British economist Joan Robinson was arguably the only woman born before 1930 who can be considered a great economist. She was in the same league as others who received the Nobel Prize; indeed, many economists expected her to win the prize in 1975. Business Week was so sure of it that it published a long article on her before that year’s prize was announced. It did not happen. Was the Swedish Royal Academy biased against Robinson? Many economists believe it was, but not because Robinson was a woman. Rather, her political views became more left wing as she aged, to the point where she admired Mao Zedong’s China and Kim Il Sung’s North Korea. These extreme views should not have affected her chances of getting an award for her intellectual contributions, but they probably did. Robinson’s first major book was The Economics of Imperfect Competition. In it she laid out a model of competition between firms, each of which had some monopoly power. Along with American economist Edward H. Chamberlin, whose Theory of Monopolistic Competition had appeared only a few months earlier, Robinson began what is known as the monopolistic competition revolution. Many economists believe that most industries are neither perfectly competitive nor complete monopolies. Robinson’s and Chamberlin’s books are what led them to that belief. Robinson’s first book and early articles show a distinctive writing style. She was clear and analytical, and she managed to put complex mathematical concepts into words. Later in the 1930s Robinson became part of the “Cambridge Circus,” a group of young economists that included later Nobel Prize winner James Meade; Roy Harrod; Richard Kahn; her husband, Austin Robinson; and Piero Sraffa. These economists met regularly to discuss their work and especially to discuss John Maynard Keynes’s famous General Theory of Employment, Interest and Money (1936), both before and after it was published. Much of Robinson’s work published at that time, especially her Introduction to the Theory of Employment, clarifies ideas that Keynes had not made clear. Robinson was the first to define macroeconomics, which became a separate field of inquiry only with Keynes’s book, as the “theory of output as a whole.” In 1954 Robinson’s article “The Production Function and the Theory of Capital” started what came to be called the Cambridge controversy. Robinson attacked the idea that capital can be measured and aggregated. This became the position in Cambridge, England. Across the Atlantic, Paul Samuelson and Robert Solow defended the by-then traditional neoclassical view that capital can be aggregated. Robinson won the battle. As historian Mark Blaug puts it, Samuelson made a “declaration of unconditional surrender.” Yet most economists still think that aggregating capital is useful and continue to do it anyway. Whether or not Robinson’s gender prevented her from winning the Nobel Prize, it seems to have slowed her advance in academia. She taught at Cambridge University from 1928 until retiring in 1971, but in spite of a very productive career, she did not become a full professor until 1965. Perhaps not coincidentally, this was the year her husband retired from Cambridge. Selected Works   1933. The Economics of Imperfect Competition. London: Macmillan. 2d ed., 1969. 1937. Introduction to the Theory of Employment. London: Macmillan. 1942. An Essay on Marxian Economics. London: Macmillan. 1956. The Accumulation of Capital. London: Macmillan. 1962. Economic Philosophy. London: C. A. Watts. 1970. The Cultural Revolution in China. London: Penguin Books. 1971. Economic Heresies: Some Old-fashioned Questions in Economic Theory. London: Macmillan.   (0 COMMENTS)

  In 1990 American economists William F. Sharpe, harry markowitz, and merton h. miller shared the Nobel Prize “for their pioneering work in the theory of financial economics.” Their early contributions established financial economics as a separate field of study. In the 1960s Sharpe, taking off from Markowitz’s portfolio theory, developed the Capital Asset Pricing Model (CAPM). One implication of this model is that a single mix of risky assets fits in every investor’s portfolio. Those who want a high return hold a portfolio heavily weighted with the risky asset; those who want a low return hold a portfolio heavily weighted with a riskless asset, such as an insured bank deposit. A measure of the portfolio risk that cannot be diversified away by mixing stocks is “beta.” A portfolio with a beta of 1.5, for example, is likely to rise by 15 percent if the stock market rises by 10 percent and is likely to fall by 15 percent if the market falls by 10 percent. One implication of Sharpe’s work is that the expected return on a portfolio in excess of a riskless return should be beta times the excess return of the market. Thus, a portfolio with a beta of 2 should have an excess return that is twice as high as the market as a whole. If the market’s expected return is 8 percent and the riskless return is 5 percent, the market’s expected excess return is 3 percent (8 minus 5) and the portfolio’s expected excess return is therefore 6 percent (twice the market’s expected excess return of 3 percent). The portfolio’s expected total return would then be 11 percent (6 plus the riskless return of 5). Sharpe was a Ph.D. candidate at the University of California at Los Angeles and an employee of the RAND Corporation when he first met Markowitz, who was also employed at RAND. Sharpe chose Markowitz as his dissertation adviser, even though Markowitz was not on the faculty at UCLA. Sharpe taught first at the University of Washington in Seattle and then at the University of California at Irvine. In 1971 he became a professor of finance at Stanford University. In 1986 Sharpe founded William F. Sharpe Associates, a firm that consulted to foundations, endowments, and pension plans. He returned to Stanford as a professor of finance in 1993 and is now a professor emeritus there. Selected Works   1964. “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.” Journal of Finance 19 (September): 425–442. 1977. “The Capital Asset Pricing Model: A ‘Multi-Beta’ Interpretation.” In H. Levy and M. Sarnat, eds., Financial Decision Making Under Uncertainty. New York: Harcourt Brace Jovanovich, Academic Press.   (0 COMMENTS)

