial Sectors”. Multilith.
Ando, A. K. “Some Comments on Brainard-Tobin Framework for Financial Analysis”. Multilith.
Modigliani, F., Rasche, R. and J. P. Cooper, “Central Bank Policy, the Money Supply, and the Short-Term Rate of Interest,” Journal of Money, Credit and Banking, 2, 1970.
Modigliani, F. and R. Shiller, “Inflation, Rational Expectations, and the Term Structure of Interest Rates,” Economica, February, 1973.
Jaffee, D. M., and F. Modigliani, “A Theory and Test of Credit Rationing”, American Economic Review, December, 1969.
_____________, Credit Rationing and the Commercial Loan Market, John Wiley and Sons, 1971.
Gramlich, & Jaffee, editors, Saving Deposits, Mortgages and Housing, Chapters 1 to 5, and 7.
Modigliani, F. “The Valuation of Corporate Stock”. Multilith.

V – WAGES, PRICES, EXPECTATIONS

Phillips, A. W. “The Relation between Unemployment and the Rate of Change of Money Wages in the U. K.” Economica, November 1958.
Lipsey, R. G. “The Relation between Unemployment and the Rate of Change of Money Wage Rate in the U. K.: A Further Analysis”, Economica, 1961.
Phelps et al. Macro Economic Foundations of Employment and Inflation Theory, See especially the two contributions of Holt.
The Econometrics of Price Determination Conference, Board of Governors of the Federal Reserve System and SSRCs.

De Menil and Enzler, “Prices and Wages in the FR-MIT-Penn Econometric Model”.
Tobin, “The Wage-Price Mechanism: Overview of the Conference”.
Hyman, “Prices and Price Behavior in Three U.S. Econometric Models”.
Nordhaus, “Recent Developments in Price Dynamics”.
Lucas, “Econometric Testing of Natural Rate Hypothesis”.

Modigliani and Tarantelli, “A Generalization of the Phillips Curve for a Developing Country”, Review of Economic Studies, April, 1973.
Eckstein and Brinner, “The Inflation Process in the United States”, Joint Economic Committee, Congress of the U.S., 92 Congress, 2ndSession.
Modigliani, “New Developments on the Oligopoly Front”, Journal of Political Economy, Vol. 66, June 1958.
Lucas, R. “Some International Evidence on Output-Inflation Tradeoffs”, AER, June, 1973.
Sargent, T. J. “Rational Expectations, The Real Interest Rate and the ‘Natural’ Rate of Unemployment.” Multilith—forthcoming in Brookings Papers on Economic Activity, 2, 1973.
Gordon, R. J. “The Welfare Cost of Higher Unemployment”, Brookings Papers on Economic Activity, 1, 1973.
Turnovsky, S. J. “Empirical Evidence on the Formation of Price Expectations”, J.A.S.A., December 1970.
de Menil and Bhalla, “Direct Measurement of Popular Price Expectations”—Princeton University Econometric Research Program, Memorandum No. 149.
de Menil, G. “Rationality in Popular Price Expectations”. Multilith.

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QUALIFYING EXAM FOR 14.454 (sic)
MACRO IV (sic)

Time Period: Less than two hours
Answer at least 2 questions

  1. Tests carried out for a number of countries of the major alternative models purporting to explain aggregate consumption (Duesenberry-Modigliani, permanent income, life cycle, Kaldorian model) are typically found to fit the data quite well, and the difference in fit is generally not large.
    1. give a brief description of each of the above models
    2. what explanation, if any, can be advanced for the empirical finding that there are no substantial differences in the closeness of fit in the various models
    3. does the fact that the alternative models fit roughly as well imply that it makes little difference which of these equations is incorporated in an econometric model
      1. rom the point of view of forecasting
      2. from the point of view of predicting the effect of alternative monetary and fiscal policies
  2. Consider the coefficient estimates of the St. Louis “reduced form model”.
    1. what are possible and likely sources of biases in these coefficients? (Be sure to explain what you mean by bias in this context.)
    2. are these estimates consistent with the monetarist view of the working of the economy?
    3. with the view embodied in the standard econometric models of the U.S.?
    4. with the view embodied in the MPS model? (optional)
  3. The “multiplier” played an important role in early Keynesian thinking.
    1. review how this notion has developed since that time.
    2. in the light of (i), describe the kind of simulations you would perform in order to evaluate the “multiplier effect of an increase in government expenditure” implied by one of the major contemporary econometric models of the U.S.
    3. can an estimate of the above multiplier be inferred from the coefficients of the St. Louis “reduced form model”?

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14.453 MACRO THEORY
FINAL EXAMINATION

Franco Modigliani
Wednesday, 12/19/73

1 ½ hours

Answer Question I and at least one other question

  1. Enclosed is a forecast for the U.S. economy generated by the MPS Model in October 1973, before the so-called oil crisis. Assume an exogenous reduction in oil imports of 3 million barrels per day (representing somewhat over 15% of the consumption of oil implicit in the above forecast) beginning in the fourth quarter of ’73, and becoming fully effective from the first quarter of ’74.
    1. analyze the likely effects of this event on the above projections of real and money GNP and its components, assuming no change in monetary and fiscal policy.
    2. what changes in economic policy, if any, would you recommend, and why?
    3. can the MPS model (or analogous macro-econometric models) be used without major modification, to simulate the effects of the reduction in oil supply? Explain.

(Note: the monetary policy assumed in the projection is a growth of the money supply at 6% in ’73.4, at 6.5% in the first half of ‘74, and 7% thereafter.)

  1. The “multiplier” played an important role in early Keynesian thinking.
      1. review how this notion has developed since that time.
      2. in the light of (i.), describe the kind of simulations you would perform in order to evaluate the “multiplier effect of an increase in government expenditure” implied by one of the major contemporary econometric models of the U.S.
      3. can an estimate of the above multiplier be inferred from the coefficients of the St. Louis “reduced form model”?
  2. Formulate your model of the short and long run determinants of the price level. Use your theory to evaluate the often expressed view that fiscal policy should be used to control real output and monetary policy to control prices.
  3. Discuss the role of price expectations in macro-economic analysis, and review the present state of knowledge with respect to the modeling of price expectational variables in macro-econometric models.

1973_14453_exam_MPSoutputReduced

Source:   Duke University. David M. Rubenstein Rare Book and Manuscript Library. Economists’ Papers Archive. Franco Modigliani Papers, Box T7.

Image Source: Franco Modigliani picture from the MIT Museum Website.

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Columbia. Economist salaries below market. Examples of Modigliani and James W. Ford, 1956

 

The following letter provides interesting testimony to Franco Modigliani‘s market value in 1956 as well as how A. G. Hart hoped to offer Modigliani’s other offers together with an offer extended to James William Ford (Harvard economics Ph.D., 1954) by Ohio State University as evidential ammunition in the economics department plea for a significant increase in Columbia University salaries to remain competitive.

_________________

COPY

[Stamp: Office of the Vice President, July 13, 1956, Columbia University]

July 8, 1956

Prof. Carl S. Shoup
Executive Officer
Department of Economics
503 Fayerweather

Dear Professor Shoup:

This is to give further background on the scrap of evidence about the adequacy of Columbia University salary scales that is offered by Franco Modigliani’s comment on our offer of a visiting professorship for next year. As your note points out, the interpretation hinges largely on his professional status.

Against our offer of $10,000 for a one-year visit, as I read Modigliani’s letter with its gentlemanly absence of specific figures, he was offered $12,000 for a year as visiting professor at Harvard and at least $12,500 as permanent professor at Berkeley, and settled for (I take it) $12,000 to stay at Carnegie Tech. His age is 37 or 38, I believe, and he has been professor for two or three years at Carnegie Tech.

Modigliani’s reputation is established, but not very wide. He has published several distinguished articles, and has important work in progress; but his only book publication to date has been a collaboration with Neisser. Furthermore, he has lacked the backing of the major graduate schools (being an immigrant with a doctorate from the New School), and has thus tended to be undervalued by the market. Besides, he suffered a setback because he had the misfortune to be in the thick of the fracas at the University of Illinois. When working conditions there became intolerable, he felt such an unconditional urge to leave that he sacrificed the bargaining power of his tenure there as associate professor. At the time he went to Carnegie Tech, he could not command a tenure appointment but went on a term arrangement which however it took them only a few months to convert to an appointment with tenure.

In short, here is the kind of man we will want when next we have an appointment to make—and undervalued rather than overvalued on the national economics market—and our salary scale is at least $2500 below what he can command at good centers with about our teaching load, and with a lower cost of living. Another interesting comparison has come in meanwhile. James Ford, whom we let go from a Columbia instructorship to be assistant professor at Vanderbilt, writes that he has refused a post at Ohio State as associate professor at $8100. This is for a man of about the caliber and stage of development we think suitable for an assistant professorship at Columbia. We must be a good $1500 below the market at that level, if this is evidence.

Very truly yours,
/s/ Albert Gailord Hart
Professor of Economics

Source:  Columbia University Archives, Rare Book and Manuscript Library. Central Files, 1890-, Box 400. Folder “Shoup, Carl Sumner (2/2); 1/1956—6/1948”.

Image Source: Franco Modigliani, from MIT Museum website.

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Pennsylvania. Memos from Ando and Dhrymes to the curriculum committee, 1965

 

The significance for the history of economics of the following three memos is that they provide an illustration of the diffusion (infiltration?) of the M.I.T. canon to other departments. Albert Ando taught a few years at M.I.T. before coming to Penn and Phoebus Dhrymes (M.I.T., Ph.D., 1961) wrote his dissertation under Kuh and Solow.  The memos were sent to the curriculum committee of the department of economics at the University of Pennsylvania in January 1965 (at least the Ando memo is dated January 14, 1965 and it explicitly refers to the Phoebus memo and their recommendations to the Mathematics Committee that are undated).

Obituaries for both Ando and Dhrymes have been added to this post and precede the three memos.

Economics in the Rear-view Mirror thanks Juan C. A. Acosta who found these memos in the Lawrence Klein Papers at the Duke University Economists’ Papers Project and has graciously shared them for transcription here. 

Addition to post: At Banca d’Italia, N. 7 – Albert Ando: a bibliography of his writings.

_______________________________

Albert Keinosuke Ando
1929-2002
Obituary

Dr. Albert Ando, professor of economics, SAS and professor of finance, Wharton, died on September 19 [2002] at the age of 72.

Dr. Ando was born in Tokyo, Japan in 1929 and came to the United States after World War II. He received his B.S. in economics from the University of Seattle in 1951, his M.A. in economics from St. Louis University in 1953, and an M.S. in economics in 1956 and a Ph.D. in mathematical economics in 1959 from Carnegie Institute of Technology (now Carnegie Mellon University). Dr. Ando came to Penn in 1963 as an associate professor of economics and finance and became professor of economics and finance in 1967. He held this position until his death.

Dr. Lawrence Klein, Nobel laureate in economics and professor emeritus of economics wrote the following about his colleague.

After World War II many Japanese scholars visited the United States for general education and to modernize their training in some key subjects. Albert Ando, Professor of Economics and Finance, who died of Leukemia last week was an early arrival in the 1940s. He was educated at Seattle and St. Louis Universities and often expressed gratitude at the career start provided by his Jesuit teachers in an adopted country.

He completed the doctoral program in mathematical economics at the Carnegie Institute of Technology, where he was strongly influenced by Herbert Simon with whom he collaborated in research papers on aggregation and causation in economic systems. He also worked closely with another (Nobel Laureate to be) Franco Modigliani on the life cycle analysis of saving, spending, and income.

Dr. Ando was on the faculties of the Carnegie and of the Massachusetts Institutes of Technology before moving to the University of Pennsylvania, where he remained since 1963. He had visiting appointments at universities in Louvain, Bonn, and Stockholm. He consulted with the International Monetary Fund, the Federal Reserve Board, The Bank of Italy, and the Economic Planning Agency of Japan. He held many positions as an editor of scholarly journals and wrote numerous articles and books.

The main contributions of Professor Ando were in econometrics (theory and applications), monetary analysis, demographic aspects of household economic behavior, economic growth, and economic stabilization. His work on the Massachusetts Institute of Technology, University of Pennsylvania, and Social Science Research Council (MPS) model was of great benefit for the research department of the Federal Reserve Board, and his more recent work on econometrics for the Bank of Italy had been very fruitful.

He served as chairman of the graduate group in the economics department, 1986-1989, and developed excellent working relationships with many advanced students. He set very high standards, and those he worked with as thesis supervisor benefited greatly. He was extremely loyal and dedicated to their work, maintaining close connection with them after they departed from the University.

During his long and fruitful career, he earned many honors–as Fellow of the Econometric Society, as a Ford Foundation Faculty Research Fellow; as a Guggenheim Fellow, and a Japan Foundation Fellow. He was given the Alexander von Humboldt Award for Senior American Scientists.

Albert Ando is survived by his wife of 35 years, Faith H. Ando, two professorial sons, Matthew and Clifford, and a daughter, Alison, who has just been admitted to the New York Bar. His mother, sister, and brother, live in Japan.

–Lawrence Klein, Professor Emeritus of Economics

Source: University of Pennsylvania. Almanac. Vol. 49, No. 6, October 1, 2002.

_______________________________

Phoebus James Dhrymes
(1932-2016)

Phoebus J. Dhrymes (1932-2016), the Edwin W. Rickert Professor Emeritus of Economics, was a Cypriot American econometrician who made substantial methodological contributions to econometric theory.  Born in the Republic of Cyprus in 1932, Phoebus Dhrymes arrived in the United States in 1951, settling with relatives in New York City. After a few months, he volunteered to be drafted into the US Army for a two-year tour of duty; afterwards he attended the University of Texas at Austin on the GI Bill. In 1961 he earned his Ph.D. from the Massachusetts Institute of Technology under the supervision of Edwin Kuh and Robert Solow (Nobel Laureate 1987).  After a year-long post-doctoral fellowship at Stanford, he began his professorial career at Harvard, then moved to the University of Pennsylvania, and then UCLA.  In1973 he joined the Department of Economics at Columbia University; he was named the Edwin W. Rickert Professor of Economics in 2003 and retired in 2013.

Econometrics refers to that aspect of the economist’s work concerned with quantifying and testing economic trends. Phoebus Dhrymes‘early research focused on problems of production and investment, but he soon turned to more methodological work and produced important results on time series and on simultaneous equations.  Throughout his career, Phoebus Dhrymes placed much emphasis on the dissemination of scientific knowledge. In the early 1970s he helped found the Journal of Econometrics, which has become the leading journal in this field.  He was also on the advisory board of the Econometric Theory, and was managing editor and editor of the International Economic Review.He was a fellow of the Econometric Society and the American Statistical Association.Dr. Dhrymes was also one of the founders of the University of Cyprus, from which he was later awarded an honorary degree.

He wrote a series of influential textbooks including Distributed Lags:  Problems of Estimation and Formulation. This work was translated into Russian and published by the Academy of Sciences of the Soviet Union, and in the 1970s Dr. Dhrymes was invited to visit the (now former) Soviet Union, specifically Moscow and Novosibirsk. At the time such visits were unusual events for westerners, requiring rarely-issued visas and security clearances, particularly for centers of research such as Novosibirsk.

In a 1999 interview he characterized his books as “filters that distill and synthesize the wisdom of many contributors to the subject.   On this score, I was influenced in my writing by the way I learn when studying by myself.”  (Econometric Theory, 18, 2002)

Dr. Dhrymes is survived by his daughter, Alexis, and his sons, Phoebus and Philip. In his personal life, he was regarded as a generous, kind and gentle man, always there for his family. He came from humble beginnings, and garnered great respect from his family and friends for his achievements. He spoke often of how much he enjoyed teaching. He was always available to his students.He encouraged individualized thinking and understanding of processes rather than rote memorization in learning. He had a warm and affable demeanor, recalled fondly by former students and family members. He will be sadly missed.

Source: Obituary for Phoebus J. Dhrymes at the Columbia University Department of Economics Website.

