British economist Jeremy Bentham is most often associated with his theory of utilitarianism, the idea that all social actions should be evaluated by the axiom “It is the greatest happiness of the greatest number that is the measure of right and wrong.” Counter to Adam Smith’s vision of “natural rights,” Bentham believed that there were no natural rights to be interfered with. Trained in law, Bentham never practiced, choosing instead to focus on judicial and legal reforms. His reform plans went beyond rewriting legislative acts to include detailed administrative plans to implement his proposals. In his plan for prisons, workhouses, and other institutions, Bentham devised compensation schemes, building designs, worker timetables, and even new accounting systems. A guiding principle of Bentham’s schemes was that incentives should be designed “to make it each man’s interest to observe on every occasion that conduct which it is his duty to observe.” Interestingly, Bentham’s thinking led him to the conclusion, which he shared with Smith, that professors should not be salaried. In his early years Bentham professed a free-market approach. He argued, for example, that interest rates should be free from government control (see Defence of Usury). By the end of his life he had shifted to a more interventionist stance. He predated Keynes in his advocacy of expansionist monetary policies to achieve full employment and advocated a range of interventions, including the minimum wage and guaranteed employment. His publications were few, but Bentham influenced many during his lifetime and lived to see some of his political reforms enacted shortly before his death in London at the age of eighty-four. Selected Works   1787. Defence of Usury. London: T. Payne and Son. 1789. An Introduction to the Principles of Morals and Legislation. London: T. Payne and Son. 1802. The Theory of Legislation. 1818. Defence of Usury. 4th ed. London: Payne and Foss. Available online at: http://www.econlib.org/library/Bentham/bnthUs.html (The fourth edition was the last published in Bentham’s lifetime.) 1823. An Introduction to the Principles of Morals and Legislation. London: Clarendon Press, 1907. Available online at: http://www.econlib.org/library/Bentham/bnthPML.html (This is a reprint of the 1823 edition, the last published in Bentham’s lifetime, which was corrected and modified by Bentham.)   (0 COMMENTS)

Eugen von Böhm-Bawerk was one of the leading members of the Austrian school of economics—an approach to economic thought founded by Carl Menger and augmented by Knut Wicksell, Ludwig von Mises, Friedrich A. Hayek, and Sir John Hicks. Böhm-Bawerk’s work became so well known that before World War I, his Marxist contemporaries regarded the Austrians as their typical bourgeois, intellectual enemies. His theories of interest and capital were catalysts in the development of economics, but today his original work receives little attention. Böhm-Bawerk gave three reasons why interest rates are positive. First, people’s marginal utility of income will fall over time because they expect higher income in the future. Second, for psychological reasons the marginal utility of a good declines with time. For both reasons, which economists now call “positive time-preference,” people are willing to pay positive interest rates to get access to resources in the present, and they insist on being paid interest if they are to give up such access. Economists have accepted both as valid reasons for positive time-preference. But Böhm-Bawerk’s third reason—the “technical superiority of present over future goods”—was more controversial and harder to understand. Production, he noted, is roundabout, meaning that it takes time. It uses capital, which is produced, to transform nonproduced factors of production—such as land and labor—into output. Roundabout production methods mean that the same amount of input can yield a greater output. Böhm-Bawerk reasoned that the net return to capital is the result of the greater value produced by roundaboutness. An example helps illustrate the point. As the leader of a primitive fishing village, you are able to send out the townspeople to catch enough fish, with their bare hands, to ensure the village’s survival for one day. But if you forgo consumption of fish for one day and use that labor to produce nets, hooks, and lines—capital—each fisherman can catch more fish the following day and the days thereafter. Capital is productive. Further investment in capital, argued Böhm-Bawerk, increases roundaboutness; that is, it lengthens the production period. On this basis Böhm-Bawerk concluded that the net physical productivity of capital will lead to positive interest rates even if the first two reasons do not hold. Although his theory of capital is one of the cornerstones of Austrian economics, modern mainstream economists pay no attention to Böhm-Bawerk’s analysis of roundaboutness. Instead, they accept Irving Fisher’s approach of just assuming that there are investment opportunities that make capital productive. Nevertheless, Böhm-Bawerk’s approach helped to pave the way for modern interest theory. Böhm-Bawerk was also one of the first economists to discuss Karl Marx’s views seriously. He argued that interest does not exist due to exploitation of workers. Workers would get the whole of what they helped produce only if production were instantaneous. But because production is roundabout, he wrote, some of the product that Marx attributed to workers must go to finance this roundaboutness, that is, must go to capital. Böhm-Bawerk noted that interest would have to be paid no matter who owned the capital. Mainstream economists still accept this argument. Böhm-Bawerk was born in Vienna and studied law at

