Aug 27

Robert Lucas

Robert Lucas Robert Emerson Lucas, Jr., born in 1937, is an American economist and Professor at the University of Chicago. For many, Lucas is probably one of the most notable economists of all times and one of the most influential economists since the late 1970s. It was in the year 1995 when he won the Nobel Prize of Economic Sciences for his development and utilisation of the rational expectations hypothesis, which has transformed macroeconomic analysis.

Robert Lucas is one of the leading figures of the New Classical Macroeconomics, which defies Keynesian economics approach that previously ruled macroeconomic theory. We can date New Classical Macroeconomics birth from Lucas´s work made in 1973, “Some International Evidence on Output-Inflation Tradeoffs”. He builds macroeconomic models using microeconomic foundations such as market clearing and the optimization by economic agents. He regards the economy as having a dynamic equilibrium with economic cycles.

He has worked with great interest in the implications of rational expectations, and formulated his own supply function in which aggregate output for a given period depends on the expectations of prices based on information available at the end of that period. Indeed, these ideas, shown in Robert Lucas’ 1972 paper “Expectations and the Neutrality of Money”, in which he used Edmund Phelps’ island parable (though applying rational, instead of adaptive, expectations), gave strong significance to the use of rational expectations in macroeconomics analysis.

Robert Lucas´s influential “Econometric Policy Evaluation: A Critique”, 1976, had a deep effect on both policy modelling and econometric practice in general. Lucas stands out the implication that parameters may be subject to change when policy does so, thus, opposing to the previous vision were the parameters were thought as being structural never mind changes in economic policy; this is known as the Lucas Critique.

Aug 27

Lope Gallego

Milton Friedman

Milton Friedman, 1912-2006, was an American economist, Professor at the University of Chicago and main figure of the Chicago School. He was awarded the Nobel Prize of Economic Sciences in the year 1976 for his achievements in the fields of consumption analysis, monetary history and theory, and for his studies about the complexity and difficulty of economic stabilizer policies.

He was a great admirer of von Hayek and became one of the main challengers of Keynesian government policies, especially fiscal policy. He was a strong defender of free market and of monetary policy, having written numerous studies on this last topic.

In “A monetary History of the United States, 1867-1960”, 1963, Friedman together with Anna J. Schwartz, analyse the role of money in the business cycle, and argued about the effects of both monetary expansion and contraction. As Friedman said “inflation is always and everywhere a monetary phenomenon”.

Friedman, in his “The Role of Monetary Policy”, 1968, theorized about the existence of a natural rate of unemployment and stated that policies trying to decrease it would be unbeneficial for the economy and bring inflation with it. He foresighted the instability of the Phillips curve and predicted what was later known as stagflation.

Friedman became an economic adviser at the Ronald Reagan administration, and advocated for minimal government intervention.

Aug 10

Lope Gallego

Kenneth Arrow

Kenneth Joseph Arrow, born in 1921, is an American economist and Professor at Stanford University. In 1972 he was granted the Nobel Prize of Economic Sciences along with John Hicks for their pioneer contributions to general equilibrium theory and welfare economics. Arrow emerges as a great economist during post-World War II, and collaborates in the U.S. government during the 60s.

In his key work “Social Choice and Individual Values”, 1951, Arrow popularized his Impossibility theorem(firstly exposed in his Ph.D. thesis), which concludes it is not feasible to develop a social welfare function from individual welfare functions without breaking certain minimum conditions of rationality and equity. He is considered as the founder of modern economic theory of social choice and his theory has been of paramount importance in welfare economics.

Arrow, jointly with Gérard Debreu, first formally demonstrated the General Equilibrium theory, using mathematical analysis. Their work shows the existence of market clearance equilibrium if certain restrictive assumptions are met. Their work is explained in the treaty “The Existence of an Equilibrium for a Competitive Economy”, 1954.

Aug 9

Lope Gallego

Lawrence Klein

Lawrence Robert Klein, born in 1920, is an American Economist and was Professor at the Wharton School of the University of Pennsylvania. In 1980 he was awarded the Nobel Prize in Economic Sciences, for the creation of economic models, and their application to the analysis of economic fluctuations and economic policies. His models based in economics have been widely used by economists throughout the world.

Klein specialized in econometrics, statistics and economic cycles and, above all, he focused in the forecasting area. His “A Textbook of Econometrics”, 1953, can be highlighted as his key work, and is the basis of econometrics studies nowadays.

Aug 9

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Simon Kuznets

Simon Smith Kuznets, 1901-1985, was a Russian born American economist, Professor at Harvard University. His main works were related with the economic growth of nations. He won the Nobel Prize in Economic Sciences in 1971. Kuznets was granted this award for the use of empirical methods in order to understand better the economic and social structure and economic growth. His works helped to understand the behaviour of economic cycles and described an economic cycle of 15-25 years known as the Kuznets Swing.

Kuznets developed a series of empirical studies using statistic models that supported J.M. Keynes ideas initially, but then redesigned his studies in order to analyse a longer period of time, and his conclusions differed from the previous ones.