_______________________________

Memorandum

To: Herbert Levine, Chairman, Curriculum Committee
From: Albert Ando
Subject: Offerings and Requirements in Macroeconomics, Monetary Theory, and Related areas in General Economics Ph.D. Program

  1. Macroeconomics

Enclosed herein is a copy of the outline and references of Economics 621 [The outline and references will be posted later] as I am offering it this fall. It is fairly similar to [the] one year course in macroeconomics which is required of all Ph.D. students at MIT. I am sure that opinions would vary on details, but it is my view that this represents more or less the topics and literature that all Ph.D. students in economics should be familiar with. Ideally, I think there should be another major topic at the end of the outline dealing with current problems and policies.

It is fairly clear that this outline could not be covered in one term, particularly under our present system in which there are only 13 to 14 weeks of classes for a term. As a matter of fact, this fall, with a great deal of rushing throughout the term, I will be able to finish the static part of the outline by the end of the fall term, but certainly no further.

This suggests that the required macroeconomics for Ph.D. students should be two term sequence of courses, the first term dealing essentially with the Keynesian static analysis, and the second term with dynamics, i.e., business cycles and growth models.

  1. Monetary Economics

I have just discovered that Economics 622 is taught without any prerequisite, and that there will be some students in 622 who have not had any macroeconomic theory this spring. I am somewhat stunned, and do not see how I will be able to teach a satisfactory course under the circumstances. This situation is indicated by the fact that 622 is required not only of Ph.D. students in economics but also of master’s candidates, and therefore it is apparently impossible to exclude the students from 622 who have not had 621. An obvious temporary solution is to make those students who have not had 621 wait until next year to take 622. In my view, elements of monetary problems should be included in the first term of the required macroeconomics course, and courses in monetary theory should be made elective. The course in monetary theory should then be taught assuming that students have had adequate preparation in macroeconomics and microeconomics, particularly the theory of general equilibrium, at the level where we can discuss the research and developments in the past dozen years or so, bringing students up to a point where they can draw a thesis topic from their work in the course. There is a room for an argument that there should be another course in addition to the advanced theory course, which deals with more traditional money and banking material. As a matter of fact, I offered two courses in monetary economics at MIT for several years, one dealing with traditional money and banking material taking the one term each of macro and micro economics as prerequisites, and another highly theoretical and advanced course taking two terms each of macro [and] micro economics as prerequisites. It seems to me, however, that Economics 639, Monetary Problems and Policies, should serve as the good traditional money and banking course, so that only one additional course seems to be needed.

  1. Microeconomics and Mathematics

After some discussion with Dhrymes, it is fairly clear that microeconomics should also be taught as a two term sequence. A possible division between two terms would be to deal with partial equilibrium analysis of consumers and firms during the first term, and with the general equilibrium analysis and welfare economics in the second term.

During this fall term, Dhrymes and I found it necessary to conduct a few special remedial sessions in mathematics so that some rudimentary notions of calculus and linear transformation will be available in the discussions in theory courses. The idea, of course, is to arrange so that all students are equipped with minimum of mathematics by the beginning of the second term. If the recommendation of the committee on mathematics is adopted, so that students will learn elementary calculus and the matrices and linear transformation, including rudiments of linear differences and differential equations at the level suggested by the committee it is possible to synchronize it with theory courses so that theory courses will be using only those mathematics students are learning in mathematics remedial courses. For instance, the first term of macro theory would not require too much mathematics except the notion of the systems of equations and their solutions, and the first term of micro theory not much more than the condition of extremum in a fairly informal manner. In the second term, on the other hand, theory courses will require conditions of stability in the general equilibrium analysis, and the difference and differential equations in dynamic models in macroeconomics.

  1. Overall First year program and Second year fields of specialization.

In addition to micro and macro theories and mathematics required for these theory courses, students should be asked to learn minimum of statistics and econometrics. The level of statistics and econometrics should be maintained at the level of text books such as Frazer, Brunk, or Mood plus Johnston.

The implication of the above statement is that the course schedule for typical first year Ph.D. students should look as follows:

First term:

Microeconomics I (Partial equilibrium analysis)
Macroeconomics I (Static Keynesian analysis, including some monetary considerations).
Mathematics I (Elementary calculus)*
Mathematics II (Elementary Linear Algebra)*
Economic History (For those with Adequate mathematical training)

*For the suggested content of mathematics courses, see recommendations of Mathematics Committee.

Second Term:

Microeconomics II (General equilibrium analysis and welfare economics).
Macroeconomics II (Dynamics, business cycles and growth)
Econometrics (6 hour course)

This schedule, of course, would be subject to variations depending on the background and preparations of students. For instance, students who already have sufficient mathematical training might be encouraged to take a course in economic history and a course in somewhat more advanced mathematics, such as mathematical theory of probability or a course in topology in the first term in place of Mathematics I and II.

_______________________________

Lists of Topics for Mathematics for Economists
[Recommendations of Ando and Dhrymes submitted to the Mathematics Committee]

(Mr. Balinski is to suggest some alternative text books)

  1. Calculus
    1. Sets and Functions.
      1. Definitions
      2. Operations on Sets and Subsets.
      3. Relations, Functions.
        K.M.S.T. Chapter 2, Sections 1 through 6, possibly Sections 10 through 13.
    2. Functions, Limits, and Continuity.
    3. Differentiation and Integration of Functions of one variable.
      1. Concepts and Mechanics.
      2. Infinite series and Taylor’s Theories.
      3. Extremum Problems.
    4. Differentiation and Integration of Functions of many variables.
      1. Concepts and mechanics.
      2. Extremum problems, nonconstrained and constrained.
      3. Implicit Function Theorem.
        Any elementary text book in Calculus (e.g. Thomas; Sherwood and Taylor), Supplemented by some sections of a slightly more advanced text on Implicit Function Theorem and La Grange multipliers.
  2. Linear Algebra and others.
    1. Vector Spaces and Matrices.
      1. Vector Spaces and Matrices, Definitions, and Motivations.
        Perlis, Chapters 1 and 2.
      2. Linear Transformations.
        K.M.S.T., Chapter 4, Sections 7 through 12.
      3. Equivalence, Rank, and Inverse.
        Perlis, Chapter 3.
        Perlis, Chapter 4.
      4. Quadratic Forms, Positive Definite and semi-definite Matrices.
        Perlis, Chapter 5, Sections 1, 2, and 5
      5. Characteristic Vectors and Roots.
        Perlis, Chapter 8, Sections 1 and w[?], Chapter 9, Sections 1, 2, 5, and 6.
      6. Difference and Differential Equations; Linear with Constant Coefficients.
        Goldberg, Chapters 1, w, e, and Chapter 4, Sections 1 and 5; Perlis, Chapter 7, Section 10. Some reference to two dimensional phase diagram analysis of non-linear differential equations with 2 variables. Lotke?
      7. Convex Sets.
        K.M.S.T., Chapter 5.

_______________________________

MEMORANDUM
January 14, 1965

To: Curriculum Committee
From: Phoebus J. Dhrymes
Subject: Mathematics, Microeconomics, Statistics and Econometrics in the Economics Graduate Training Program

  1. Mathematics

It has become quite apparent to me during the course of the last term that our students are woefully equipped to handle instruction involving even very modest and elementary mathematics.

I think it is quite generally accepted that a student specializing in Theory, Econometrics and to a lesser extent International Trade and Industrial Organization would find it increasingly difficult to operate as a professional economist, and indeed seriously handicapped in satisfactorily carrying on a graduate study progress, without adequate mathematical training. With this in mind Albert Ando and I have prepared a tentative list of topics that graduate students ought be minimally familiar with and which has been presented to the Mathematics Committee.

This could form a remedial (and a bit beyond) course to extend over a year and to be taken (by requirement or suggestion) by students intending to specialize in the fields mentioned above during their first year of residence.

  1. Microeconomics

It has been my experience in teaching Econ. 620 that one semester is a rather brief period for covering the range of microeconomic theory a graduate student in Pennsylvania ought to be exposed to. As it is the case at both Harvard and MIT, I would propose that the course Econ. 620 be extended to a year course. Roughly speaking, the topics to be covered might be:

  1. Theory of Consumer Behavior
    1. the Hicksian version
    2. the von Neumann-Morgenstern version, including the Friedman-Savage paper
  2. Demand functions, elasticities, etc.
  3. Theory of the firm; output and price determination
    1. Production functions
    2. Cost functions and their relations to i.
    3. Revenue and profit functions and the profit maximizing hypothesis
    4. The perfectly competitive firm and industry, and their equilibrium; comparative statics; supply functions
    5. The monopolistic firm
    6. Monopolistic competition
    7. Duopoly and oligopoly
  4. Factor employment equilibrium
    1. Factor demand functions
    2. Factor employment equilibrium under various market institutional arrangements
    3. Some income distribution theory
    4. Factor supply.
  5. General Equilibrium Analysis; Input-Output models
  6. Welfare Economics (Samuelson; Graaf)
  7. Capital Theory (Fisher, Wicksell, recent contributions)
  8. (Marginally) Some revealed preference theory; or neoclassical growth models; or alternative theories of the firm (e.g., Cyert and Marsh)

It would be desirable if students were sufficiently well-equipped mathematically to handle these topics at some level intermediate between Friedman’s Price Theory Text and Henderson and Quandt; however, since this is not the case at present some other alternative must be found, such as in the manner in which the propose mathematics course is taught, and the order in which topics above are covered. The split of the subjects could be a) through c) or d) for the first semester and the remainder for the second semester. Clearly, neither the topics proposed nor the split represent my immutable opinion and there is considerable room for discussion.

  1. Statistics

At present the statistical training of our students suffers from their inadequate mathematical preparations.

It is my opinion that minimally we should require of our students that they be familiar with the elementary notions of statistical inference, estimation, testing of hypotheses and regression analysis at the level of, say, Hoel, or Mood and Graybill, or any other similar text, (a semester course). For students intending to specialize in Econometrics or other heavily quantitative fields, then it should be highly desirable that a year course be available, say at the level of Mood and Graybill, Graybill, or Fraser, Hogg and Craig, Brunk, etc., with suitable supplementary material. Since, we do have access to a statistics department it might be desirable for our students to take a suitable course there.

Again, due to the problems posed by the mathematics deficiency of incoming students, some accommodation must be reached on this score as well.

  1. Econometrics

Econometrics should not be a required subject; rather the requirement—minimal requisite—should be confined to the one semester course indicated under III. It would be desirable to offer a year course to be taken after the statistics sequence and which would cover at the level of, say, Klein, Goldberger, or my readings showing applications and problems connected thereto.

Topics, could start by reviewing the general linear model, Aitken estimators and similar related topics; simultaneous equation and identification problems, k-class estimators, 3SLS, maximum likelihood estimation, full and limited information, Monte Carlo methods.

Also selected topics from Multivariate Analysis; specification analysis, error in variable problems; elements of stochastic processes theory and spectral and cross spectra analysis.

It might be desirable to teach these subjects in the order cited above, although it would appear preferable to have multivariate analysis precede the review of the general linear model.

  1. General Comments:

I generally agree with Albert Ando’s memorandum on proposed curriculum revision in so far as they pertain to Mathematics requirements, Macro-economics and Monetary Theory.

I think that at present we require our students to take too many courses. I would favor only the following requirements; the basic Micro and Macro year courses. At least a semester of statistics, as indicated under III, and one semester in either economic history or history of economic thought—although I do not feel too strongly on the latter. I presume, in all of this that students in our program are only those ultimately aiming at specialization in Theory, Econometrics, International Trade, Industrial Organization, and possibly Comparative Systems, or Soviet Economics. It is my understanding that our curriculum will not cover those concentrating in Labor Relations, Regional Science or Economic History.

Thus, through their first year our students would be taking more or less required courses, with the second year essentially left open for their special fields of concentration.

Thus, the course program of a typical first year student will look more or less as shown in Albert Ando’s memorandum, p. 4, although I would be somewhat uneasy about requiring 6 hours of mathematics in the first term and 6 hours of statistics (econometrics) in the second term of the first year. Nonetheless I do not object strongly to this, and indeed in this past term many of the students taking 620 and 621 had in effect taken a six-hour course in Mathematics, 611 as taught by Dorothy Brady and approximately 3 hours as taught by Albert Ando and myself.

Quite clearly the above are merely proposals intended to serve as a basis for discussion an ultimately for guidance of entering students in planning their program of study rather than rigid requirements.

 

Source: Duke University, David M. Rubenstein Rare Book and Manuscript Library. Economists’ Papers Archive, Lawrence Klein Papers, Box 19, Folder “Curriculum”.

Images: Left, Albert Ando; Right, Phoebus Dhrymes. From the respective obituaries above.

Categories
Funny Business M.I.T.

M.I.T. Economics skit from about 1971

 

The following M.I.T. economics skit from ca. 1971 attains biblical proportions or at least displays biblical pretensions. The script comes from Robert Solow’s file of many such skits that Roger Backhouse has copied during his archival research. Alas this script displays some half-dozen gaps, but there is always some hope that the missing parts (mainly lyrics for songs noted below) will be found eventually in some other economist’s archived papers.

While there is no explicit date on the manuscript, the references to President Nixon, a mention of the eighth edition of Samuelson’s Economics (published in 1970) and the reference to Bishop and Domar who last taught the first graduate microeconomic and macroeconomic courses in 1970-71 are sufficient to give us a reasonably tight point estimate of early 1971 for this skit.

I have taken the liberty of correcting the many spelling errors and obvious typos. To improve readability I have also added boldface, alignment formatting etc. Comments are found within square brackets in italics.

Nerd humor, crude double entendre, puns coexist along side of flashes of wit and emotion. But it is mostly nerd humor.

_________________________

Opening Song [Lyrics missing]

Announcer [Text missing]

Narrator:

In the beginning God created the endowments and utility.
And God looked on the utility and saw that they were goods.
And there was darkness upon the face of the utility and the utility was without form.
And God said let there be light and there was light and the preferences were revealed.
And God said let there be a social welfare function and so it was that the preferences were ordered.
And God said let there be liberation of consciousness and there was consciousness of liberation.
And created economic man in his own image.
And on the seventh day God rested because the Robnett was closed.

[Robnett was name of the room in the Sloan Building that served as a graduate student lounge.]

[Enter Adam]

Adam: Like man, what am I gonna do with this endowment of two nuts I got stuck with. There ain’t no one to exchange ‘em with. I can’t get no satisfaction.

[Enter Eve tossing apple]

Eve: Hey man wanna bite of my apple

Adam: Now we’re getting down to the core of the problem.

Eve: Can I have one of your nuts if I give you a bite of my apple.

Adam: Well you see, I suffer from a certain lumpiness in my endowments. One nut ain’t no good to you on its own but I’ll exchange both of my nuts for 2 bites of your apple.

Eve: Hold it: I got a better idea. Why don’t we put your nuts and my apples together and reproduce them. Perhaps we can make a date.

[Gong and Lights]

God:   Stop! In creating this perfect static world for you, I forbade you to break the budget constraint. Now you have reproduced your endowments and broken the budget constraint. Henceforth I condemn all economic men to conduct their intercourse only through the medium of money, and each and every man shall maximize his profits.

[Exit God]

Narrator: ….and so it came to pass that a whole stream of prophets came into existence. And the first and greatest of these was Paul, son of Samuel, who led his tribe out of the gates of Harvard. And whilst resting at Tech. Square Paul saw a flash of burning light from behind the NASA building. And God spoke unto Paul and Paul wrote down these words on a tabernacle later to be called the Ten Foundations.

[Enter Paul]

Paul: Adam Smith who begat Malthus who had a surplus so he begat Ricardo who begat Marx, who By God was a bigoted begat. But Böhm-Bawerk begat Jevons who then begat Marshall who then get begat John Keynes. But Schumpeter came from the Austrian school and finally begat me.

While we’re waiting for Joan to print up the tabernacles for us why don’t we have a sing-song to make sure you know the begetting chain.

SONG – WHEN ECON.
[For the melody: Paul Robeson’s rendition of the original hymn]

LET MY PEOPLE KNOW

  1. When Econs were in Adams land (solo)
    Let my people know (chorus)
    Everything worked by the invisible hand (solo)
    Let my people know (chorus)
    Go down Paul way down in (Adams) land
    Tell old (Adam) let my people know
  2. When econs were in Ricardo’s land
    The topic was the rent on land
  3. When econs were in Marx’s land
    Come now brothers and join the band
  4. When econs were in Marshall’s land
    All was solved with a maximand
  5. When econs were in Keynesian Land
    Savings equaled investment planned

[Joan enters gives notes to Paul]

Paul: During the five minutes left to me I’ll read to you from the Ten Foundations.