James Buchanan is the cofounder, along with Gordon Tullock, of public choice theory. Buchanan entered the University of Chicago’s graduate economics program as a “libertarian socialist.” After six weeks of taking Frank Knight’s course in price theory, recalls Buchanan, he had been converted into a zealous free marketer. Buchanan’s next big conversion came while reading an article in German by Swedish economist Knut Wicksell. The obscure 1896 article’s message was that only taxes and government spending that are unanimously approved can be justified. That way, argued Wicksell, taxes used to pay for programs would have to be taken from those who benefited from those programs. Wicksell’s idea contradicted the mainstream 1940s view that there need be no connection between what a taxpayer pays and what he receives in benefits. That is still the mainstream view. But Buchanan found it persuasive. He translated the essay into English and started thinking more along Wicksell’s lines. One of the products of his thinking was a book he coauthored with Gordon Tullock titled The Calculus of Consent. In it the authors showed that the unanimity requirement is unworkable in practice and considered modifications to the rule that they called “workable unanimity.” Their book, along with Anthony Downs’s An Economic Theory of Democracy, helped start the field of public choice and is now considered a classic. Together, Buchanan and Tullock also started the academic journal Public Choice. Perhaps Buchanan’s most important contribution to economics is his distinction between two levels of public choice—the initial level at which a constitution is chosen, and the postconstitutional level. The first is like setting the rules of a game, and the second is like playing the game within the rules. Buchanan has proselytized his fellow economists to think more about the first level instead of acting as political players at the second level. To spread this way of thinking, Buchanan even started a new journal called Constitutional Economics. Buchanan also believes that because costs are subjective, much of welfare economics—cost-benefit analysis, and so on—is wrongheaded. He spelled out these views in detail in Cost and Choice, an uncommonly impassioned economics book. Yet Buchanan has not persuaded most of his economist colleagues on this issue. Buchanan was awarded the 1986 Nobel Prize in economics for “his development of the contractual and constitutional bases for the theory of economic and political decision making.” Buchanan was born in Murfreesboro, Tennessee, and has spent most of his academic life in Virginia, first at the University of Virginia, then at Virginia Polytechnic Institute and State University, and most recently at George Mason University. In 1969 Buchanan became the first director of the Center for the Study of Public Choice. He was president of the Southern Economic Association in 1963 and of the Western Economic Association in 1983 and 1984, and vice president of the American Economic Association in 1971. Selected Works   1962 (with Gordon Tullock). The Calculus of Consent: Logical Foundations of Constitutional Democracy. Ann Arbor: University of Michigan Press. Available online at: http://www.econlib.org/library/Buchanan/buchCv3Contents.html. 1968. The Demand and Supply of Public Goods. Chicago: Rand McNally. Available online at: http://www.econlib.org/library/Buchanan/buchCv5Contents.html. 1969. Cost and Choice. Chicago: Markham. Available online at: http://www.econlib.org/library/Buchanan/buchCv6Contents.html. 1973. “Introduction: L.S.E. Cost Theory in Retrospect.” In James M. Buchanan and G. F. Thirlby, eds., L.S.E. Essays on Cost. London: Weidenfeld and Nicolson. Available online at: http://www.econlib.org/library/NPDBooks/Thirlby/bcthLS1.html. 1975 (with Robert P. Tollison). The Limits of Liberty. Chicago: University of Chicago Press. Available online at: http://www.econlib.org/library/Buchanan/buchCv7Contents.html. 1977. Freedom in Constitutional Contract. College Station: Texas A&M University Press. 1980 (with Geoffrey Brennan). The Power to Tax. Cambridge: Cambridge University Press. Available online at: http://www.econlib.org/library/Buchanan/buchCv9Contents.html. 1962+ The Collected Works of James M. Buchanan. Available online at: http://www.econlib.org/library/Buchanan/buchCContents.html.   (0 COMMENTS)

