I have already posted about the nomination of Janet Yellen to be Treasury Secretary, a historic first and most duly deserved. She is great and totally appropriate, and I have already bloviated at length on that.
I am now going to discuss a more obscure and odd matter, the view of her and her Nobel-Prize-winning husband, George Akerlof, in the eyes of the public. This is triggered by various media stories that have sort of downplayed or dismissed him while praising her and lifting her up, which I am all for and have done myself here and elsewhere on numerous occasions. I note that I may be in a special position to comment on this as I have known George for 60 years, which might make me concerned about how people view him, although as someone frequently described as “the nicest person in the economics profession” who is also genuinely humble, he does not mind or care about any of this at all.
Mostly I want to reaffirm his important role both in her work and more broadly his importance to the economics profession and more broadly the history and development of economic thought. While she published papers on her own and with others, her most important and influential papers have been coauthored with him, including the one getting mentioned in the news reports about efficiency wages. They have had a long joint research program studying labor market behavior taking into account such things as social interactions effects such as workers taking seriously whether they are being treated fairly. They also contributed to the lit on the downward stickiness of nominal wages, which is an important macro fact, with Yellen bringing this into the policy discussion at the Fed when she was first a gov there under Greenspan, with this playing a role in her helping him to move from focusing on a zero inflation target to a positive one. A major paper by George with Dickens and Perry at Brookings would support this and help pin down what is now the nearly universal 2% target that most central banks use, for better or worse. They have had an enormous influence on global central banking that is not all that well understood or recognized.
Regarding George himself, a curious thing has reminded me, actually clarified, how important his work has been for microeconomic theory as a whole. He merely shared his 2001 Nobel for asymmetric information with Michael Spence and Joseph Stiglitz, although I think that both he and Stiglitz deserved to get it each by themselves. Anyway, nearly a week ago Tyler Cowen posted on Marginal Revolution the grad micro major exam at MIT for Spring, 1961, available at http://www.irwincollier.com/m-i-t-comprehensive-theory-exams-in-macroeconomics-1961/ or something like that.
Most of the exam looks like stuff one would see on a current one at most grad microprograms in the US, lots of stuff derived from Samuelson’s Foundations, especially as mediated by the now somewhat passe Varian grad textbook, still in use. Some questions look more undergrad for today, such as some industrial org applications not using game theory and a question on when are laissez-faire equilibria not Pareto optimal. There is also one question that would now be strictly on a macro exam, although it does have a micro foundation, to explain the distinction between nominal and real interesr rates, thank you Irving Fisher, whom Samuelson took very seriously.
Anyway, given all the continuity and carryover, what struck me is what was not on that exam, basically two items: game theory and asymmetric information. Of course von Neumann and Morgenstern published their book in 1944 and Nash proved his more influential equilibrium in 1950, published in 1951. But while probably they talked about how the prisoner’s dilemma explains the instability of cartels, game theory was largely still not being taught at the MIT econ dept in 1961. Its takeover of industrial org and other topics was still in the future, frankly at a minimum waiting for the modifications that Harsanyi and Selten would make on Nash’s important theorem to bring forth the canonical Bayes-Nash-subgame perfect equilibrium, from which many developments would come.
And, of course, the other missing topic now all over the grad micro courses is asymmetric information. Ah ha! Yes, there had been informal discussions of this topic, most importantly by Hayek in his arguments against the efficacy of central planning. But it was indeed the now-taken-for-granted paper from a half century ago, yes, 1970 in the QJE, originally rejected by at least one other journal, “The Market for Lemons,” about used car markets. It is easy to forget about how important it was. It began the formal discussion of this important issue, which as near as I can tell is along with game theory the main new thing that has happened in orthodox microeconomic theory in the last half century plus.
Indeed, much of what was new in standard micro theory in the final decades of the 20th century, as well as well into this one, involved integrating game theory with asymmetric information and then applying this to a a wide variety of topics in microeconomics, as well as occasionally macro as well.. Insurance markets, basic industrial org, auction theory, financial markets, health economics, it goes on and on. A sign of this is more recent Nobels since that one in 2001, with Hart and Holmstrom getting it together in 2016 basically for their 1987 paper that really nailed down the principal-agent problem, and this fall’s one for Milgrom and Wilson, with Milgrom having contributed substantially to the development of all this and auction theory an important product of it.
So, bottom line, quite aside from his important work with Janet, George Akerlof’s paper from a half century ago is one of the most important papers published in economics since the early 1950s, being the foundation of one of the two main streams of development in microeconomic theory. We can talk all we want about Yellen and Akerlof, especially right now, but in the longer run, George is just incredibly important.
I am going to add on to this post an odd item related to both of them coming from my old personal connections to them, especially George,. One sign of his humility is that he regularly says he was the intellectual failure of his family, especially on his mother, Rosalie Hirschfelder’s, side. Many of them, including her and her brother Joe, and his brother at least, went to Yale and majored in chemistry, and his father, Gustav, an immigrant from Sweden, was also a successful chemist, although I do not know if he went to Yale. Anyway, George went to Yale for undergrad before going to MIT for grad school, but he did not do chemistry, and in this has said he viewed himself as not living up to the family ideal of hard science, going into the softer economics instead.
Anyway, his uncle Joe participated in the Manhattan Project as a chemist and after the war became a professor at the University of Wisconsin-Madison, where he became a friend of my father’s, and I came to know him. He married a woman, Elizabeth Stafford, a mathematician who had become divorced from her mathematician husband, with whom she wrote a widely used textbook in the 1930s.. Betty Hirschfelder wrote many papers on her own and taught math at UW for 20 years, but was never offered a full-time or tenure track position. Nevertheless she lived to be 100 years old and eventually gave substantial money to the math dept, some for grad students and some for the library, which was closed a few years ago as part of stupid policies there. I knew her, and my mother used to have her over for tea, and George regularly visited her.
After Janet Yellen became Fed Chair she wrote a paper, which I should track down to see where it was published, that got a lo of publicity. It was about discrimination against women in American academia, and her leading example was this aunt-by-marriage of her husband George, Betty Hirschfelder, who was a highly productive and capable mathematician, but was treated poorly by the UW-Madison math dept. And now Janet herself has helped improve conditions for women in economics and has become this shining example of breaking through to new positions by a woman in economic policymaking.