Other studies by Kuznets deal with inequality in wealth distribution. As the Kuznets’ curve shows, inequality increases in the short term of economic growth, but it ends up decreasing in the long term. He frequently expressed his opinion that GDP per capita was not an accurate measure of welfare.

In 1940 he stated that the US economy was not working at its full capacity and was one of the designers of the Victory Plan in order to maximize the war economy during World War II.

Aug 9

Lope Gallego

Edmund Phelps

Edmund Phelps Edmund Strother Phelps, born in 1933, is an American economist and an advocate of New Keynesian Economics. He is a Professor at Columbia University, where he imparts Political Economy. In 2006 Phelps won the Nobel Prize in Economics Sciences, due to his analysis of inter-temporal tradeoffs in macroeconomics, along with their effect on economic policy in the short and long run.

In his paper “Money-Wage Dynamics and Labor Market Equilibrium”, 1968, Phelps established a link between employment, wage setting and inflation, and defended the importance of expectations and imperfect information, in the setting of prices and wages.

In 1969, Phelps wrote “The New Microeconomics in Inflation and Employment Theory”, in which he explained how money surprises could have real effects in the absence of nominal rigidities, using as an example markets physically separated; this metaphor is nowadays known as Phelps’ island parable. Robert Lucas would later on use this paper to introduce rational expectations, which would change the outcome of this study.

He is attributed the term “Golden Rule” of accumulation, which Phelps put forward in his paper “The Golden Rule of Accumulation: a Fable for Growthmen”, 1961, at which savings are such that they optimize the growth of consumption.

Aug 9

Lope Gallego

Thomas Sargent

Thomas Sargent Thomas John Sargent, born in 1943, is an American economist who has been deeply involved in the new classical macroeconomics, researching the fields of macroeconomics, monetary economics and time series economics. It was in 2011 when he and Christopher A. Sims were awarded the Nobel Prize in Economic Sciences for the use of empirical research when explaining cause and effect in macroeconomics.

Sargent is considered to be one of the leaders in the rational expectations revolution that states that people respond strategically to changes in fiscal and monetary policy, and not passively, as previous models such as the adaptive expectations assumed. In this field, his works with Neil Wallace are of paramount importance, specially their paper “Rational Expectations and the Theory of Economic Policy”, 1976, which focuses on the application of rational expectations to analyze the outcome of monetary policies; and their paper “Some Unpleasant Monetarist Arithmetic”, 1981, which deals with the problem of monetarist arithmetic, and whose main conclusion is that issuing government debt to fund economic policies can cause as high an inflation as monetizing debt.

Sargent has also developed studies on the evolution of unemployment, comparing the United States with Europe, which conclusions are reflected in the work “Two Questions about European Unemployment”, 2007.

Jul 22

Lope Gallego

George Akerlof

George Akerlof George Arthur Akerlof, born in 1940, is an American economist and professor at University of California, Berkeley. He was awarded the Nobel Prize in Economic Sciences in 2001 along with Michael Spence and Joseph E. Stiglitz.

He is best known for his contributions to asymmetric information theories: study of transactions in which one of the parties has better information than the other one. Adverse selection and moral hazard can result from the worst cases of asymmetric information in transactions between economic agents.

Akerlof’s key article on this subject is “The Market for Lemons: Quality Uncertainty and the Market Mechanism”, 1970, in which he develops a classical example of second hand car market in which the seller is the only one that truly has complete information about the quality of the car, to simply explain the risk of asymmetric information.

Jul 22

Lope Gallego

James Tobin

James Tobin, an American economist (1918-2002), and follower of Neo-Keynesian economics, thought that government intervention was necessary in order to stabilize the economy and to avoid recessions. He received the Nobel Prize in Economic Sciences in 1981 for his analysis of financial markets and their relation with decisions involving spending, employment, production and prices. In fact, Tobin discovered the relation between the market value, and the replacement value of an asset. This ratio is called Tobin´s Q, and it links the financial market to the markets of goods and services.

Tobin proposed the creation of a tax on international currency markets transactions -the so called “Tobin Tax”- in order to reduce speculation. He saw this tool as a means to promote freedom of trade; however it has also been encouraged by anti-globalization groups in order to reduce free trade.

Amongst other subjects, he also worked in the measuring of social welfare. Tobin believed GDP was not a good measure for accounting welfare, so he developed the concept of Measure of Economic Welfare as a more realistic measure. In his measurement, what does not create general satisfaction, such as armament, bureaucracy expenditure growth or new urban highways systems, must be left aside.

Jul 22

Lope Gallego

John Nash

John Forbes Nash (1928-2015) was an American mathematician that was Professor at Princeton University. In 1994 he received the Nobel Prize in Economic Sciences along with John Harsanyi and Reinhard Selten, for their works regarding game theory.

During the 50s (in papers originated after his PhD dissertation “Non-Cooperative Games”, 1950) he developed the so-called Nash Equilibrium that occurs when no player would change its strategy knowing the preferences and strategies of the other players. No player has anything to gain by changing only their own strategy unilaterally. This is, you would make your own best decision taking into account the other players’ decision.

His ideas and theories are not only used in economics and mathematics, but also in other very different fields such as politics and military theory.