  Ronald Coase received the Nobel Prize in 1991 “for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.” Coase is an unusual economist for the twentieth century, and a highly unusual Nobel Prize winner. First, his writings are sparse. In a sixty-year career he wrote only about a dozen significant papers—and very few insignificant ones. Second, he uses little or no mathematics, disdaining what he calls “blackboard economics.” Yet his impact on economics has been profound. That impact stems almost entirely from two of his articles, one published when he was twenty-seven and the other published twenty-three years later. Coase conceived of the first article, “The Nature of the Firm,” while he was an undergraduate on a trip to the United States from his native Britain. At the time he was a socialist, and he dropped in on perennial Socialist Party presidential candidate Norman Thomas. He also visited Ford and General Motors and came up with a puzzle: how could economists say that Lenin was wrong in thinking that the Russian economy could be run like one big factory, when some big firms in the United States seemed to be run very well? In answering his own question, Coase came up with a fundamental insight about why firms exist. Firms are like centrally planned economies, he wrote, but unlike the latter they are formed because of people’s voluntary choices. But why do people make these choices? The answer, wrote Coase, is “marketing costs.” (Economists now use the term “transaction costs.”) If markets were costless to use, firms would not exist. Instead, people would make arm’s-length transactions. But because markets are costly to use, the most efficient production process often takes place in a firm. His explanation of why firms exist is now the accepted one and has given rise to a whole literature on the issue. Coase’s article was cited 169 times in academic journals between 1966 and 1980. “The Problem of Social Cost,” Coase’s other widely cited article (661 citations between 1966 and 1980), was even more pathbreaking; indeed, it gave rise to the field called law and economics. Economists before Coase of virtually all political persuasions had accepted British economist Arthur Pigou’s idea that if, say, a cattle rancher’s cows destroy his neighboring farmer’s crops, the government should stop the rancher from letting his cattle roam free or should at least tax him for doing so. Otherwise, believed economists, the cattle would continue to destroy crops because the rancher would have no incentive to stop them. But Coase challenged the accepted view. He pointed out that if the rancher had no legal liability for destroying the farmer’s crops, and if transaction costs were zero, the farmer could come to a mutually beneficial agreement with the rancher under which the farmer paid the rancher to cut back on his herd of cattle. This would happen, argued Coase, if the damage from additional cattle exceeded the rancher’s net returns on these cattle. If, for example, the rancher’s net return on a steer was two dollars, then the rancher would accept some amount over two dollars to give up the additional steer. If the steer was doing three dollars’ worth of harm to the crops, then the farmer would be willing to pay the rancher up to three dollars to get rid of the steer. A mutually beneficial bargain would be struck. Coase considered what would happen if the courts made the rancher liable for the damage caused by his steers. Economists had thought that the number of steers raised by the rancher would be affected. But Coase showed that the only thing affected would be the wealth of the rancher and the farmer; the number of cattle and the amount of crop damage, he showed, would be the same. In the above example, the farmer would insist that the rancher pay at least three dollars for the right to have the extra steer roaming free. But because the extra steer was worth only two dollars to the rancher, he would be willing to pay only up to two dollars. Therefore, the steer would not be raised, the same outcome as when the rancher was not liable. This insight was stunning. It meant that the case for government intervention was weaker than economists had thought. Yet Coase’s soulmates at the free-market-oriented University of Chicago wondered, according to George Stigler, “how so fine an economist could make such an obvious mistake.” So they invited Coase, who was then at the University of Virginia, to come to Chicago to discuss it. They had dinner at the home of Aaron Director, the economist who had founded the Journal of Law and Economics. Stigler recalled: We strongly objected to this heresy. Milton Friedman did most of the talking, as usual. He also did much of the thinking, as usual. In the course of two hours of argument the vote went from twenty against and one for Coase to twenty-one for Coase. What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.1 Stigler himself labeled Coase’s insight the Coase theorem. Of course, because transaction costs are never zero and sometimes are very high, courts are still needed to adjudicate between farmers and ranchers. Moreover, strategic behavior by