TEN FOUNDATIONS
[Text missing]

[Gong, lights]

God: Paul! the promised land lies before the tribe of econs and thou must lead them unto this land of math and money. Thou shalt find it on a piece of old wasteland between the factories down on the river.

[Exit God]

Narrator: …and so the tribe of economists came to rest but Paul was not to become head of the tribe but instead the church grew and a Bishop was made head.

[Enter Bishop]

Bishop… Reads from manuscript in Pious voice

Everybody: Get off that’s last year’s skit.

[Exit Bishop]

Narrator: But the economists were not to live in peace for long for the mighty hosts of the Philistines fell upon them and besieged them.

[Enter 2 economists]

1st Econ: They say that these Philistines have a great warrior called Goliath who has issued a challenge to all economists to face him as champion of the Philistines.

2nd Econ: This character sounds Frankly Fishy to me

[Enter Frank]

Frank: No one calls Frank a Philistine. Take that and that.

[kills two economists.]

Narrator: And now a word from my sponsor: [Aitken Ad:]

 

Announcer: When you wake up in the morning, do your residuals seem to be going round and round?

If they do, you may be suffering from serial correlation. For severe bouts of serial correlation, especially if accompanied by lagged endogenous variables, see your local econometrician. But for the ordinary, everyday serial correlation, try Aitken’s, generalized least squares.
Don’t confuse Aitken’s with any ordinary least squares.

Scientific tests have proved that ordinary least squares is inefficient when it comes to serial correlation. Ordinary least squares merely covers up the problem, making you feel better by giving you optimistically high R2’s, low standard errors. Aitken’s heals while it conceals.

So for all of you who suffer from low Durbin-Watson statistics, the swing is to Aitkens’s. Aitken’s generalized least squares, brewed in Edinburgh, and other fine cities. But you know that.

[Others sing Amazing Frank]
[For the melody: Paul Robeson’s rendition of the original hymn]

Amazing Frank how sweet the sound
To save a wretch like me
I once was lost but now I’m found
Was blind but now I see.

That precious day that Frank appeared
The hour I first believed
Twas Frank that taught my heart to fear
And Frank my fears relieved.

Through many dangers toils & snares
I have already come
‘Tis Frank that’s brought me safe this far
And Frank will lead me home.

Narrator: ….and there was among the economists one called David.

David: All of my people are being killed—I must rescue them.

[hands cigarette to Frank who dies]

All Econs: How did you do it?

David: It’s easy—he got stoned!

All: Oh!

Narrator:…and so David became King of the tribe of Economists.

…and David begat a wise son called Solomon who inherited the ability to always know the question when given the answer

[QUESTION AND ANSWER: Text Missing]

Narrator:…But the economists lost their respect for the elders of the tribe and the world became more and more evil. This threw the economists into an economic and moral problem. The reproduction rate became higher, a labour saving device had to be introduced.

[LET’S CONTRACEPT: Lyrics or Text Missing]

[Bishop enters]

Bishop: I’m not surprised the world’s becoming more evil that Nixon just sits and fiddles while Arthur Burns. I must read the economic word to the econs

[23rd Psalm: Lyrics or Text Missing]

My lesson isn’t working, just listen to the people

[ain’t gonna deflate]

AIN’T GONNA DEFLATE

[Sung to the tune Blood on the Risers (Gory Gory What a Helluva Way to Die)]

VERSE

  1. They increased supply of money till the central bank was bust
    Commercial banks gave credit till restrictions were a must
    Investment broker ran amuck with their investment trusts
    AND we ain’t gonna deflate no more

CHORUS:
Glory Glory what a hell of a way to go (3 times)
And we ain’t gonna deflate no more

  1. They equaled up the tax receipts to gov’ment expenditure
    They raised the defense budget- so to help along the war
    And Dicky’s own account became more and more and more
    AND we ain’t gonna deflate no more

CHORUS:

  1. They lowered the rate of interest to keep Euro-dollars out
    The Germans out exchange rates messed everyone about
    The French exported gold to all as if there were a draught
    AND we ain’t gonna deflate no more

CHORUS

  1. They printed paper money and handed it around
    Sent money to Cape Kennedy got rockets off the ground
    But all the money printed went straight to Herr von Braun
    AND we ain’t gonna deflate no more

CHORUS

  1. Speculators bulled and beared till buffaloed they got
    Stability was never heard become a laughing spot
    The widows and the orphans cried keep down that old p dot
    NO     WE AIN’T GONNA DEFLATE NO MORE.

 

Narrator: ….one man alone was good in all this world.

[Franco Sawing]

[Gong, lights]

[The following Noah’s ark piece borrows heavily from the 1963 comedy album “Bill Cosby is a Very Funny Man….Right!” ]

God: Franco! (3 times) crescendo

Franco: No answer.

God: This is the Lord, Franco (Thunderously)

Franco: I’ll be with you in about 5 minutes.

God: Franco I want you to build me a model. I want it to be 60 equations long and 30 variables wide.

Franco: But I don’t know any econometrics.

God: So! Franco I want you to take two of every kind of variable into your model. Your model alone can save mankind for I shall flood the world with money.

Narrator: ….and so Franco worked feverishly not to say Frank-tically gathering variables from all his students until eventually he had two of every kind.

[Gong, lights]

God: Franco

Franco: What!

God: The time has come Franco

Franco: Do you know what I’ve been through. I’ve got all these variables and stuck them all in my model. They all look the same to me. How am I supposed to identify them?
Besides you didn’t tell me those variables were homoskedastic.
Now the investment’s got galloping consumptions, that infant industry’s riding his business cycle everywhere, income’s got a growth.
The whole model’s exploding.

[Gong, lights]

Franco: My God it’s shorting

Narrator:…and so money rained for forty days and forty nights.

[Franco looks out from model]

Franco: It’s stopped.

[Lights, gong]

God: Franco

Franco: Here we go again

God: You must tell all the variables to leave the model and multiply.

[Exit God]

Franco: Easier said than done. All right, come on out all you variables. Go away and multiply…go away and multiply.

[Enter 2 adders kissing]

1st Adder: We can’t multiply

Franco: Why not?

2nd Adder: We’re adders

Franco: There must be some way. God’s always right. Look, look, they’ve multiplied. How did you manage it.

1st adder: It’s marvelous what you can do with Logs isn’t it.

[Exeunt]

Narrator:…and so a population explosion occurred over night. And new preachers of the true economic world arose.

Announcer: And they begat three economists, Diamond, Modigliani, and Bhagwati.

 

[SONG: JAG, PETER, AND FRANCO]
[Still need to establish the original song used to parody]

THREE ECONOMISTS

(soft shoe routine)

Together: I’m Peter, I’m Franco, I’m Jagdish Bhagwati
We are the finest teachers in the world

Peter: I teach public finance though it’s sometimes hard to tell

Franco: I teach monetary and I give my students hell

Jagdish: I just sit and listen to the questions of Steve Zell

Together: Oh we are the finest teachers in the world.

[Peter does his thing, commentator describing. Text/Lyrics missing]

Together: I’m Peter, I’m Franco, I’m Jagdish Bhagwati
We all have our own teaching techniques.

Peter: I like mathematics—it’s a discipline sublime

Franco: I think talking slowly is a really awful crime

Jagdish: I draw Johnson diagrams—a dozen for a dime.

Together: Oh we all have our own teaching techniques

[Franco does his ad for the MITFRB model. Text/Lyrics missing]

[Jagdish does his offer curves spiel. Text/Lyrics missing]

Together: I’m Peter, I’m Franco, and I am Jagdish B.
We are the hardest workers in the world

Peter: I worked through Thanksgiving but I didn’t get much done

Franco: I run back and forwards from Cambridge to Washington

Jagdish: My output of articles is measured by the ton

Together: Oh we are the hardest workers
No we couldn’t be called shirkers
Yes we are the hardest workers in the world, oh yeah.

 

[STUDENTS LAMENT]

THE GRADUATE STUDENTS’ SONG

[To the tune of “My God how the money rolls in”]
[swaying from side to side, arms linked, on choruses]

ALL:

  1. Oh we are all graduate students
    We study with vigor and vim
    ‘Cos once we have got our Ph.D’s
    My God how the money rolls in.

Rolls in, rolls in, my God how the money rolls in, rolls in
Rolls in, rolls in, my God how the money rolls in.

  1. Our first year it was quite traumatic
    Just like being torn limb from limb
    We made it through Bishop and Domar
    Although at times it was quite grim
  2. But now as we’re facing the generals
    Our chances of passing seem slim
    We’re trying to alter the format
    The faculty will not give in

(pleading)

Give in, give in, oh faculty won’t you give in, give in
Give in, give in, oh faculty won’t you give in.

  1. And then we’ll start writing our theses
    We’ll make a great contribution
    We’ll go to the AEA meetings
    To get in the job market swim
  2. We’ll write up some erudite papers
    With lots of equations therein
    Then next comes a best-selling textbook
    To give Paul some competition

Competition, competition, to give Paul some competition, ‘tition
Competition, competition, to give Paul some competition.

  1. Paul Samuelson’s text is on top now
    It’s up to its eighth edition
    But we’ll supersede it entirely
    And start off a new tradition
  2. The they’ll give the Nobel Prize to us
    Our pride will be full to the brim
    And after we’ve published we’ll perish
    My God how the money rolls in

Rolls in, rolls in, my God how the money rolls in, rolls in
Rolls in, rolls in, my God how the money rolls in.

 

Source:   Duke University. David M. Rubenstein Rare Book and Manuscript Library. Economists’ Papers Archives, Papers of Robert M. Solow, Box 83.

Image Source:   Sir John Betjeman—an English poet, writer, and broadcaster. From “Myrth Study” at the National Geographic Website (23 Dec 2013). He has nothing to do with the history of economics, but I love this picture of laughter!

Categories
Exam Questions Northwestern Suggested Reading Syllabus

Northwestern. Monetary Policy Readings and Exam. Modigliani, 1961

 

Between his professorships at Carnegie and MIT, Franco Modigliani briefly held a professorship at Northwestern. It appears that Northwestern could not be faulted in its pursuit and courtship of Modigliani, but one sees that Modigliani’s academic heart was left in Cambridge. He answered the call to MIT, undoubtedly leaving a broken hearted colleague or two in Evanston.

Below the reading list and final exam questions for Franco Modigliani’s course at Northwestern “Monetary Policy”.

____________________________

Modigliani remembers Northwestern

Carnegie granted me a sabbatical year in 1957-58, during which I was a visiting professor at Harvard, where I stood in for Leontief (who was on leave)…At the end of 1959 I was again invited to be a visiting professor, but this time at MIT. I intended to accept, but the administration at the Carnegie Institute was against it. In that period I felt rather annoyed by the university, for I had the impressiona that the administration did not intend to invest resources in the economics sector. To my dismay, they decided not to replace an excellent economist, Alexander Henderson, who had worked alongside me and died prematurely…
Serena and I therefore decided it was time to move on and accepted MIT’s offer and an invitation to occupy a permanent chair at Northwestern University, with the proviso that I be allowed to retain my post of visiting professor at MIT. The year 1960, then, was a crucial one, for I fell in love with MIT. It was a delight to have so many colleagues who were both at the top of the profession and pleasant. The administration aimed only to oil the wheels of the teacher’s liffe, and the students were all of the first quality…
At MIT everyone knew I had the commitment to go to Northwestern and, nobless oblige, no one tried to deter me. The University of Northwestern [sic] gave us a grand welcome. We found a large funished house awaiting us near the campus, and we were taken to avarious areas in order that we might choose where to buy our home. But we made too many comparisons with MIT and could not make the decision to put down roots. Everyone was too kind, too solicitous, and maybe we had the feeling as of being animals in a zoo, with everybody asking us about Italy. Well, our hearts were still back at MIT. Judge, then, how happy we were when, at Christmas, the dean of the Sloan School at MIT phone me and asked: “Franco, now you’ve had a taste of Northwestern…what about coming back to us?” We had no hesitation, and in June 1962 Serena returned to Massachusetts alone and bought our house in Belmont, where I joined her as soon as I had finished my classes in Evanston and where we spent 36 happy years.

Source:  Franco Modigliani, Adventures of an Economist. New York: Texere, 2001, pp. 91-2.

____________________________

NORTHWESTERN UNIVERSITY
Department of Economics
Economics C-30
Mr. Modigliani

Fall Term 1961

C-30 MONETARY POLICY

Reading List I

Books suggested for general background and review

Chandler—The Economics of Money and Banking, 3rd edition
Day and Bean—Money and Income
Sayers—Modern Banking

  1. The Supply of Money, the Banking System, Financial Intermediaries and the Matrix of Claims

Meade, J. E.—“The Amount of Money and the Banking System”—Readings in Monetary Theory.
The Federal Reserve System—Purposes and Functions—Ch. I-VIII and XIII
H.C. Carr—“Why and How to read the Federal Reserve Statement” Journal of Finance, Dec. 1959
Roosa, R. V.—Federal Reserve Operations in the Money and Government Securities Markets
Chandler, L. V.—“Federal Reserve Policy and the Federal Debt”—Readings in Monetary Theory
Federal Reserve Bulletin—August 19959 “A quarterly presentation of Funds, Saving and Investment”

 

Reading List II

  1. The Demand for Money

Fisher, I.—The Purchasing Power of Money, Chs. 1-6 and 8
Robertson, D.—Money, Chs. 4-6
Pigou, A.C.—“The Value of Money”, Readings in Monetary Theory
Hicks, J. R.—“A suggestion for simplifying the Theory of Money”, Readings in Monetary Theory
Tobin, J.—“The interest elasticity of Transaction Demand for Cash”, Review of Economics and Statistics (RE&S), August 1956
Keynes, J. M.—General Theory, Ch. 15
Friedman, M.—“The Restatement of the Quantity Theory of Money”, in Studies in the Quantity Theory of Money
Latané, H.A.—“Cash Balances and the Interest Rate”, RE&S, Nov. 1954, pp. 456-460
___________–“Income Velocity and Interest Rates”, RE&S, Nov. 1960, pp. 445-449
Stedry, A.C.—“A Note on Interest Rates and the Demand for Money”, RE&S, August 1959
Bronfenbrenner and Mayer—“Liquidity Functions in the American Money”, Econometrica, October 1960, Sects. I-IV
Friedman, M.—“The Demand for Money: Some Theoretical and Empirical Results”, JPE, August 1959

 

Reading List III

  1. The Modus Operandi of Monetary Policy—Money and Liquidity—Monetary and Fiscal Tools.

Keynes, J.M.—A Treatise on Money—Ch. 13, 31, 37.
Keynes, J.M.—The General Theory of Employment, Interest and Money—Ch. 2, 6, 10, 11, 18, 19, 21.
Hicks, J.R.—“Mr. Keynes and the Classics”—Readings in the Theory of Income Distribution.
Modigliani, F.—“Liquidity Preference and the Theory of Interest and Money”—Readings in Monetary Theory (except sections 10 and 13)
Patinkin, D.—“Price Flexibility and Full Employment”—Reading in Monetary Theory
Tobin, J.—“A Dynamic Aggregative Model”, JPE, April, 1955 (espec. pp. 103-111)
Modigliani, F.—“Long Run Implications of Alternative Fiscal Policies and the Burden of the National Debt”—(Mimeographed)
Roosa, R.V.—“Interest Rates and the Central Bank”—Money, Trade and Economic Growth; Essays in Honor of John H. Williams
Kareken, J.H.—“Lender’s Preferences, Credit Rationing and the Effectiveness of Monetary Policy”, Review of Economics and Statistics, August 1957.
Friedman, M.—“A Monetary and Fiscal Framework for Economic Stability” Readings in Monetary Theory.
American Assembly—United States Monetary Policy Ch. 1, 2, 7.
Friedman, M.—A Program for Monetary Stability, (Fordham University Press)
Axilrod, S.H.—“Liquidity and Public Policy,” Federal Reserve Bulletin, October 1961.

 

Reading List IV

  1. The Term Structure of Interest Rates, Monetary Policy and Debt Management

*Lerner, A.P.—“Essential Properties of Interest and Money”, QJE, May 1952
*Lutz, F.—“The Structure of Interest Rates”, Readings in the Theory of Income Distribution.
Hawtrey, H. G.—A Century of Bank Rates, Ch. VI
*Tobin, J.—“Liquidity Preference as Behavior Toward Risk”, Review of Economic Studies, Feb. 1958
*Meiselman, D.—“Expectations, Errors, and the Term Structure of Interest Rates” (mimeographed)
*Riefler, W.W.,–“Open Market Operations in Long Term Securities”, FRB, Nov. 1958
*Young, R.A. and Yager, C.A.—“The Economics of ‘Bills Preferably’” QJE, August, 1960.
Conrad, J.W.—An Introduction to the Theory of Interest. University of California Press, 1959 (especially part Three)

 

Final Examination
December 14, 1961
8:00-10:00

ANSWER ANY FOUR QUESTIONS

  1. Under the present system commercial member banks are required to keep a reserve proportional to their demand deposit liability in the form of cash or deposits with the Federal Reserve Banks.
    1. What is the function and role of these reserve requirements?
    2. What would be the major implications of requiring a reserve proportional to their commercial loans rather than to their demand deposits. Explain whether and why you would favor or oppose such a change?
  2. Some authors have maintained that the ability of certain financial intermediaries other than banks to create close money substitutes seriously impairs the effectiveness of monetary policy. Spell out the argument and assess its validity.
  3. Evaluate the relative merits and shortcomings of monetary and fiscal policies in dealing with “cost push” inflation.
  4. Explain the essence of the so called “availability doctrine” and its relevance for an understanding of the modus operandi of monetary policy.
  5. State the main arguments for and against the “bills only” doctrine and give your own evaluation and recommendation.
  6. The Federal Reserve Board and the Federal Deposit Insurance Corporation have recently raised the maximum rate payable on time deposits from 3 to 4%.
    1. What are the purposes and the likely effects of this move?
    2. Even though the new provision does not apply to Saving and Loan Institutions a spokesman for the United States Saving and Loan League was quoted by the Sun-Times of December 2 to the effect that the change “may very well mean some dividend rate increase by Savings and Loan institutions in different parts of the country” and “If Savings and Loans have to pay more for dividends they will have to increase rates on mortgages. This is a surprising development in view of the administration’s announced drive to hold mortgage rates down.” Assess this statement critically.

 

Source: Duke University, Rubenstein Library. Franco Modigliani Papers, Box T6, Folder “Teaching material, Economics, 1961”.

Image Source: Website Archivio Storico degli economisti.

 

 

 

Categories
Economists Funny Business M.I.T.

M.I.T. Analysis in Wonderland. Graduate Student Skit, 1975

 

The annual skit party was a huge social event in the economics department at MIT in the 1970s and presumably before and after.  Each of the cohorts was expected to write and perform its own skit in which economics and economics professors were the principal targets. Faculty written skits were often a part of the festivities. Here in this posting for the historical record, a parody of Alice in Wonderland set in the Wonderland Institute of Technology in 1975 written by the first-year class of 1974-75. But first I provide a list of my classmates with links to some biographical information where I was able to find something…whatever happened to Paul Krugman? Not everybody participated in the preparation and performance so there remains a presumption of comic innocence for the majority of the following.

In 1978 many of this cohort were involved in Casablank, a parody of the movie Casablanca. That script has been transcribed and posted at the highlighted link.

__________________

First Year Economics Graduate Students, 1974-75
M.I.T. (Spring 1975)

Abel, Andrew B.
Aspe, Pedro A.
Begg, David K. H.
Beleza, Luis Miguel C. P.
Bookstaber, Richard M.
Collier, Irwin L., Jr.
Datcher, Linda P.
Daula, Thomas V.
Desormeaux, Jorge J.
Donnelly, John F.
Duarte, Virgulino
Klorza, Santiago C.
Feiger, Margaret C.
Frankel, Jeffrey A.
Geehan, Randall R.
Giavazzi, Francesco
Halpern, Janice D.[sic, H.?]
Helms, L. Jay
Hill, Raymond D.
Krasker, William S.
Krugman, Paul R.
Malveaux, Julianne M.
Mincy, Ronald B.
Mooney, Patricia D.
Mork, Knut A.
Nagatani, Hiroaki
Neuer, Margaret R.
Smith, David A. [Alton]
Startz, Richard
Winicker, Mary K.

Source:  M.I.T. Archives. MIT Department of Economics Records, Box 1, Folder “Women & Minorities”.

__________________

While transcribing this skit from my own days as a graduate student, I discovered how much I had indeed forgotten. The mapping of many a character to the corresponding faculty member was no longer obvious to me. I have added a listing of  Dramatis Personae with annotations based on the combined incomplete memories of myself,  Jeff Frankel, Dick Startz, Andy Abel, Ray Hill and Jay Helms. Perhaps some long-lost member of the troupe will stumble across this page and help me fill in the blanks, especially with respect to casting (20 characters!). 

______________________

ANALYSIS IN WONDERLAND

Composed and performed by the first-year economics graduate students at M.I.T.
Second term, 1974-75

 

DRAMATIS PERSONAE

Narrator: played by Richard Bookstaber
Alice (Representative Graduate Student): played by Margaret (née Agnew) Feiger
Advisor (presumably the actual first-year advisor, Peter Diamond): actor unknown
Cheshire Cat (Jagdish Bhagwati): actor unknown
Micro: (Hal Varian?): actor unknown
Macro: (Stanley Fischer?): actor unknown
Quick & Dirty (Martin Weitzman): actor unknown
Palmer (Palmer, an actual Sloan School graduate student): actor unknown
Dormouse (Evsey Domar?): actor unknown
Mad Hatter (Charles Kindleberger): played by Jeffrey Frankel
March Hare (Robert Engle?): actor unknown
Tweedledee (Jerry Hausman):  possibly played by Jay Helms
Tweedledum (Robert Hall): possibly played by Bud Collier
Knave of Hearts (Franco Modigliani): actor unknown
Knave of Clubs (Arthur Burns): actor unknown
Knave of Spades (William McChesney Martin): actor unknown
Knave Alan (Allan Greenspan): actor unknown
King (President Gerald Ford): actor unknown
Joker (Paul Samuelson): possibly played by Ray Hill
White Rabbit (Robert Bishop?): actor unknown

ACT I

Narrator: The first year class presents…

Analysis in Wonderland, a tragicomedy in four unnatural acts. Any resemblance to faculty members living or otherwise should be inferred from the initials worn by the characters.

Act I, Alice enters Wonderland and meets the Cheshire cat.
(Alice is sitting at a table reading Samuelson’s Economics.)
Narrator: One day Alice was reading a book, but she was getting very bored, for the book had no conversations or jokes in it.
Alice: And what is the use of a book without conversations or jokes?
Narrator: And so she began to drift off. And eventually she noticed that there was someone on the other side of the desk…
Advisor: Hi! Welcome to the Wonderland Institute of Technology. You must be a first year graduate student. I’m your first year advisor, and it’s my job to talk to you and give you a feeling that someone cares about you personally.

Now, let me see your schedule (grabs book). Well, uh, (looks at book then says with emphasis) Paul, this schedule looks fine to me (signs it) and remember to turn in your roll cards on the first day of each class.

(Through all this Alice keeps going “uh” and “but”…but can’t manage to say anything)

Remember that if you have any questions or problems, just come in and talk to me, I have plenty of time. Excuse me!

(The advisor gets up and runs out. Alice runs after, then comes back)
Alice: What a strange place! But where should I go from here? Why there’s a Cheshire Cat. (Enter Cheshire cat) Excuse me, sir, but can you tell me where I ought to go from here?
Cheshire Cat: Why, I’m wery [sic] glad you asked me that. You should go to the optimal point, of course.
Alice: But how long will that take me?
Cheshire Cat: I can’t tell you that, listen to this. (Turns on radio, which produces static. Turns it off.) You see! Our economic theories are all static.
Alice: I would like to see some faculty.
Cheshire Cat: Well, you could go to Harward [sic], but it’s wery rare that anyone sees any faculty there. Or you could stay here, but everyone here has completely lost their faculties. They’re all mad, you know.
Alice: But I don’t want to go among mad people.
Cheshire Cat: Oh, you can’t help that; we’re all mad here. I’m mad. You’re mad.
Alice: How do you know I’m mad?
Cheshire Cat: Well, a physicist’s not mad, you grant that? Now, a physicist starts with facts and tries to find theories that fit them. I start with theories and don’t bother with facts. Therefore I’m mad. Yes?
Alice: But what are your theories about?
Cheshire Cat: Do they have to be about anything?
Alice: Well, I’ve often seen a subject without a theory, but a theory without a subject? It’s the most curious thing I ever saw in all my life!

(Alice suddenly starts)
Cheshire Cat: Don’t worry, it’s just the inwisible hand.
(Enter two characters with paper hats (?) on which are cross diagrams. One has a potato chip taped to his shoulder.)
Cheshire Cat: They’re Mike and Mac Ro
Micro: Someone must stop him! It’s shameful! Look at that silly diagram he’s wearing! It’s a disgrace to the profession.
Macro: It’s a perfectly good diagram. Not like that ridiculous diagram you’re wearing!
Alice: But the diagrams look just the same.
Cheshire Cat: Shhh! You’ll only get them more upset.
Alice: Why don’t you try to talk your differences over?
Micro: Well, we microeconomists believe in logic, so I’m willing to reason it out.
Macro: You can’t expect me to be reasonable. Can’t you see I’ve got a chip on my shoulder?
Alice: Why, yes—it’s a potato chip in fact.
Macro: I wear it in honor of our founder, Cain’s. So prepare to defend yourself.
Micro: I warn you, I’m a master of the Marshallian arts.
Macro: But I’m armed with the most deadly tool of macroeconomics: (pulls out several pairs of pliers)…Multi-pliers!
Micro: And I have the most dangerous concept of microeconomics. (pulls out a slingshot) Elasticity!
Alice: Oh no, they’re going to have a duel and micro is a semi-strict under dog!

(Mike and Mac turn back to back)
(enter panting, the Quick and Dirty banker, carrying a money bag and a calculator)
Q&D: Wait! You can’t have a duel without a primal.
Alice: Who are you?
Q&D: I’m duh quick and doity bankuh. And by my quick and doity bankuh’s calculation, I find dat what you need is more liquidity which I will now provide.

(out of the moneybag he pulls a waterpistol, shoots everyone, then runs)
Macro: Now we’re all wet. What are we going to do?
Alice: It’s all right, I know just what to do. Here’s the driest thing I know.

(begins reading from Bishop [notes])
Micro: This isn’t getting me dry at all.
Macro: Now there’s only one way to get dry, and this will prove to you that macroeconomics is good for something.
Alice: What are you going to do?
Macro: I’m going to do some hand-waving! Macroeconomists are always drying things out by waving their hands.
Alice: They are?
Macro: Of course! That’s why none of their theories will hold water. Now, watch this! (He begins to draw a diagram)
Alice: What do those lines mean?
Macro: Oh, I don’t know. But they’re pretty good lines, and Lord knows I have the right to a few good lines in this ridiculous skit.
Palmer: Haven’t you got the A line drawn wrong?
Macro: (Going very fast) Well, that line doesn’t really matter. (erases it)
Palmer: But then shouldn’t you erase the k line, too?
Macro: Well, all right (erases).
Palmer: What do X and Y stand for?
Macro: Oh, don’t worry about the axes (erases them). Actually, these are not quite like this anyway. (erases remaining lines) And, as you can see, equilibrium is at the intersection.
Alice: Well, I’ve often seen lines without an intersection, but an intersection without lines? It’s the most curious thing I ever saw in my whole life.
Narrator: You’re repeating yourself, Alice.
Alice: What do you expect, Mel Brooks?
Micro: You think that’s hand-waving! Why, I have seen hand-waving, compared with which that is no better than eternal bliss.
Alice: But what is better than eternal bliss?
Micro: Well, a ham sandwich, for instance.
Alice: But nothing’s better than eternal bliss.
Micro: And a ham sandwich is better than nothing. So, by transitivity, there you are!
Alice: (ignoring Micro as she turns to the Cheshire Cat) Isn’t there anyone here who isn’t mad?
Cheshire Cat: You might try an assistant professor.
Alice: Which one should I try?
Cheshire Cat: It doesn’t matter—pick one at random.
Alice: How do I do that?
Cheshire Cat: Just draw one from an assistant professor urn.
Alice: What’s an assistant professor urn?
Micro, Macro, Cheshire Cat, Narrator (in unison) About eleven thousand a year!
(pause)
Narrator: …and a copy of Bishop’s notes.
Alice: Curiouser and curiouser.
(exeunt all)

 

ACT II

Narrator: Act II. The Mad Boston Tea Party
(Dormouse sleeps throughout. Mad Hatter stuttering throughout; price keeps going up on hat.)
Mad Hatter: What’s your liquidity preference my dear?
Alice: It looks like you have nothing but tea.
Mad Hatter: That is all we have.
Alice: Then why did you ask?
Mad Hatter: Consumer sovereignty. (gives Alice tea) I would like to suggest to you that that will be eight pence (takes shilling from Alice.)
Alice: No cover charge?
Mad Hatter: A gentleman never takes cover, as we say in the old country.
Alice: Hey, I gave you a shilling and you only gave me two pence change back!
Mad Hatter: A gentleman never counts his change.
Hare: Gentleperson!
Alice: This sounds like a liquidity trap to me.
Mad Hatter: Alright, I’ll put it down on the T-account…(gets book)
Alice: There is something floating in my tea.
March Hare: (looking) Exchange rates.
Mad Hatter: … two pence… (fiddling with T-accounts)
Alice: No it’s ice.
Mad Hatter: …under frozen assets.
Hare: Gary Becker! (general laughter)
Mad Hatter: Why is the Poisson distribution like a temperature of 102?
Alice: Well, let’s see… I suppose you would have to integrate e to the…
Mad Hatter: Integration! They only do that in South Boston.
March Hare: No, that’s disintegration.
Alice: I suppose you have to differentiate between…
Mad Hatter: Differentiate? The first derivative is the last refuge of a scoundrel.
Alice: I give up, why is the Poisson distribution like a temperature of 102?
Mad Hatter: I haven’t the slightest idea.
Alice: That’s not very funny.
Mad Hatter: Funny?
March Hare: She wants to hear a joke.
Mad Hatter: A joke, a joke!
March Hare: …Fogel and Engerman! (general laughter)
Alice: I’m afraid I don’t get it.
Mad Hatter: Well, you see, certain names are standing jokes around here, like…Walt Whitman Rostow! (laughter)
Alice: Can I try one?
Mad Hatter: Go right ahead.
Alice: Milton Friedman! (silence among the actors who look sour a moment after the audience’s laughter dies down.)
Mad Hatter: Try another one.
Alice: Jay Forrester….(more silence).
Alice: I don’t understand. What’s wrong?
Mad Hatter: Well, some people just can’t tell a joke.
March Hare: Perhaps you’d like to see a proof?
Mad Hatter: A proof! A proof!
March Hare: This is a proof I recited before the Queen of Hearts. (goes to board)

Twiddle Twiddle lambda star
Alpha hat, beta hat times X bar.
Alpha hat, beta hat sigma Xi

One over n, equals mean of Y.
[writes on board:]:
\begin{array}{l}\mathop{{\tilde{\tilde{\lambda }}}}^{*}=\hat{\alpha }+\hat{\beta }\cdot \bar{X}\\=\hat{\alpha }+\hat{\beta }\cdot \sum{{{X}_{i}}}\left( \frac{1}{n} \right)=\bar{Y}\end{array}
Mad Hatter: Time to move on to the next place.
(everybody gets up to move)
Alice: What?! You mean you just move on to the next place without erasing?
March Hare: We don’t have to erase; we just relabel the axes.
Mad Hatter: I always erase twice, once before the period and once afterward. (erases)

(everyone moves down one, and relabels axes and curve)
     
Alice: And I suppose when you use up all the places you just start again at the beginning of the circle?
Mad Hatter: Yes. It’s called recycling.
March Hare: You better wake up the Dormouse.