the parties involved can prevent them from reaching the agreement, even if the gains from agreeing outweigh the transactions costs. So, why were economists so excited by the Coase theorem? The reason is that it made them look differently at many issues. Take divorce. University of Colorado economist H. Elizabeth Peters showed empirically that whether a state has traditional barriers to divorce or divorce on demand has no effect on the divorce rate. This is contrary to conventional wisdom but consistent with the Coase theorem. If the sum of a couple’s net gains from marriage, as seen by the couple, is negative, then no agreement on distributing the gains from the marriage can keep them together. All the traditional divorce law did was enhance the bargaining position of women. A husband who wanted out much more than his wife wanted him in could compensate his wife to let him out. Not surprisingly, divorce-on-demand laws have made women who get divorces financially worse off, just as the absence of liability for the rancher in our example made the farmer worse off. Coase also upset the apple cart in the realm of public goods. Economists often give the lighthouse as an example of a public good that only government can provide. They choose this example not based on any information they have about lighthouses, but rather on their a priori view that lighthouses could not be privately owned and operated at a profit. Coase showed, with a detailed look at history, that lighthouses in nineteenth-century Britain were privately provided and that ships were charged for their use when they came into port. Coase earned his doctorate from the University of London in 1951 and emigrated to the United States, where he was a professor at the University of Buffalo from 1951 to 1958, at the University of Virginia from 1958 to 1964, and at the University of Chicago from 1964 to 1979, when he retired. See also: externalities. Selected Works   1937. “The Nature of the Firm.” Economica 4 (November): 386–405. 1938. “Business Organization and the Accountant.” Reprinted in James M. Buchanan and G. F. Thirlby, eds., L.S.E. Essays on Cost. London: Weidenfeld and Nicolson, 1973. Available online at: http://www.econlib.org/library/NPDBooks/Thirlby/bcthLS5.html. 1959. “The Federal Communications Commission.” Journal of Law and Economics 2 (October): 1–40. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3 (October): 1–44. 1974. “The Lighthouse in Economics.” Journal of Law and Economics 17, no. 2: 357–376.   Footnotes 1. George Stigler, Memoirs of an Unregulated Economist (New York: Basic Books, 1988), p. 76.   (0 COMMENTS)

  Arthur F. Burns is best known for having been chairman of the Federal Reserve System from 1970 to 1978. His appointment by President Richard Nixon capped a career of empirical studies of the economy, and particularly of business cycles. In a 1934 study based on his Ph.D. dissertation, Burns had noted the almost universal tendency of industries to slow down after an initial growth spurt. Burns pointed out that this tendency did not imply slow growth for the whole economy because new industries continued to appear. Measuring Business Cycles, coauthored with Wesley Mitchell and published in 1946 by the National Bureau of Economic Research (NBER), is a massive empirical study of previous business cycles. In it, Burns and Mitchell distilled a large number of statistical indicators of recessions and expansions into one signal of turning points in the U.S. business cycle. The NBER, a private nonprofit research institute, is now the organization that announces when recessions begin and end. Much of the institute’s approach is based on work done by Burns and Mitchell. Their book, more than any other single accomplishment, gave Burns a reputation as an expert in business cycle forecasting. Burns earned all his degrees at Columbia University. He began teaching economics at Rutgers University in 1927. In 1945, he became became a professor at Columbia University and, in 1959, became the John Bates Clark professor of economics. From 1953 to 1956 he was chairman of President Dwight D. Eisenhower’s Council of Economic Advisers. He was president of the NBER from 1957 to 1967, and president of the American Economic Association in 1959. From 1981 to 1985 Burns was the U.S. ambassador to the Federal Republic of Germany. Selected Works   1934. Production Trends in the United States Since 1870. New York: National Bureau of Economic Research. 1946 (with W. C. Mitchell). Measuring Business Cycles. New York: Columbia University Press.   (0 COMMENTS)

  Gerard Debreu’s contributions are in general equilibrium theory—highly abstract theory about whether and how each market reaches equilibrium. In a famous paper coauthored with Kenneth Arrow and published in 1954, Debreu proved that under fairly unrestrictive assumptions, prices exist that bring markets into equilibrium. In his 1959 book, The Theory of Value, Debreu introduced more general equilibrium theory, using complex analytic tools from mathematics—set theory and topology—to prove his theorems. In 1983 Debreu was awarded the Nobel Prize “for having incorporated new analytical methods into economic theory and for his rigorous reformulation of the theory of general equilibrium.” A native of France, Debreu spent most of his professional life at the University of California at Berkeley. He started as a professor of economics in 1962 and was appointed professor of mathematics in 1975. In 1976 Debreu was made a chevalier of the French Legion of Honor. Selected Works   1954 (with Kenneth Arrow). “Existence of a Competitive Equilibrium for a Competitive Economy.” Econometrica 22, no. 3: 205–290. 1959. Theory of Value: An Axiomatic Analysis of Economic Equilibrium. New York: Wiley. Reprint. New Haven: Yale University Press, 1971. 1981. Mathematical Economics: Twenty Papers of Gerard Debreu. Edited by W. Hildenbrand. Cambridge: Cambridge University Press.   (0 COMMENTS)

Gary S. Becker received the 1992 Nobel Prize in economics for “having extended the domain of economic theory to aspects of human behavior which had previously been dealt with—if at all—by other social science disciplines such as sociology, demography and criminology.” Becker’s unusually wide applications of economics started early. In 1955 he wrote his doctoral dissertation at the University of Chicago on the economics of discrimination. Among other things, Becker successfully challenged the Marxist view that discrimination helps the person who discriminates. Becker pointed out that if an employer refuses to hire a productive worker simply because of skin color, that employer loses out on a valuable opportunity. In short, discrimination is costly to the person who discriminates. Becker showed that discrimination will be less pervasive in more competitive industries because companies that discriminate will lose market share to companies that do not. He also presented evidence that discrimination is more pervasive in more-regulated, and therefore less-competitive, industries. The idea that discrimination is costly to the discriminator is common sense among economists today, and that is due to Becker. In the early 1960s Becker moved on to the fledgling area of human capital. One of the founders of the concept (the other being Theodore Schultz), Becker pointed out what again seems like common sense but was new at the time: education is an investment. Education adds to our human capital just as other investments add to physical capital. (For more on this, see Becker’s article, “Human Capital,” in this encyclopedia.) One of Becker’s insights is that time is a major cost of investing in education. Possibly that insight led him to his next major area, the study of the allocation of time within a family. Applying the economist’s concept of opportunity cost, Becker showed that as market wages rose, the cost to married women of staying home would rise. They would want to work outside the home and economize on household tasks by buying more appliances and fast food. Not even crime escaped Becker’s keen analytical mind. In the late 1960s he wrote a trail-blazing article whose working assumption is that the decision to commit crime is a function of the costs and benefits of crime. From this assumption he concluded that the way to reduce crime is to raise the probability of punishment or to make the punishment more severe. His insights into crime, like his insights on discrimination and human capital, helped spawn a new branch of economics. In the 1970s Becker extended his insights on allocation of time within a family, using the economic approach to explain the decisions to have children and to educate them, and the decisions to marry and to divorce. Becker was a professor at Columbia University from 1957 to 1969. Except for that period, he spent his entire career at the University of Chicago, where he held joint appointments in the departments of economics and sociology. Becker won the John Bates Clark Award of the American Economic Association in 1967 and was president of that association in 1987. Selected Works   1965. “A Theory of the Allocation of Time.” Economic Journal 40, no. 299: 493–508. 1968. “Crime and Punishment: An Economic Approach.” Journal of Political Economy 76, no. 2: 169–217. 1971. The Economics of Discrimination. 2d ed. Chicago: University of Chicago Press. 1975. Human Capital. 2d ed. New York: Columbia University Press. 1981. Treatise on the Family. Chicago: University of Chicago Press.   (0 COMMENTS)