(Mad Hatter and March Hare exit)
Alice: (To Dormouse) Wake up, wake up. (shakes him)
Dormouse: (waking) Whaaaaat?
Alice: Wake up. It’s over.
Dormouse: (Pause…) Can I Xerox your notes?
Alice: (starts to leave. turns and says) Why is a Poisson distribution like a temperature of 102? (Pause. Alice exits)
Dormouse: (alone) Because it’s not normal.

 

ACT III

Narrator: Act III. Alice meets Tweedledum and Tweedledee, who have a battle.
(Alice enters and sits down. Dum and Dee enter, arm-in-arm, prancing. Dee sits down; Dum goes to the board and begins. Throughout, Dee is frantic, pacing, and talking very fast. Dum is red-faced, slow-talking, constantly looking at the floor; arms folded, with noticeably short pants and a turtleneck.)
Dum: So, to conclude yesterday’s talk, we can see that it’s entirely possible that for the two sub-groups, say, men and women, you could have different parameters in the regression…
Dee: (jumping up to interrupt) I think I can draw a picture that will make that all clear. Wish I had my colored chalk… [draws pictures].
     
…so you see that while the slope in the pooled regression is zero, contrariwise; it’s actually negative for men and positive for women.
Dum: …Sort of, different slopes for different folks, which tells us…
Dee: [interrupting] …and contrariwise, I can clear this up by drawing a picture that would show…[draws picture]
 
Dum: [interrupting]…that there could be kinky behavior in some subgroups….
Dee: Right. (sits down)
Dum: But, as I was going to say, this illustrates the 287th “Iron Law” of econometrics, which states that….
Dee: (again jumping up to interrupt)…Contrariwise,…I think I can make that clear with a picture in four dimensions. Damn, I just wish I had my colored chalk…(draws pictures)
…which shows that…
Dum: (getting very irritated, interrupting) Nohow!

The time has come, the Walras said
to talk of many things,
of matrices and error terms
of cabbages and kings,
and keeping out your pictures
that keep complicating things.
Dee: Contrariwise!

In my way of showing things
I’m better far than you,
Your talk is like an old dead horse–
It’s slow, not unlike glue.
Dum: Now wait a second…
(Dum and Dee break into a general dispute, yelling at one another.)
Dum: ….you’re not consistent…
Dee: …you’re almost surely driving me to the p-limit…
Dum: …you’re a homoscedastic deviate…
(While Tweeledum and Tweedledee continue arguing, the Narrator breaks in…)
Narrator: So Tweedledum and Tweedledee
Agreed to have a fight
For Tweedledum said Tweedledee
Couldn’t prove Gauss-Markov right.
Dum: Of course we must have a fight. What time is it?
Dee: 10:40—We’re late getting started, so we better hurry up.
Dum: Let’s fight ‘till noon, then have lunch.
Narrator: So they agreed to fight and, as Alice watched, they began to see who could prove the theorem better.
(Dum and Dee give lectures simultaneously, beginning and ending at the same time with the same words.)
Dee:

[simultaneously with Dum]

I CLAIM THAT OLS IS BLUE.

Basically, we want to prove that

{{\sum{\left( \mathbf{{X}'Y} \right)}}^{-1}}\mathbf{{Z}'}\beta \le {{\sum{\left( \mathbf{{X}'\tilde{Y}} \right)}}^{-1}}\mathbf{{Z}'}\gamma

Now just take the inverse of the antilog of the Jacobian and delete the fourth row. Let little x be the square root of big X, and let medium-sized x be measured from its mean; substitute back in and we have

{{\sum{\left( \mathbf{{X}'}\left[ \begin{matrix} \mathbf{Y} \\ \mathbf{Z} \\ \end{matrix} \right] \right)}}^{-1}}{\left| J \right|\cdot \Pi \cdot {{R}^{2}}}/{\text{hat size}}\;

which you will recall from 14.381.

Then, as I promised, you can use this by transposing Z and x, deleting R and reversing the inequality…..OH SHIT…I’ve screwed up…Well, just change every medium-sized x in your notes to big X, delete all sigmas, and reverse the third and fourth steps of the proof I gave last week which was right here on the board. Or look in Tahl’s [Theil with an West Virginian accent] book. Everyone should understand this perfectly—and of course the notation is clear. Then, adding the obvious steps we learned in 14.381 to this proof completes the argument. SO OLS IS BLUE, as promised.
Dum:

[simultaneously with Dum]

I CLAIM THAT OLS IS BLUE.

Well….a lot of people go around proving the Gauss-Markov….Theorem….but the literature is full of cases….where what’s done is wrong….Take matrix addition for example….Some people just add element-by-element….while often the more interesting thing to do…..is to use the Choleski factorization of one of the matrices….And recalling that Tweedledum and I are the final arbiters of econometrics at W.I.T. (at least until Fisher gets back off leave) you’d better do it this way, or consider dropping the course. SO OLS IS BLUE, as promised.
Palmer: Shouldn’t you invert that Jacobian before proceeding to expansion in Lambert spaces….
Dee: [interrupting] If it was so, it might be; If it WERE so, it could be; But as it isn’t, it ain’t. That’s logic.
Narrator: Alice couldn’t figure out just who had won the fight, although Tweedledee HAD used a lot more words….
[exeunt]

 

ACT IV

Tweedledee: Act Four, “The trahl”.
Narrator: Within a few moments Alice will witness the trial of the Knave of Hearts who is in deep trouble now because the King of Hearts is flying all the way from the Capital of Wonderland to preside at the trial. You are undoubtedly familiar with the Knave of Hearts most important contribution to economic analysis, “A Life-Cycle Built for Two”. But now he has been accused of starting the latest Wonderland inflation and depression—or as they say in the seminar rooms down by the River Chuck—“inflession”. The economic experts of the King—Knave Arthur of Clubs, Knave William of Spades, and Knave Alan of Diamonds—have all convinced him that economic voodoo has been practiced on models on the Wonderland economy in the hallowed halls of W.I.T. Since the King of Hearts has never played with a full-deck in his life, he was easily deceived by these rascals. Fortunately for the Knave of Hearts the Queen was unable to come to the trial due to a prior speaking engagement before the Veterans of Foreign Business Cycles.
(Enter Knaves of C.S. &D. They play “Hail to the Chief” on kazoos for a few bars and end with “Pop goes the weasel.” Then the King enters wearing a helmet and carrying a football. A WIN button is conspicuous. King bends over, hikes the ball to Knave of Clubs. King sits down on throne in middle of stage.)
Knave of Clubs. Where’s the jury?
King of Hearts. (points at the Knaves) You. (Knaves turn around but no one is behind them. King continues…) Yes, you. You are his peers. And for a proper trial before we cut off his grant, we must have a jury of his peers.
Knight of Diamonds. (tossing a coin à la [George] Rath) We know what to do.
(Enter all the other characters from Wonderland, except Joker and reporters)
King: What are the charges?
Knave of Clubs: Eleven dollars a barrel.
White Rabbit: The King of Hearts, he has no smartz
But Unemployment yes.
The Knave of Hearts has played his part
To make inflation worse.
Knaves in the jury-box: Boo, Hiss, Boo!
King: It is a pretty despicable offense isn’t it?
Knave of Spades: Are you kidding? The charges don’t even rhyme.
King: Will the defendant rise?
Knave of Hearts: If I had known you were going to ask me that question I would have built it into my model.
King: I’ll hold you in contempt!
Knave of Hearts: I don’t suppose I’ll become overly fond of you either.
King: Let the jury note the defendant’s behavior.
Knave of Hearts: Which reminds me of my 1944 paper, but that is of course a secondary issue given the gravity of the problems which we now face. While I can’t formally defend the following equation to my own satisfaction, I think that it does make some economic sense. But first I should say that things will be getting much worse before they will get better, I can give you the latest predictions…..
King: (fuming through all of the above) Bind the bearer of bad tidings or he’ll talk us to death…
Knave of Clubs: But what shall we bind him with?
King: Bearer bonds, naturally!
(The Knaves come out of the jury box and use first-aid gauze to tie the knave of Hearts by body and legs & gag him—leaving only one arm free. Knave of Hearts has been talking with his hands throughout his testimony, and he continues gesturing with his free hand while occasional grunts can be heard under his gag.)
King: May it be noted that in the tradition of Wonderland jurisprudence we have left the defendant with one degree of freedom in spite of his lack of respect for this court. Are there any witnesses?
Mad Hatter: I am.
King: Take the stand.
Knave of Clubs (to Mad Hatter): Did the defendant do it?
Mad Hatter: Certainly not.
Knave of Spades: And you witnessed this with your own eyes?
Mad Hatter: And I didn’t hear or smell him do it either.
Knave of Diamonds: But how strong was your prior?
Mad Hatter: Well, I don’t like to boast but when I was a young man working for the OSS during the War, I once spent a week in bed with a….
Knave of Clubs: No, no, no. How much could new data affect your prior beliefs, and if considerably, what was your posterior judgment?
Mad Hatter: I don’t now, that’s a good one. But I’ve got one for you. What weighs 12,000 pounds and has a twice differentiable indifference map over hay and peanuts?
King: That’s irrelevant!
Mad Hatter: That’s right.
King: Give your evidence, or I’ll cut your grant off on the spot!
Mad Hatter: (stutters) I’m a poor man your majesty.
King: You’re a very poor speaker. (knaves laugh) I thought that was a pretty good one too. I’m in the mood for a few laughs (to White Rabbit) Call in the Joker.
White Rabbit: The Joker.
(Enter Joker, attended by secretary, fans seeking autographs, and reporters taking pictures)
Joker: It’s great to be back in Wonderland folks. A funny thing happened on my way…
King: (interrupting) You have been called here to testify. What is the Keynesian viewpoint?
Joker: As Uncle Miltie Friedman would say, only blindmen use Keynes. Hey, that’s a pretty good one. (To secretary) Write that down for my textbook—Better yet, put out a new edition. But, seriously folks just the other day I was leafing through a volume of Ricardo’s letters in the Sraffa collection when I came across a letter from Ricardo to James Mill describing the following encounter between Thomas Malthus and David Ricardo. Ricardo was walking down the street one day when he ran into the good Reverend who was, much to Ricardo’s surprise, sporting a banana in his left ear. Ricardo was surprised because Malthus was always the last of the political economists to adopt a new fashion. Finally Ricardo’s curiosity got the better of him and he asked, “I say Tom, why is that banana in your ear?” Malthus didn’t seem to understand—but that was hardly unusual as Malthus, more often than not, couldn’t understand what his friend was saying. In fact, old Malthus personally thought that Ricardo couldn’t optimize his way out of a paper sack, much less a Lambert space. Finally Malthus said, “I’m sorry Dave, but I can’t hear you, you see, I have this banana in my ear.” (everyone in the courtroom is sleeping) And now….ahem…ahem (everyone wakes up). A few of your favorite impressions: Francois Quesnay! (He covers his face with his hands; removes hands; expression unchanged) Böhm-Bawerk! (same routine)
King: Enough!
Joker: Nassau Senior! (same routine)
King: Take him away. (White rabbit and knaves carry Joker off, still doing impressions. e.g. Stanley Jevons, Joseph Schumpeter, Vilfredo Pareto….)
King: Who is the next witness?
Rabbit: Alice!
Alice: Here! (she goes to the witness stand)
King: What do you know about this business?
Alice: Nothing.
King: If you say anything, I’ll give you part credit. Otherwise….
Alice: But I don’t need part credit!
King: Young lady, I’m growing impatient. Either tell us something about this business or I’ll cut off your grant.
Alice: (crying) But I don’t have a grant.
King: Then why are you so upset, indeed.
Alice: What sort of….(alarm clock goes off in the jury box and the knaves wake up).
Knaves: (in unison) Verdict time!!
Knave of Spades: (To Knave of Diamonds) Do you have the coin?
Knave of Diamonds: Yes I do. (to Spades). You’re innocence, (to Clubs) you’re guilt. Call it innocence. (he tosses the coin high in air)
Alice: What kind of trial is this?
King: Don’t be a stupid child. It’s a Bernoulli trial.
Knave of Spades: Tails.
Knave of Diamonds: Sorry it’s heads. He’s guilty!
Alice: May I see the coin? (it’s tossed to her) This coin has two heads.
King: Did anyone say p equaled one half?
(Lights out. Everyone leaves but Alice. Lights on she has book and wakes up.)
Alice: I’m glad I woke up before I had to take generals. (She leaves)
Audience: (Deafening applause) Bravo. Cheers. Whoopee.

 

Source: Transcribed by Irwin Collier from personal copy.

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Curriculum Exam Questions Harvard Suggested Reading Syllabus

Harvard. Advanced Economic Theory. Franco Modigliani, 1957-8

During the academic year 1957-58 Wassily Leontief was on academic leave from Harvard and Franco Modigliani of the Carnegie Institute of Technology took a leave of absence to accept a visiting professorship filling in for Leontief. From Modigliani’s papers in the Rosenstein Library of Duke University I have been able to piece together outlines and readings for the two semesters of advanced economic theory that he taught.

For the Summer session and Fall semester of 1957 it is possible to construct a topical outline for the first semester of Harvard’s Economics 202 from Modigliani’s own handwritten notes. We see that the outline matches that of the corresponding course “Advanced Economics I” that Modigliani taught in the spring semesters of 1957 and 1959 at his home university, i.e. before and after his year at Harvard. We note some additions and deletions in the readings for Modigliani’s Carnegie Tech courses, but since the outline was not significantly changed, it is reasonable to assume that his Fall Semester reading list at Harvard was some “average” of these two Carnegie Tech courses. A copy of Modigliani’s exam questions for the first semester of Advanced Economic Theory (January 25, 1958) completes the material for the first semester.

For the Spring semester of 1958 we have a cover page to his lecture notes indicating four broad topics to be covered. For three of the topics I found short mimeographed reading lists in another folder in a different box of Modigliani’s papers. For the topic “Money and Keynesian Economics” there is a two page handwritten outline that precedes his lecture notes. I cannot explain why the first semester covers parts I-IV and the second semester apparently begins with part VI.

 

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Course Enrollment

[Economics] 202. Advanced Economic Theory. Professor Modigliani (Carnegie Institute of Technology). Full Course.

(F)      1 Junior, 1 Senior, 29 Graduates, 4 Radcliffe, 3 Other: Total 38
(S)      1 Junior, 1 Senior, 27 Graduates, 3 Radcliffe, 4 Other: Total 36

 

Source: Harvard University. Report of the President of Harvard College and Reports of Departments, 1957-58, p. 82.

 

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Modigliani Outline for Fall Semester, 1957 (Handwritten)

Ec. Analysis I
Summer & Fall 1957 Harvard

Outline

Part I. Methodology.

(A) Subject matter and the areas

(B) The methodology of positive economics and of Welfare economics

(C) Discussion of types of model and sequence of presentation

Part II. Theory of Demand and application

II(a) Partial Equilibrium Analysis-Demand function and application

(A) The law of demand and the description of demand functions

(1) The law of demand
(2) Cournot formulation. The notion of functions and some mathematics
(3) The slope of demand functions and responsiveness
(4) Criticism of slope as measure of responsiveness
(5) The notion of demand elasticity and its computation
(6) The behavior of total outlays and its relation to η

(B) Application to problem of random supply. Price and income variation and stabilization.

(C) Application to the elementary theory of Monopoly.

(1) Nature of the model
(2) The case of no costs. Total curves
(3) Graphical computation of MR
(4) η and MR
(5) Fixed costs. Comp. Statics
(6) Effect of Taxes
(7) Introduction of costs. Equilibrium Analysis
(8) Comparative Statics and Taxation

II (b) Utility Analysis

(A) Introduction

(1) Utility and M.U. The Marshallian approach
(2) Shortcoming. The alternative approach.

(B) Indifference Approach

(1) The fundamental postulates
(2) Graphical Representation of tastes
(3) Indifference map and utility function
(4) Slope of I.C.—m.r. of s. and expression in terms of m.u.
(5) Generalizations and the role of two commodities
(6) Types of indifference maps.
(7) The opportunity set. The case of perfect markets
(8) Pathological cases and the law of d.m.r. of s.
(9) Effect of variation in income. Engel curves
(10) Effect of variations in prices. The demand curve
(11) The case of two commodities; income derived from the commodities. Demand and supply.
(12) Generalization to n commodities; complementarity and substitution

(C) Applications of utility analysis

(1) Consumers surplus
(2) Elements of Index number theory

II (c) General Equilibrium of Exchange.