  In 2003, econometrician Robert Engle, along with econometrician Clive Granger, received the Nobel Prize in economics. Engle’s prize was “for methods of analyzing economic time series with time-varying volatility (ARCH).” ARCH stands for “autoregressive conditional heteroskedasticity.” The name is complex, but the idea can be grasped. Many data vary randomly about a constant mean. For instance, the height of six-year-olds may come close to forming a normal distribution around its mean (or average) value. When these data are graphed, they form the so-called bell curve known to all students from their teachers’ practice of “grading on a curve.” But many economic time series (i.e., data recorded in calendar sequence, annually or at shorter or longer intervals) do not display a constant mean. GDP, for example, typically grows over time (see National Income Accounts). Even if the econometrician estimates its trend rate of growth, he still finds that it varies around that trend—that is, is volatile. What is more, if GDP is above trend one quarter, it is likely to remain above trend the next quarter, and if it is below trend, it is likely to remain below trend. Such a time series is said to be “autoregressive.” Effectively, it has a short-run mean and a long-run mean. Any random variation around the long-run mean raises or lowers the short-run mean; and even if there were no more random variations, the time series would adjust only slowly back toward its long-run mean. With GDP, autoregressive behavior implies extended periods of above-normal and below-normal economic activity—booms and slumps. Although econometricians have long known that the variability in stock prices, GDP, interest rates, and other time series is not constant over time, before Engle they modeled the ever-changing mean, making the incorrect assumption that volatility around the short-run mean was constant (i.e., that the spread of the bell curve, measured by the standard deviation, was constant). When the volatility (measured by the standard deviation) is constant, statisticians call it “homoskedastic.” But Engle realized that for many problems, such as calculating insurance premiums or the prices of options, the variability of a series around the mean is just as important as the variability of the mean itself, and that this variability is not always constant—it is “heteroskedastic.” Just as with the mean of GDP, a time series (e.g., corporate profits or inflation rates) is sometimes best characterized as having a long-run and a short-run volatility. The volatility may rise or fall randomly around its long-run value. If, when it is high, it tends to stay high and, when it is low, it tends to stay low, adjusting only slowly back to the long-run value, then the volatility is itself autoregressive. Just as autoregressive variations in GDP describe the business cycle, autoregressive volatility in the prices of financial assets describes cycles of riskiness important to financial traders. Engle figured out a way to formulate and estimate models that could describe these cycles adequately. The term “conditional” in ARCH implies that Engle’s models also take account of the cycles in the mean. His ARCH model, first published in 1982, can be used to forecast volatility, something crucial for investors who want to limit the riskiness of their stock holdings. Engle’s student, Tim Bollerslev, generalized the model, calling it, naturally, GARCH (generalized ARCH).1 GARCH has served a practical use in so-called value-at-risk analysis. Value-at-risk models are used to calculate capital requirements for compliance with the Basel rules that regulate risks in international banking. Using GARCH, economists can figure out how risky a portfolio can be while having only some specified small probability of a maximum loss. Individual investors can do likewise. In an example given on the Nobel committee’s Web site, if you had $1 million in an S&P 500 index on July 31, 2002, there was a 99 percent probability that your maximum loss the next day would be $61,500, or about 6 percent.2 Engle earned his B.S. in physics at Williams College in 1964, his M.S. in physics at Cornell in 1966, and his Ph.D. in economics at Cornell in 1969. He was a professor at MIT from 1969 to 1974 and a professor at the University of California at San Diego from 1974 to 1999. Since 1999, he has been a professor at New York University’s Stern School of Business. Selected Works   1982. “Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of U.K. Inflation.” Econometrica 50: 987–1008. 1986 (with Tim Bollerslev). “Modeling the Persistence of Conditional Variances.” Econometric Reviews 5: 1–50.   Footnotes 1. Tim Bollerslev, “Generalized Autoregressive Conditional Heteroskedasticity,” Journal of Econometrics 31 (1986): 307–327.   2. See http://nobelprize.org/economics/laureates/2003/ecoadv.pdf.   (0 COMMENTS)

  Milton Friedman was the twentieth century’s most prominent advocate of free markets. Born in 1912 to Jewish immigrants in New York City, he attended Rutgers University, where he earned his B.A. at the age of twenty. He went on to earn his M.A. from the University of Chicago in 1933 and his Ph.D. from Columbia University in 1946. In 1951 Friedman received the John Bates Clark Medal honoring economists under age forty for outstanding achievement. In 1976 he was awarded the Nobel Prize in economics for “his achievements in the field of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy.” Before that time he had served as an adviser to President Richard Nixon and was president of the American Economic Association in 1967. After retiring from the University of Chicago in 1977, Friedman became a senior research fellow at the Hoover Institution at Stanford University. Friedman established himself in 1945 with Income from Independent Professional Practice, coauthored with Simon Kuznets. In it he argued that state licensing procedures limited entry into the medical profession, thereby allowing doctors to charge higher fees than they would be able to do if competition were more open. His landmark 1957 work, A Theory of the Consumption Function, took on the Keynesian view that individuals and households adjust their expenditures on consumption to reflect their current income. Friedman showed that, instead, people’s annual consumption is a function of their “permanent income,” a term he introduced as a measure of the average income people expect over a few years. In Capitalism and Freedom, Friedman wrote arguably the most important economics book of the 1960s, making a case for relatively free markets to a general audience. He argued for, among other things, a volunteer army, freely floating exchange rates, abolition of licensing of doctors, a negative income tax, and education vouchers. (Friedman was a passionate foe of the military draft: he once stated that the abolition of the draft was almost the only issue on which he had personally lobbied Congress.) Many of the young people who read it were encouraged to study economics themselves. His ideas spread worldwide with Free to Choose (coauthored with his wife, Rose Friedman), the best-selling nonfiction book of 1980, written to accompany a TV series on the Public Broadcasting System. This book made Milton Friedman a household name. Although much of his trailblazing work was done on price theory—the theory that explains how prices are determined in individual markets—Friedman is popularly recognized for monetarism. Defying Keynes and most of the academic establishment of the time, Friedman presented evidence to resurrect the quantity theory of money—the idea that the price level depends on the money supply. In Studies in the Quantity Theory of Money, published in 1956, Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in money supply growth cause employment and output to increase, and decreases in money supply growth have the opposite effect. Friedman’s solution to the problems of inflation and short-run fluctuations in employment and real GNP was a so-called money-supply rule. If the Federal Reserve Board were required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear. Friedman’s monetarism came to the forefront when, in 1963, he and Anna Schwartz coauthored Monetary History of the United States, 1867–1960, which contends that the great depression was the result of the Federal Reserve’s ill-conceived monetary policies. Upon receipt of the unpublished manuscript submitted by the authors, the Federal Reserve Board responded internally with a lengthy critical review. Such was their agitation that the Fed governors discontinued their policy of releasing minutes from the board’s meetings to the public. Additionally, they commissioned a counterhistory to be written (by Elmus R. Wicker) in the hope of detracting from Monetary History. Friedman’s book has had a substantial influence on the economics profession. One measure of that influence is the change in the treatment of monetary policy given by MIT Keynesian Paul Samuelson in his best-selling textbook, Economics. In the 1948 edition Samuelson wrote dismissively that “few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle.” But in 1967 Samuelson said that monetary policy had “an important influence” on total spending. The 1985 edition, coauthored with Yale’s William Nordhaus, states, “Money is the most powerful and useful tool that macroeconomic policymakers have,” adding that the Fed “is the most important factor” in making policy. Throughout the 1960s, Keynesians—and mainstream economists generally—had believed that the government faced a stable long-run trade-off between unemployment and inflation—the so-called phillips curve. In this view the government could, by increasing the demand for goods and services, permanently reduce unemployment by accepting a higher inflation rate. But in the late 1960s, Friedman (and Columbia University’s Edmund Phelps) challenged this view. Friedman argued that once people adjusted to the higher inflation rate, unemployment would creep back up. To keep unemployment permanently lower, he said, would require not just a higher, but a permanently accelerating inflation rate (see Phillips curve). The stagflation of the 1970s—rising inflation combined with rising unemployment—gave strong evidence for the Friedman-Phelps view and swayed most economists, including many Keynesians. Again, Samuelson’s text is a barometer of the change in economists’ thinking. The 1967 edition indicates that policymakers faced a trade-off between inflation and unemployment. The 1980 edition says there was less of a trade-off in the long run than in the short run. The 1985 edition says there is no long-run trade-off. Selected Works   1945 (with Simon Kuznets). Income from Independent Professional Practice. New York: National Bureau of Economic Research. 1953. Essays in Positive Economics. Chicago: University of Chicago Press. 1956. Ed. Studies in the Quantity Theory of Money. Chicago: University of Chicago Press. 1957. A Theory of the Consumption Function. Princeton: Princeton University Press. 1962. Capitalism and Freedom. Chicago: University of Chicago Press. 1962. Price Theory: A Provisional Text. Chicago: Aldine. 1963 (with Anna J. Schwartz). A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press. 1972. An Economist’s Protest: Columns on Political Economy. Glen Ridge, N.J.: Thomas Horton and Daughters. 1980 (with Rose Friedman). Free to Choose. New York: Harcourt Brace Jovanovich.   (0 COMMENTS)