(A) Nature of Problem and approach.

(1) What we wish to explain
(2) Nature of model’s assumptions.

(B) The two person, two commodity case.

(1) The Edgeworth Box.
(2) The offer curves
(3) The behavior of excess demand as function of p and competitive equilibrium (normal case) [illegible] market
(4) The relation between Ex and Ey. Walras law.
(5) Multiple intersection of offer curves. Stable and unstable equilbria. The correspondence Principle.
(6) The pure monopoly solutions.
(7) Comparison of competitive and monopoly solution. Welfare maximization.
(8) The Pareto locus and the Weak Welfare ordering.
(9) Necessary and sufficient condition for max. welfare under individualistic welfare function. The [illegible word] feasibility function. Every point on Pareto locus achievable by perfect market, lump sum taxes and subsidies.
(10) Comparative statics.
(11) Uses of Edgeworth Diagram in the study of barter and bilateral monopoly

(C) General Equilibrium of Exchange

III. Theory of supply and production

(A) Introduction

(1) Nature of production and relation to consumption and exchange model.
(2) The organization of production and the nature of the firm in the model.
(3) Factors of production; general notions and the classical dichotomy[?]
(4) Profit maximization and the definition of profit.

(B) Production functions and cost functions.

B(I). One output and two inputs.

(1) Three dimensional representation.
(2) A single variable factor. Product curve.
(3) The cost curve

B(II). Two variable inputs

(1) Determination of equilibrium can be broken up into two parts. Cost minimization, and choice of best output along the minimized cost function.
(2) Cost minimization.

[(C) Supply function]

(1) Long run cost functions and returns to scale
(2) The long run supply curve
(3) Short run costs and supply curves

IV. Market Structures.

(A) Classification of Markets

(B) Monopolistic competition.

(1) Equilibrium for the firm
(2) Simultaneous equilibrium of the group.
(3) Essential characteristics of equilibrium in relation to monopoly and perfect competition, welfare aspects.
(4) Relaxation of the pure model.
(5) Forces making for [illegible] higher prices

(C) Oligopoly with homogeneous selling and no free entry

(1) Duopoly, Cournot solution
(2) Oligopoly and the limit solution as n goes to infinity

 

Source: Duke University, Rubenstein Library. Franco Modigliani Papers. Box T6. Folder “Economics 1956-57”

 

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Mimeographed Course Outline,
Carnegie Institute of Technology 1957

February, 1957

GI-581—Advanced Economics I
Course Outline and Major References (Provisional)

I. Methodological issues:

(1) Kaufman — Methodology of the Social Sciences
(2) Friedman — Essays in Positive Economics — Part I
(3) Robbins — The Nature and Significance of Economic Science

II. Theory of Demand and Applications

(A) Partial equilibrium approach — Marshallian Demand functions and applications to simple monopoly.

(B) General equilibrium approach — Utility analysis and indifference curves

(C) General equilibrium of exchange: (i) the two person, two commodity case; (ii) the general case

(1) Marshall — Principles of Economics, Book III, Ch. III and IV; Mathematical Appendix, Notes II and III
(2) Cournot — The Mathematical Principles of the Theory of Wealth, Ch. IV, V, VI
(3) Bowley — The Mathematical Groundwork of Economics, Ch. I
(4) Hicks — Value and Capital, Part I (pages 12-52) and Part II, ch. IV and V.
(5) Mosak — General Equilibrium Theory in International Trade, Ch. 1 and 2
(6) Samuelson — Foundations of Economic Analysis, Ch. 1, 5, 6, 7
(7) Slutsky — On the Theory for the Budget of the Consumer, Readings in Price Theory
(8) Hicks — Revision of Demand Theory

III. Theory of supply and costs under competitive conditions

(A) Partial equilibrium approach — theory of Rent

(B) General equilibrium approach — production functions and marginal productivity

(C) General equilibrium of production and exchange

(D) Some welfare implications

(1) Viner — Cost Curves and Supply Curves, Readings in Price Theory
(2) Stigler — The Theory of Prices
(3) Hicks — Value and Capital, Ch. VI and VII
(4) Mosak — Ch. V
(5) Lerner — The Economics of Control

IV. Imperfect Competition Theories and Market Structures

(A) Theory of monopoly

(B) Small numbers and imperfect competition

(1) Cournot — Ch. 7
(2) Chamberlin — Theory of Monopolistic Competition
(3) Robinson — Economics of Imperfect Competition
(4) Readings in Price Theory, Part V, Imperfect Competition
(5) Hall and Hitch — Price Theory and Business Behavior, Oxford Economic Papers, 1939
(6) Stigler — Notes on the Theory of Duopoly, JPE, 1947, page 521
(7) Fellner — Competition among the Few
(8) Bain — A Note on Pricing in Monopoly and Oligopoly, AER, 1949, page 448
(9) Hurwicz — The Theory of Economic Behavior, Readings in Price Theory
(10) Henderson — The Theory of Duopoly, QJE, December, 1954
(11) Harrod — Economic Essays, The Theory of Imperfect Competition revised
(12) Hicks — The Process of Imperfect Competition, Oxford Economic Papers, 1954
(13) Paul — Notes on Excess Capacity, Oxford Economic Papers, 1954
(14) Hahn — Excess Capacity and Imperfect Competition, Oxford Economic Papers, 1955

Source: Duke University, Rubenstein Library. Franco Modigliani Papers. Box T8. Folder “(Notes on Advanced Monetary Theory III , 1953-1960”.

 

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Mimeographed Course Outline, Carnegie Institute of Technology 1959

February, 1959

GI-581—Advanced Economics I
Course Outline and Major References

I. Methodological issues:

(1) Kaufman — Methodology of the Social Sciences
(2) Friedman — Essays in Positive Economics — Part I
(3) Robbins — The Nature and Significance of Economic Science

II. Theory of Demand and Applications

(A) Partial equilibrium approach — Marshallian Demand functions and applications to simple monopoly.

(B) General equilibrium approach — Utility analysis and indifference curves.

(C) General equilibrium of exchange: (i) the two person, two commodity case; (ii) the general case

(D) Basic concepts of Welfare Economics. Index number theory.

(1) Marshall — Principles of Economics, Book III, Ch. III and IV; Mathematical Appendix, Notes II and III
(2) Cournot — The Mathematical Principles of the Theory of Wealth, Ch. IV, V, VI
(3) Samuelson — Foundations of Economic Analysis, Ch. 1, 2, 3, 5, 6
(4) Hicks — Value and Capital, Part I (pages 12-52) and Part II, ch. IV and V.
(5) Slutsky — On the Theory for the Budget of the Consumer, Readings in Price Theory
(6) Hicks — Revision of Demand Theory Parts I and II
(7) Bowley — The Mathematical Groundwork of Economics, Ch. I
(8) Mosak — General Equilibrium Theory in International Trade, Ch. 1 and 2
(9) Boulding — Welfare Economics in Survey of Contemporary Economics, vol. II.

III. Theory of supply and costs under competitive conditions

(A) Partial equilibrium approach — theory of Rent

(B) General equilibrium approach — production functions and marginal productivity

(C) General equilibrium of production and exchange under competitive conditions

(D) Some welfare implications

(E) Stability of equilibrium — comparative statics and dynamics.

(1) Viner — Cost Curves and Supply Curves, Readings in Price Theory
(2) Stigler — The Theory of Prices
(3) Samuelson — Foundations chs. 4, 9
(4) Lerner — The Economics of Control chs. 15, 16, 17
(5) Hicks — Value and Capital, Ch. VI and VII
(6) Mosak — Ch. V
(7) Cassel — The Theory of Social Economy Vol I. ch. 4, pp. 134-155

IV. Imperfect Competition Theories and Market Structures

(A) Classification of market structures

(B) Theory of monopoly

(C) Monopolistic competition, large group

(D) Oligopolistic competition

(E) The role of the conditions of entry.

(1) Cournot — Ch. 7
(2) Chamberlin — Theory of Monopolistic Competition
(3) Robinson — Economics of Imperfect Competition, Book V.
(4) Readings in Price Theory, Part V, Imperfect Competition
(5) Hall and Hitch — Price Theory and Business Behavior, Oxford Economic Papers, 1939
(6) Stigler — Notes on the Theory of Duopoly, JPE, 1947, page 521
(7) Fellner — Competition among the Few
(8) Hurwicz — The Theory of Economic Behavior, Readings in Price Theory
(9) Henderson — The Theory of Duopoly, QJE, December, 1954
(10) Bain — Barriers to New Competition. Esp. ch. 1, 3, 4, 6.
(11) Modigliani — New Developments on the Oligopoly Front. JPE June 1958, pp. 215-232.
(12) Cyert and March — Organizational Structure and Pricing Behavior in an Oligopolistic Market. AER March 1955, pp. 129-139
(13) Cyert and March — Organizational Factors in the Theory of Oligopoly. QJE Feb. 1956, pp. 44-64

Source: Duke University, Rubenstein Library. Franco Modigliani Papers. Box T8. Folder “(Notes on Advanced Monetary Theory III , 1953-1960”.

Final Examination for GI 581 in 1959 and 1960 has been posted!

 

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Final Examination Economics 202, Fall Semester (1957-58)

HARVARD UNIVERSITY
Department of Economics
ECONOMICS 202

Answer questions 1, 2, and two of the remaining three. Question 1 will be given double weight.

  1. Assume that the government fixes by law the price of a commodity and hands out to the public ration coupons equal in number to the number of units of the commodity produced. Assume throughout that the supply is perfectly inelastic.

a) Show graphically the opportunity locus of an individual consumer, in terms of the usual indifference diagram, with one of the axes representing money. Under what condition would a consumer not use all of his coupons?

b) Show that consumers would be better off if they were free to buy or sell their ration coupons in a free market.

c) Supposing now that coupons could be bought and sold in a free market, explain how one could derive an individual consumer’s demand curve for coupons. (Hint: the situation is analogous to the consumer being forced to buy his ration of the good at the legal price and then being allowed to sell it or buy more of it on a free market.)

d) Explain the formation of the equilibrium market price of coupons.

e) What can be said as to the relation between the legal price, the price of coupons, and the price which would prevail in the absence of price control and rationing? Under what condition would the sum of the first two be equal to the third?

  1. Wicksell states two alternative conditions under which entrepreneurial profits would be zero:

“…either that large-scale and small-scale operations are equally productive, so that, when all the factors of production are increased in the same proportion, the total product also increases exactly proportionately; or at least that all productive enterprises have already reached the limit beyond which a further increase in the scale of production will no longer yield any advantage.”

Explain the reasoning behind Wicksell’s statement of these conditions. Is either of them sufficient, or must other conditions be added?

  1. Discuss the significance of free entry to the relation of the long-run equilibrium size of the firm to its optimum size.
  1. A profit maximizing monopolist buys factors of production in a perfect market.

a) Discuss the long-run effect on his demand for each of the factors he uses and on his selling price of a tax on one of the factors. (Give a graphic treatment for the case of two factors.)

b) Suppose that one of the two factors is fixed in the short run. Contrast the change in the long-run and short-run demand for both factors when a tax is placed on either.

  1. Evaluate the methodological positions of Friedman and Koopmans. Would an agreement with one as against the other make any difference as to the direction of economic research?

January 25, 1958

 

Source: Duke University, Rubenstein Library. Franco Modigliani Papers. Box T8. Folder “(Notes on Advanced Monetary Theory III , 1953-1960”.

 

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[Handwritten cover page to course lecture notes]

 

ECONOMIC ANALYSIS II
Harvard—Spring 1958
Outline

I. Welfare Economics and Critique of Laisser faire

II. Dynamics with Certainty

III. Theory of Choice Under Uncertainty

IV. Money and Keynesian Economics

 

Source: Duke University, Rubenstein Library. Franco Modigliani Papers. Box T6. Folder “Economics 1956-57”.

 

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[Two mimeographed sheets of course outline and readings]

HARVARD UNIVERSITY
Department of Economics
Economics 202

Spring, 1958

VI. Economics of Welfare

Readings:

Lerner, A. P., The Economics of Control, Chap. 1-14 (as a review)

Hicks, J. R., “The Foundations of Welfare Economics,” Economic Journal, Dec. 1939.

Scitovsky, T., “A Reconsideration of the Theory of Tariffs,” Review of Economic Studies, Volume 9, 1941

Samuelson, P., “Evaluation of Real National Income,” Oxford Economic Papers, Jan. 1950

J. de V. Graaf, Theoretical Welfare Economics

Baumol, William J., Welfare Economics and the Theory of the State (omit Ch. 8)

Ruggles, N., “The Welfare Basis of Marginal Cost Pricing,” Review of Economic Studies, Vol. XVII, 1949-50.

Vickrey, W., “Some Objections to Marginal Cost Pricing,” JPE, June 1948

*Burk (Bergson) A., “A Reformulation of Certain Aspects of Welfare Economics,” Quarterly Journal of Economics, Vol. 52, 1938

*Samuelson, P., Foundations of Economic Analysis, Chapter 8

*Koopmans, T. C., Three Essays on the State of Economic Science, I—Allocation of Resources and the Price System.

VII. Dynamics under Certainty

Temporal theory of consumer choice — the notion of interest — inter-temporal equilibrium without production — temporal theory of production and capital — growth

Readings:

Fisher, The Theory of Interest, Chapters II, X, XI, XVI, XVIII.

Hicks, Value and Capital, Chapters IX, X, XI, XV, XVI, XVII, XVIII.

Lutz and Lutz, The Theory of Investment of the Firm, Chapters I-X, XII, XV, XX.

Lindahl, Studies in the Theory of Money and Capital, Part III, Ch. 2, 3.

Samuelson, “Dynamics, Statics and the Stationary State,” in Clemence, Readings in Economic Analysis, Vol. I

Modigliani and Brumberg, “Utility Analysis and the Consumption Function,” in Kurihara, Post-Keynesian Economics.

*Mosak, General Equilibrium Theory, Ch. VI, VII.

*Koopmans, Three Essays on the State of Economic Science, Essay I, part 4, (Pp. 105-126).

VIII. Some Approaches to the Theory of Choice under Uncertainty.

Readings:

Arrow, “Alternative Approaches to the Theory of Choice under Uncertainty in Risk-taking Situations,” Econo metrica, 1951.

Modigliani, “Liquidity and Uncertainty,” (Discussion paper) AER, May 1949

Hart, Anticipations, Uncertainty and Dynamic Planning

Marschak, “Probability in the Social Sciences,” in Lazarsfeld, Mathematics 1 Thinking in the Social Sciences.

Friedman and Savage, “The Utility Analysis of Choice Involving Risk,” in Readings in Price Theory.

Strotz, “Cardinal Utility,” AER, May 1953.

Hart, “Risk, Uncertainty, and the Unprofitability of Compounding Probabilities,” in Readings in the Theory of Income Distribution.

*Herstein and Miller, “An Axiomatic Approach to Measurable Utility,” Econometrica, April 1953.

 

Source: Duke University, Rubenstein Library. Franco Modigliani Papers. Box T6. Folder “Economics 1956-57”.

 

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[Handwritten outline preceding notes for fourth part of second semester]

Money and Keynesian Economics
Outline

I. Introduction of uncertainty and money in dynamic general equilibrium framework

II. The supply and demand for money

(A) Supply side. The banking system and bank balance equation

(B) The demand side

(1) The transaction demand. Cambridge and Fisher equations.
(2) The formal closing of system with dichotomy and neutrality. Criticism. No connection between demand for money and demand for anything else. No [illegible] formal money market
(3) The role of interest rate on transaction demand
(4) Liquidity preference and the connection of Money and Bond market. The formal model of these markets in which funds are acquired or disposed of against bonds.
(5) Preservation of dichotomy under certain assumptions: the role of money in real system. Its disappearance with pure bank money and η =1.
(6) Sources of non-transaction or asset demand for money:

(a) Transaction costs on short funds.
(b) The so called speculative demand.

The case of a single short rate [for the supply of money to equal the demand for money] provided r01 >0.
Liquidity trap. No carrying cost, r cannot be negative.
The case of multiple rates. Speculative demand.