  Robert Fogel was corecipient (with Douglass C. North) of the 1993 Nobel Prize in economics “for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change.” Fogel earned his master’s degree in economics at Columbia University in 1960, learning economics from george stigler and economic history from Carter Goodrich. He earned his Ph.D. at Johns Hopkins University in 1963, where he worked under simon kuznets. His interest, early on, was in understanding the factors that contribute to economic growth. Because of his training from Stigler and Kuznets, he was empirically inclined. His first major book, based on his Ph.D. dissertation, was Railroads and American Economic Growth. Fogel’s work on railroads is a first-rate, extremely detailed application of one of the most important principles of economics: that there is a substitute for virtually everything. So rather than just accepting the idea that railroads were so important in economic growth because of their ubiquity, Fogel carefully considered where the extension of canals might have replaced railroads had the railroads never been built. He took account also of the cost of these hypothetical canals, along with the cost savings from not building railroads. Fogel concluded that almost all the agricultural land that became economically valuable because of railroads also would have been valuable had there been only an extended series of canals. The net contribution of railroads to gross national product (GNP) due to reducing shipping costs of agricultural products, concluded Fogel, amounted to only about 2 percent of GNP. Of course, Fogel recognized that his methods did not take account of the reduced cost of shipping nonagricultural goods by railroad. Fogel, along with his University of Rochester colleague Stanley Engerman, generated much controversy in the early 1970s with their work on the economics of slavery. Fogel and Engerman claimed, in their fact-filled book, Time on the Cross, that slavery was economically viable before the Civil War and that economic factors would not have brought it down; an ethical commitment to ending slavery was required for that to happen. Fogel and Engerman also claimed that slavery was efficient, although other economic historians (including Gavin Wright, Peter Temin, Paul David, Richard Sutch, Roger Ransom, and, most recently, Jeffrey Rogers Hummel) have contested this claim. From 1960 to 1964, Fogel was on the faculty of the University of Rochester. He left in 1964 for the University of Chicago, where he was on the faculty until 1975, spending fall semesters at the University of Rochester from 1968 to 1975. In 1975, he left for Harvard University and in 1981 returned to the University of Chicago.  In the early 1980s, he began to study a burning question in economic demography: What accounts for the dramatic increase in life expectancy over the last two centuries? Between 1850 and 1950, for example, U.S. life expectancy at birth increased from about forty to sixty-eight years. Fogel found that less than half of the decrease in mortality could be explained by better standards of nourishment. Selected Works   1964. Railroads and American Economic Growth: Essays in Econometric History. Baltimore: Johns Hopkins University Press. 1965. “The Reunification of Economic History with Economic Theory.” American Economic Review 55, nos. 1/2: 92–98. 1974 (with Stanley L. Engerman). Time on the Cross: The Economics of American Negro Slavery. Boston: Little, Brown. 1981 (with James G. March). Aging: Stability and Change in the Family. New York: Academic Press. 1989. Without Consent or Contract: The Rise and Fall of American Slavery. New York: Norton. 2000. The Fourth Great Awakening and the Future of Egalitarianism. Chicago: University of Chicago Press. 2004. “Changes in the Disparities in Chronic Disease During the Course of the Twentieth Century.” NBER Working Paper no. 10311. National Bureau of Economic Research, Cambridge, Mass. 2004. The Escape from Hunger and Premature Death, 1700–2100: Europe, America, and the Third World. New York: Cambridge University Press. 2004. “High Performing Asian Economies.” NBER Working Paper no. 10752. National Bureau of Economic Research, Cambridge, Mass. 2005. “Reconsidering Expectations of Economic Growth After World War II from the Perspective of 2004.” NBER Working Paper no. 11125. National Bureau of Economic Research, Cambridge, Mass.   (0 COMMENTS)