(7) The breakdown of the system. The Pigou effect. its implications on extreme fluctuations of price level.
(8) The consequence of price rigidity.

III. The Economics of rigid prices (rigid wages)

(A) Description of labor market and the [illegible]of rigidity.
(B) The emergence [consequence?] of the notion of Income. Capitalism. Property and non-property income
(C) Nature of demand and supply. Consumption and Investment.
(D) Why wage rigidity [illegible]a solution even when r of full employment is negative. Supply falls faster than demand
(E) The four quadrant analysis and its interpretation.

 

Source: Duke University, Rubenstein Library. Franco Modigliani Papers. Box T6. Folder “Economics 1956-57”.

Image Source: Franco Modigliani page at the History of Economic Thought Website.

Categories
Chicago Economists

Chicago. Milton Friedman from Cambridge to T.W. Schultz. 29 Mar 1954

About a week ago I posted Milton Friedman’s letter from Cambridge, England to T. W. Schultz dated 28 October 1953. Today we have the next carbon copy of a letter to Schultz from Cambridge in the Milton Friedman papers at the Hoover Institution in which Friedman discusses a range of issues from a one-year appointment in mathematical economics at Chicago, the Cowles’ Directorship appointment, and postdoctoral fellowships. The letter ends with a laundry-list of miscellaneous comments from Arthur Burns’ Economic Report to the President through the reception of McCarthy news in England. Friedman’s candid assessments of many of his fellow-economists make this letter particularly interesting.  More to come!

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If you find this posting interesting, here is the complete list of “artifacts” from the history of economics I have assembled. You can subscribe to Economics in the Rear-View Mirror below. There is also an opportunity for comment following each posting….

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Milton Friedman to T.W. Schultz
29 March 1954

15 Latham Road
Cambridge, England
March 29, 1954

 

Dear Ted:

Of the people you list as possible visiting professors while Koopmans is away, Solow of M.I.T. is the one who offhand appeals to me the most. I have almost no doubt about his absolute competence: I read his doctoral dissertation at an early stage and saw something of him last summer and the preceding summer when he was spending some time at Hanover in connection with one or another of Bill Madow’s projects. He has a seminal mind and analytical ability of a very high order. My only questions would be the other that you raise, whether he is broadly enough interested in economics. And here I am inclined to answer with an uncertain yes, relying partly on the fact that he is flexible and capable of being induced. I do not know Dorfman of California either personally or through his writings. My question about him is that I believe that we would do best if we could use this opportunity in general to bring in someone with a rather different point of view and who will provide a broadening of the kind of thing done under the heading of mathematical economics, and my impression is that Dorfman is very much in the same line as Koopmans – but here too, I don’t have much confidence in my knowledge. As you know, I think very highly of both Modigliani and Christ, but as of the moment for this particular spot, would prefer Solow, partly on grounds of greater differentiation of product.

One rather harebrained possibility that has occurred to me outside your list is Maurice Allais, the French mathematical economist who is Professor at École des Mines. Allais is a crackpot genius in many respects. He came out of engineering and is largely self taught, which means he holds the erroneous views he has discovered for himself as strongly as the correct ones. I have always said that if he had, at a formative age, had one year of really good graduate education in economics he might have become one of the really great names. At the same time, Allais is an exceedingly active and stimulating person who works in mathematical economics of a rather different kind than we have been accustomed to. I think it would be a good thing to have him around for a year – both for us and him – though I am most uncertain that it would be for a longer period. I don’t have any basis for knowing whether Allais would be interested.

I have tried to think over the other European mathematical economists to see if they offer other possibilities. There are others in France: Guilbaud [Georges-Théodule Guilbaud (1912-2008)], Boiteux [Marcel Boiteux (1922-)] (I don’t have that spelled right), but none seem to me as good as Allais for our purposes. There are Frisch and Haavelmo in Norway, Wold in Sweden; of these, Haavelmo would be the best. I find it hard to think of anybody in England who meets this particular bill, and would be at all conceivable. Dick Stone? Has just been over and is not primarily mathematical but might be very good indeed in some ways. Is certainly econometric minded and fairly broadly so. R.G.D. Allen? Has done almost nothing in math. econ. for a long time.*

*[handwritten footnote, incomplete on left side presumably because carbon paper folded on the corner:   “…real possibility here is a young fellow at the London School, A. W. Phillips…invented the “machine” Lerner has been peddling. He came to econ. out of ….good indeed. He has an important paper in the mathematics of stabilization (over) policies, scheduled to appear(?) in Econ. Journal shortly.”]

Getting back home, the names that occur to me have, I am sure, also occurred to you. Is Kenneth Arrow unavailable for a year’s arrangement? What about Vickrey? I don’t believe that in any absolute sense I would rate Vickrey above Christ, say, but for us he has the advantage of bringing a different background and approach.

The above is all written in the context of a definite one-year arrangement in the field of mathematical economics. I realize, of course, that this may turn out to be an undesirable limitation. This is certainly an opportunity to try someone whom we might be interested in permanently; and it may be possible to make temporary arrangements for math. econ. for the coming year – via DuBrul, Marschak, etc. The difficulty is that once I leave this limited field, the remainder is so broad that I hardly know where to turn. For myself, I believe we might well use this to bring someone in in money, if that possibility existed. If it did, I should want strongly to press on you Harry Johnson, here at Cambridge, but originally a Canadian educated at the University of Toronto, who is the one new person I have come to know here who has really impressed me.

One other person from the US left out of the above list but perhaps eligible even within the narrower limitations is William Baumol. Oughtn’t he be considered?

Within the narrower limitations, my own listing would, at the moment, be: Allais, Solow, Baumol, Arrow, Vickrey, Phillips. I would hasten to add that my listing of Arrow fourth is entirely consistent with my believing him the best of the lot in absolute competence, and the one who would still go to the top of this list for a permanent post.

I turn to the other possibility you raise in your letter, a permanent post a la the Tobin one. I am somewhat puzzled how to interpret the change of view, you suggest, I assume that the person would be expected to take over the directorship of Cowles. If this is so, it seems to me highly unfortunate to link it with a permanent post in the department. Obviously, the best of all worlds would be if there were someone we definitely wanted as a permanent member of the department who also happened to be interested in the Cowles area and was willing to direct, or better interested in directing, Cowles. In lieu of this happy accident, I would myself like to see the two issues kept as distinct as possible; to have the Cowles people name a director, with the aid and advice but not necessarily the consent, of the department; have the department offer him cooperation, opportunity to teach, etc., but without having him a full-fledged permanent member. I hope you will pardon these obiter dicta. I realize that this is a topic you have doubtless discussed ad nauseam; what is even more important, if after such discussion, you feel differently, I would predict that you would succeed in persuading me to your view; which is why I leave it with these dicta and without indicating the arguments – you can provide them better than I.

The issue strikes me particularly forcefully because I do feel that in terms of the needs of the department, our main need is not for someone else mainly in the Cowles area; it is for someone to replace either Mints in money, or me in orthodox theory, if I slide over to take Mints’ role.

For Cowles’ sake as well as our own, there might be much to be said for having the directorship be the primary post for whoever comes. It seems to me bad for Cowles to have that post viewed as either a sideshow or a stepping stone. For directorship of Cowles, some names that occur are: Herbert Simon; Dorothy Brady; with more doubt Modigliani. One possibility much farther off the beaten track is Warren Nutter, who has, I gathered, been a phenomenal administrative success in Wash. at Central Intelligence Agency; yet is an economist. Would Charlie Hitch, who has been running Rand’s economic division be completely out?

[Handwritten note: “You know, Gregg Lewis might be better than any of these if he would do it!]

If the post is to be viewed as primarily a professorship in the department, with Cowles directorship as a sideline, I have great difficulty in making any suggestions: I would not, in particular, be enthusiastic about any of those mentioned in the preceding paragraph. Arrow, yes, but he is apparently out. Simon Kuznets, yes, but he would be likely to make Cowles into something altogether different that it is. I feel literally stuck in trying to think of acceptable candidates. Perhaps I can be more useful in reacting to other suggestions.

Let me combine with this some comments on your March 15 letter, which I should have answered long since.

On the post-doctoral fellowship, I feel less bearish than you, primarily, I suppose because I am inclined to lay a good deal of emphasis on the intangible benefits from having a widespread group of people who have had a year at Chicago. It seems to me that a post-doctoral fellowship is more likely to do this than a staff appointment, both because it is likely to bring in a wider range of people to apply and because it is rather more likely to have a one or two year limit and so a more rapid turnover. What has disappointed me most is the limited number of people among whom we have been forced to choose. Why is it that we don’t get more applications? Is it because we do treat it now like a staff appointment? Do we advertise it as widely as we might and stimulate a considerable number of applicants? Or is it simply because the great increase in number of post-doctoral fellowships available (and decrease in quality of people going in for economics?) has lowered the demand for any one fellowship? I find it hard to believe that making it into a staff appointment would help much in providing more adequate review and appraisal – this is I believe a result of the limitations of time on all of us – but it might give it greater prestige and make it more valuable to the recipient in this way, though, it would cost him tax and limit freedom.

I believe that part of the problem you raise about the postdoctoral fellowship has little to do with it per se but is a general problem about the department. Is our own work subject to as much discussion and advice from our colleagues as each of us would like? The answer seems to me clearly no. The trouble is – and I am afraid it is to some extent unavoidable and common at other places – that we have so many other duties and tasks to perform that being an intellectual community engaged in cross-stimulation perforce takes a back seat. This disease is I think one that grows as the square of the professional age. From this point of view, I think that the more junior people around the better in many ways and I think this one of the real virtues of the development of research projects that will enable us to keep more beginners around.

On the whole, I continue to think that the fellowship idea is sound, in the sense that we ought to have a number of people around who have no assigned duties. I would defend the Mishan result in these terms. I think he was a most useful intellectual stimulant and irritant to have around even if his own output was not too striking. The virtue of the fellowship arrangement is that it enables you to shape the hole to the peg. I cannot of course judge about Prais. But I am surprised by your adverse comments on Dewey’s use of it; I would have thought his one of the clearly most successful post-doctoral fellowships so far.

As you have doubtless heard, Muth has decided to go to Cowles. I am sorry that he has. I think he is good. I am somewhat troubled about the general problem of recruiting for the Workshop at a distance. In addition to Muth, I had heard from Pesek, whom I encouraged but left the matter open because he would rather have a fellowship that he applied for that would pay his travelling expenses to Washington. My general feeling is that it would be a mistake to take anyone just because I am not on the spot, that it would be far better to start fairly slowly, and let the thing build up, adding people as they turn up next year. Any comments or suggestions would be greatly appreciated.

I am delighted to hear about Fred’s ford project. I had a wire from Willits recently re Harberger and I assume it was in connection with his proposed project. Al Rees will be a splendid editor, I feel, and it is excellent to have him entirely in the department. I hardly know what to think of Morton Grodzins as Dean. I assume that his appointment measn that he was regarded as a successful administrator at the Press. Grodzins has great drive and energy, is clearly bright and intelligent, but whether he has the judgment either of men or of directions of development that is required, and the ability to raise money that Tyler displayed, is something I have less confidence in. Who is taking over the Press?

I enjoyed your comments on both Arthur Burns and McCarthy. With respect to the first, I thought the economic report extraordinarily good, both in its analysis of the immediate situation and in its discussion of the general considerations that should guide policy. It showed courage, too, I think in its willingness to say nasty things about farm supports and minimum wages to mention two. My views about the recession are indicated by the title of a lecture I am scheduled to give in Stockholm towards the end of April: “Why the American Economy is Depression-proof”. After all, there is no reason why Colin Clark should be the only economist sticking his neck out. It continues to seem to me that the danger to be worried about is over-reacting to this recession and in the process producing a subsequent inflationary spurt. Arthur seems to me to be showing real courage in holding out against action. To do something would surely be the easy and in the short run politically popular course.

McCarthyism has of course been attracting enormous attention here. Indeed, for long it has crowded almost all other American news into the background with the result that it has given a thoroughly distorted view of America to newspaper readers. I enclose a clipping in this connection which you may find amusing. it is not a bad summary, though I trust I put in more qualifications.

We have gotten an opportunity to go to Spain via an invitation to lecture at Madrid (Earl’s doing, I suspect), so Rose and I are leaving next week for a week there. Shortly after our return we go to Sweden and Denmark for a couple of weeks. We are very much excited by the prospects. Best regards to all.

Yours

[signed]
Milton

 

Source: Hoover Institution Archives. Milton Friedman Papers. Box 194, Folder “194.6 Economics Department S-Z, 1946-1976”.

 

Image: Left, Milton Friedman (between 1946 and 1953 according to note on back of photo in the Hoover Archive in the Milton Friedman papers). Right, Theodore W. Schultz from University of Chicago Photographic Archive, apf1-07484, Special Collections Research Center, University of Chicago Library.

Categories
Economists M.I.T.

MIT. Department of Economics Group Photo, 1976

Back Row:  Harold FREEMAN, Hal VARIAN, Jerome ROTHENBERG, Peter DIAMOND, Jerry HAUSMAN

4th Row: Paul JOSKOW, Anne FRIEDLAENDER, JOHN R. MORONEY (VISITOR TO DEPARTMENT)

3rd Row: Stanley FISCHER, Jagdish BHAGWATI, Rudiger DORNBUSCH, Robert SOLOW, Robert HALL

2nd Row: Edward KUH, Morris ADELMAN, Abraham J. SIEGEL, Richard ECKAUS, Martin WEITZMAN

1st Row: Evsey DOMAR, Paul SAMUELSON, Charles KINDLEBERGER, E. Cary BROWN, Franco MODIGLIANI, Sydney ALEXANDER, Robert BISHOP

1976_MITEcon_blogCopy

Apparently didn’t get the memo and/or not pictured: Michael PIORE, Frank FISHER, Peter TEMIN.

Thanks to Robert Solow, the photo-bomber standing to Solow’s left in the picture has been identified as a guest from Tulane University, John Moroney. It is possible that I forgot some other person not included in this faculty picture.

I note that the entire front row has gone to that great Department of Economics in the Cloud.

Source: A graduate student buddy of mine who entered the MIT Ph.D. program in 1975/76.

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If you find this posting interesting, here is the complete list of “artifacts” from the history of economics I have assembled of which this is the 250th. You can subscribe to Economics in the Rear-View Mirror below. There is also an opportunity for comment following each posting….

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Courses Exam Questions M.I.T. Suggested Reading Syllabus

M.I.T. Intermediate Macroeconomics. Modigliani, 1961

Welcome to my blog, Economics in the Rear-View Mirror. If you find this posting interesting, here is the list of “artifacts” from the history of economics I have already assembled for you to sample or click on the search icon in the upper right to explore by name, university, or category. You can subscribe to my blog below.  There is also an opportunity to comment below….

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These course materials for undergraduate intermediate macroeconomics at MIT in the Spring term of the 1960/61 academic year are clearly identified as being for a course taught by Franco Modigliani. As it happens from time to time, one finds syllabi and reading lists in the files of colleagues and not just in the papers of students who took the course or the professors who taught them. These materials from reading list through class-assignments, term-paper assignment, up to and including the final examination all come from Robert Solow’s papers at the Duke University library’s Economists’ Papers Project. 

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14.05 Economic Fluctuations and Growth

Prereq.: 14.02
Year: U(1,2)     3-0-5

Analytical study of determinants of national income level, employment, and prices; study of their fluctuations and long-run trends. Consideration of historical and current behavior of the economic system, and role of stabilization policies.

Modigliani

Source:   Massachusetts Institute of Technology Bulletin. The General Catalogue Issue for the Centennial Year 1960-61. p. 240.

 

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Spring, 1961
Professor Modigliani

 

14.05—Economic Fluctuations and Growth
READING LIST

 

Suggested Purchases: Dernburg & McDougall, Macro-Economics (1960)—(referred to below as D&M)
US Department of Commerce, U.S. Income and Output (1958)
Federal Reserve Chart Book, Historical Supplement (1960)

Review references in each section are to Samuelson, Economics (4th ed., 1958)

 

I. Introduction

Review: Samuelson, Ch. 1
New: D&M, Ch. 1

Friedman: Essays in Positive Economics, pp. 1-30.

II. National Income and Other Measures of Economic Activity.

Review: Samuelson, Ch. 10
New:   D&M, Ch. 1-5

Hart, Money, Debt, and Economic Activity (2nd ed., pp. 167-171)
G. Moore, Statistical Indicators of Cyclical Revivals and Recessions, pp. 1-20, 63-77
Survey of Current Business—“The Business Situation” in a recent issue, and look at annual review in February, 1960, number.

References: For current business conditions and course problems, get acquainted with the following, by examining thoroughly at least one recent issue:

Survey of Current Business (monthly; annual summary in February; National Income issue in July)
Federal Reserve Bulletin (monthly)
Economic Indicators (monthly; historical supplement, 1957)
See Bratt, Business Cycles and Forecasting (1953), Chapter 15, for additional source material

III. The Supply of Money and the Banking System.

Review: Samuelson, Chap. 15 and Appendix, 16.
New:   Hart, Money, Debt, etc., Ch. 4 and 6.

Federal Reserve System: Purposes and Functions

IV. The Determinants of the Level of National Income.

A. Monetary Approaches

Review: Samuelson, Ch. 14 and Appendix
New:   D&M, Ch. 9

Hart, Money, Debt, Ch. 10, 12

B. The Theory of Effective Demand

Review: Samuelson, Ch. 11, 12
New: D&M, Ch. 6, 7

Hart, Money, Debt, Ch. 11, pp. 167-179
(optional) Modigliani & Brumberg, “Utility Analysis and the Consumption Function”, in Post-Keynesian Economics (esp. pp. 388-418)
(optional) Ando, “Aggregative Implications of the Modigliani-Brumberg Consumption Function” (mimeographed), pp. 1-118 and Summary

V. Cyclical Fluctuations and Growth.

A. Nature and Causes of Economic Fluctuations

Review: Samuelson, Ch. 13
New: D&M, Ch 19, Section 1-3

Metzler, “The Nature and Stability of Inventory Cycles”, Review of Economics and Statistics, 1941-42
Modigliani, “Business Reasons for Holding Inventories and their Macro-economic Implications”, pp. 495-506
Modigliani, “Discussion of Hickman on Capacity, Capacity Utilization and the Acceleration Principle”, pp. 450-463 N.B.E.R. reprint
Cobren, “Inventories in Postwar Business Cycles”, Survey of Current Business, April, 1959
Tinbergen, The Dynamics of Business Cycles, Ch. 13
Hicks, Trade Cycle, Ch. 8, 9 (optional)
Fortune, series on the capital goods market in August, September, November, and December, 1958. (Sample, especially December issue.)

References only: Summaries of historical development of business cycle theories: Haberler, Prosperity and Depression, Part I.

B. Growth and its Interrelation with Cycles

D&M Ch. 16, 17
Abramovitz, Resource and Output Trends in the U.S. since 1870
(optional) Ando & Modigliani, “Growth Fluctuations and Stability”, AER, May 1959, pp. 501-524
Bratt, Business Cycles and Forecasting (1953 ed.), Ch. 3
“A New Look at Production Growth Rates”, in Survey of Current Business, April 1957
Fortune, “The Market of the 1960’s” (series of 9 articles, Jan.-Sept. 1959) (Sample, esp. April issue)
Committee for Economic Development, Economic Growth in the United States (hurriedly)

VI. Business Forecasting.

Charles Roos, “Survey of Economics Forecasting Techniques”, Econometrica, October 1955
Moore, Statistical Indicators of Cyclical Revivals and Recessions, pp. 63-77 (National Bureau of Economic Research Method)
Moore, Measuring Recessions, esp. pp. 259-272
Sidney S. Alexander, “Rate of Change Approaches to Forecasting—Diffusion Indexes and First Differences”, The Economic Journal, June 1958
Fortune, “The Business Roundup”, January 1960
“1959 Survey of Consumer Finances”, Federal Reserve Bulletin, July and September 1959 (note supplementary tables)
Klein & Lansing, “Decisions to Purchase Consumer Durable Goods”, Journal of Marketing, October 1955
Fortune, series cited above on “The Market of the 1960’s” and on “The Coming Capital Goods Boom”
Modigliani & Weingartner, “Forecasting Uses of Anticipatory Data on Investment and Sales”
Bassie, Economic Forecasting (good general reference)
Abramson and Mack, Business Forecasting in Practice (for reference)

VII. Public Policy and Economic Stabilization.

A. Synthesis of Monetary and Income Analysis

Review: Samuelson, Ch. 17
New: D&M, Ch. 8, 9, 10

B. Monetary Policy

D&M, Ch. 11
United States Monetary Policy (American Assembly) –(esp. Ch. 1, 2, 4, 6)
Friedman, “The Supply of Money and Changes in Output”, in The Relationship of Prices to Economic Stability and Growth (Joint Econ. Committee)
Bach, “The Economics and Politics of Money”, Harvard Business Review 1953 (reprint)
Committee on the Economic Report (Patman Subcommittee)—Replies pp. 368-384, 402-428 (for reference)

C. Fiscal and Debt Policy

Review: Samuelson, Ch. 18
New:   D&M, Ch. 20, 21

The Federal Budget in Brief for Fiscal 1961 (get acquainted; copy of complete budget also on reserve)
Committee on Economic Development, Taxes and the Budget; also reprinted in Readings in Fiscal Policy (Parts I and II only)
Committee on Economic Development, The Budget and Economic Growth
Samuelson, “The New Look in Tax and Fiscal Policy”, in Federal Tax Policy for Economic Growth and Stability, pp. 229-34
Butters, “Taxation, Incentives, and Financial Capacity”, in Readings in Fiscal Policy
McCracken, “The Debt Problem and Economic Growth”, Michigan Business Review, November 1956

D. Wages, Productivity, Prices, and Inflation

D&M, Ch. 12, 14, 18
Wages, Prices, Profits and Productivity, American Assembly, (esp. Ch. 1, 3, 4, 6)

E. Overall Stabilization Policy and Economic Growth.

Friedman, “Framework for Monetary-Fiscal Stability”, Readings in Monetary Theory, OR;
Bach, “Monetary-Fiscal Policy Reconsidered”, Readings in Fiscal Policy
Rockefeller Committee, The Challenge to America
C. E. D. Defense Against Inflation, July 1958
Eckstein, “Inflation, the Wage-Price Spiral, and Economic Growth”, in The Relationship of Prices to Economic Stability and Growth (Joint Economic Committee)
Bach, Inflation, Ch. 2, 4
Samuelson and Solow, “Analytical Aspects of Anti-Inflation Policy”, AER May 1959 (reprint)

VIII. International Aspects.

Review: Samuelson, Ch. 31 and Appendix
New:   D&M, Ch. 15

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Spring 1961
Professor Modigliani

14.05 – Economic Fluctuations and Growth
GUIDE SHEET TO BASIC ECONOMIC DATA SOURCES.

BASIC HISTORICAL INFORMATION:

Historical Statistics of the United States Colonial Times to 1952 (U. S. Government Printing Office) – Data on all major economic and many social areas, with descriptions of series.

U. S. Income and Output – A Supplement to the Survey of Current Business, providing data of all components of gross national product, 1929-1957.

Banking and Monetary Statistics, 1860-1941 (Board of Governors, Federal Reserve System)-More detailed series on money and banking, with descriptions of series.

The Economic Almanac (published annually by the National Industrial Conference Board) – each issue repeats large amount of historical data, some back to 1790. Several of these series go back further than the official government series; as such, they are often less accurate because of the less adequate coverage of the series and larger likely estimating errors involved.

(U. S. Census (U. S. Government Printing Office) – Vast amounts of data on most aspects of the economic life of business and individual, reaching back to 1790. Difficult to use without assistance or experience.

CURRENT DATA – OFFICIAL SOURCES

Survey of Current Business (U. S. Department of Commerce, monthly) – The most complete source of basic economic data, plus objective analyses of various economic developments. An annual survey is published each year in the February issue, and Annual Statistical Supplements have been issued in several recent years, which provide the data in more easily usable form than do most of the monthly issues.*

Federal Reserve Bulletin (Board of Governors, Federal Reserve System, monthly) – The basic source of current official monetary and banking data, plus monthly analyses of monetary developments.

Monthly Labor Review (U. S. Department of Labor) – The basic source of current official data on labor and on price movements, plus monthly analyses of developments in these areas.

Statistical Abstract of the U. S. (U. S. Government Printing Office, annually) – The basic annual compilation of all U. S. Government statistical data; corresponds to the Historical Statistics of the United States, above.

*Business Statistics, 1959 Biennial Edition – The latest major supplement to the Survey. It includes all major series published in the Survey, from 1929 through 1958 in most cases.

CURRENT DATA AND ANALYSES—UNOFFICIAL

There are a vast number of analyses of current economic developments published. Among the more widely recognized as careful and influential are:

Monthly Letter of the National City Bank of New York – General business conditions and financial conditions.

Fortune Magazine (monthly) – Current business analyses and industry studies, written from a relatively “liberal” business slant.

The Conference Board Business Record (National Industrial Conference Board, monthly) – Briefly analyzes current developments; more conservative than Fortune.

CURRENT EVENTS—NEWSPAPERS

Three newspapers are widely thought to provide the most complete coverage of current economic events. They are:

New York Times (daily and Sunday) – Provides the most complete coverage of current economic events.

New York Herald-Tribune (daily and Sunday) – The Times’ closest rival.

Wall Street Journal (daily) – Leading financial and business paper. Complete daily data on most important markets; also includes many speculative news stories and analyses of current and expected developments.

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Spring, 1961
Professor Modigliani

14.05-Economic Fluctuations and Growth
WRITTEN ASSIGNMENTS

I. Due Monday, February 13

“Inflation erodes the purchasing power of the dollar, robs the average man, and lowers the national standard of living. These results are pernicious and disastrous. Inflation must be avoided.” (Excerpt from recent statement by U. S. Senator)

Do you agree with the Senator? Why or why not?

 

II. Due Friday, September 17

Prepare a brief report (two to three pages) on the current business conditions and the outlook for the next six to twelve months.

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Spring, 1961
Professor Modigliani

14.05-Economic Fluctuations and Growth
WRITTEN ASSIGNMENT

III. Due February 24

Economists as well as politicians are very much concerned with the overall burden of taxes, or share of the nation’s income taxed away by the government.

Using as a framework for National Income Accounts of the Department of Commerce, state and defend what seems to you the most useful and meaningful measure of the “share of the nation’s income taken by the government” (paying attention to the numerator as well as to the denominator). Compute this year for 1948 and 1957.

Is the above concept identical with the “share of the nation’s output of goods and services consumed by the government”? If not, define the second concept and measure this year for the same two years.

Include any comments that may be suggested by your empirical findings.

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Spring, 1961
Professor Modigliani

14.05-Economic Fluctuations and Growth
WRITTEN ASSIGNMENT

IV. Due March 6

In a small, completely isolated economy (i.e., no foreign trade with money-using habits comparable to those of the U. S., there are four identical banks. Each bank’s balance sheet is as follows:

Cash $3,000,000 Deposits $8,000,000
Loans 2,000,000
Government Securities 5,000,000 Capital and Surplus 2,000,000
$10,000,000 $10,000,000

The law prescribes that banks must hold a 20% cash reserve against deposits. There is no central bank.

(a) A customer of bank letter a minds $1 million of gold (considered as cash for reserve purposes) and deposits it in his bank. Trace through any likely expansion of the money supply by Bank Letter a and by the entire banking system. What would be the maximum expansion possible?
Specify clearly any assumptions that you make, and state your reasoning carefully and precisely.

(b) Is the banking system in a more or less sound position after the gold deposit in any consequences you have predicted above? Explain why or why not.

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Spring, 1961
Professor Modigliani

14.05-Economic Fluctuations and Growth
WRITTEN ASSIGNMENT

V. Due March 10

In 196X the Federal Government will collect about 85 billion in taxes, according to present estimates, which also indicate that the money will be used roughly as follows:

Regular government expenses $77 billion
Repayment of government debt
…..Held by commercial banks 3 billion
…..Held by individuals and businesses other than banks 5 billion

Suppose these estimates are accurate, and assume it Government deposits are carried out with the commercial banks.

a. What will be the effect of these operations on the amount of money (current and deposits) owned by the public (including individuals and businesses other than banks)?

b. What will be the effect on the amount of total liquid assets (money plus government securities) owned by the public?

c. How, if at all, would your answers to (a) and (b) have been different if:

(1) All bonds paid off had been owned by commercial banks.
(2) All months paid off had been owned by the Federal Reserve Banks.

d. What generalization, if any, can you draw from this reasoning as to the most effective means of retiring the government debt, if the main aim is to alleviate inflationary pressure.

Explained concisely the reasoning by which to obtain the answers given.

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14.05-Economic Fluctuations and Growth
TERM PAPER—DUE MAY 15, 1961

Write an essay on the postwar “creeping inflation” in the U.S. – Its nature, causes and possible remedies. The essay should review the major explanations that have been advanced (e.g. cost-push and demand-poll); assess their usefulness in the light of the empirical evidence; and provide a formulation of your own conclusions and the evidence which supports them. It should further examine the implications of your analysis with respect to the outlook for price stability in the years immediately ahead.

The following items have been placed on reserve in Dewey Library to serve as a starting point, you should feel free to trace and use other references.

Books

American Assembly, Wages, Productivity, Prices, and Inflation
American Assembly, Wages, Prices, Profits and Productivity
Bowen, W. G., The Wage–Price Issue

Pamphlets, Monographs, Periodicals, etc.

Bowen, W. G., “Wage Behavior in the Postwar Period”, monograph, Industrial Relations Section, Princeton University, 1960
Eckstein, O., “Inflation, the Wage-Price Spiral, and Economic Growth”, in The Relationship of Prices to Economic Stability and Growth (Joint Economic Committee)
Phelps, E. S., “A Test for the Presence of Cost Inflation in the United States, 1955-1957”, Yale Economic Essays, Spring 1961
Samuelson and Solow, “Analytical Aspects of Anti-Inflation Policy”, AER, May 1960
Schultze, C., “The Recent Inflation in the United States”, Study Paper No. 1, Joint Economic Committee, 1959
Selden, R., “Cost-Push Versus Demand-Pull”, JPE, February 1959

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Prof. Modigliani
May 24, 1961

 

14.05 – ECONOMIC FLUCTUATIONS AND GROWTH
Final Examination

Answer all Questions.

I. Indicate whether the following statements are true or false and give a brief explanation of your answer. Major weight attaches to the explanation. (5 points per question)

(a) The money supply can always be increased through the Federal Reserve open market purchases.

(b) The relation between the two main demand liabilities of the FRB, namely Federal Reserve notes and member bank deposits is determined primarily by reserve requirements.

(c) Inflation will tend to occur whenever the money supply rises faster than productivity.

(d) Liquidity preference helps to explain why the velocity of circulation tends to vary over the business cycle.

(e) If the rate of investment expenditure declines, the stock of capital goods in the economy declines.

(f) Built-in flexibility in fiscal policy means that the level of government expenditure should vary countercyclically.

(g) A high marginal tax rate has a stabilizing effect on the economy by reducing the marginal propensity to consume.

(h) The most important characteristic of a good leading indicator is that it should always turn ahead of general business conditions.

 

II. (20 points) Given the following information (in billions of dollars per year):

Full employment income (Yf) 300
Consumption expenditure 20 plus 80 percent of disposable income
Government purchase of goods and services 50
Government receipts 20 percent of national income (Y)
Transfer payments 10 plus 5 percent of the difference between Yf and Y
Net investment 22

(a) Calculate the equilibrium level of income implied by this information and explain carefully in what sense it is an “equilibrium” level.

(b) What rate of investment would be required to bring about full utilization of resources? What measures other than an increase in investment could be utilized to reach full employment?

 

III. (20 points) Define the following concepts:

(a) multiplier

(b) capital coefficient

(c) acceleration principle,

and explain their use in business cycle analysis.

 

IV. (20 points) Explain the functioning of monetary policy as a stabilization device, and analyze its strength and weaknesses.

 

Source: Duke University. Rosenstein Library. Robert Solow Papers. Box 68. Folders “Reading Lists”, “Assignments, home problems”, and “Exams, tests, quizzes”.