French economist J. B. Say is most commonly identified with Say’s Law, which states that supply creates its own demand. Over the years Say’s Law has been embroiled in two kinds of controversy—the first over its authorship, the second over what it means and, given each meaning, whether it is true. On the first controversy, it is clear that Say did invent something like Say’s Law. But the first person actually to use the words “supply creates its own demand” appears to have been James Mill, the father of john stuart mill. Say’s Law has various interpretations. The long-run version is that there cannot be overproduction of goods in general for a very long time because those who produce the goods, by their act of producing, produce the purchasing power to buy other goods. Say wrote: “How could it be possible that there should now be bought and sold in France five or six times as many commodities as in the miserable reign of Charles VI?”1 With this statement Say had the long run in mind. Certainly the long-run version is correct. Given enough time, supply does create its own demand. There can be no long-run glut of goods. But Say also said that even in the short run there could be no overproduction of goods relative to demand. It was this short-run version that thomas robert malthus attacked in the nineteenth century and john maynard keynes attacked in the twentieth. They were right to attack it. Say was the best-known expositor of Adam Smith’s views in Europe and America. His Traité d’économie politique was translated into English and used as a textbook in England and the United States. But Say did not agree with Adam Smith on everything. In particular, he took issue with Smith’s labor theory of value. Say was one of the first economists to have the insight that the value of a good derives from its utility to the user and not from the labor spent in producing it. Say was born in Lyons. During his life he edited a journal, operated a cotton factory, and served as a member of the Tribunate under the Consulate of Napoleon. He was the first to teach a public course on political economy in France and continued his stay in academia first at the Conservatoire des Arts et Métiers, and then at the College de France in Paris. Say was a friend of Thomas Robert Malthus and david ricardo. Selected Works   1803. Traité d’économie politique. Translated from the 4th edition of the French by C. R. Prinsep. A treatise on political economy; available online at: http://www.econlib.org/library/Say/sayT.html.   Footnotes 1. Say, A Treatise on Political Economy, book 1, chap. XV, para. 4.   (0 COMMENTS)

In 1979 Theodore Schultz was awarded the Nobel Prize along with W. Arthur Lewis for their “pioneering research into economic development … with particular consideration of the problems of developing countries.” Schultz’s focus was on agriculture, a natural interest for someone who had grown up on a South Dakota farm. In 1930 Schultz began teaching agricultural economics at Iowa State College (now Iowa State University). He left in protest in 1943 when the college’s administration, bowing to political pressure from some of the state’s dairy farmers, suppressed a report that recommended substituting oleomargarine for butter. Schultz moved to the University of Chicago’s economics department, where he spent the rest of his academic career. Early on at Chicago, Schultz became interested in agriculture worldwide. In his 1964 book, Transforming Traditional Agriculture, Schultz laid out his view that primitive farmers in poor countries maximize the return from their resources. Their apparent unwillingness to innovate, he argued, was rational because governments of those countries often set artificially low prices on their crops and taxed them heavily. Also, governments in those countries, unlike in the United States, did not typically have agricultural extension services to train farmers in new methods. A persistent theme in Schultz’s books is that rural poverty persists in poor countries because government policy in those countries is biased in favor of urban dwellers. Schultz was always optimistic that poor agricultural nations would be able to develop if this government hostility to agriculture disappeared. “Poor people in low-income countries,” he stated, “are not prisoners of an ironclad poverty equilibrium that economics is unable to break.” Schultz was an empirical economist. When he traveled to serve on commissions or to attend conferences, he visited farms. His visits to farms and interviews with farmers led to new ideas, not the least of which was on human capital, which he pioneered along with Gary Becker and Jacob Mincer. After World War II, while interviewing an old, apparently poor farm couple, he noticed their obvious contentment. When he asked them why they were so contented even though poor, they answered that they were not poor because they had used up their farm to send four children to college and that these children would be productive because of their education. This led Schultz quickly to the concept of human capital—capital produced by investing in knowledge. Schultz was president of the American Economic Association in 1960, and in 1972 he won the Francis A. Walker Medal, the highest honor given by that association. Selected Works   1950. “Reflections on Poverty Within Agriculture.” Journal of Political Economy 43 (February): 1–15. 1961. “Investment in Human Capital.” American Economic Review 51 (March): 1–17. 1963. The Economic Value of Education. New York: Columbia University Press. Translated into Spanish, Portuguese, Japanese, and Greek. 1964. Transforming Traditional Agriculture. New Haven: Yale University Press. Translated into Japanese, Korean, Portuguese, and Spanish. Reprint. New York: Arno Press, 1976.   (0 COMMENTS)

  Myron Scholes, along with robert merton, was awarded the 1997 Nobel Prize in economics “for a new method to determine the value of derivatives.” The particular derivative they studied was stock options (see futures and options markets). A call option gives its owner the right to buy a stock at a particular price, called the strike price, during a set time period. A put option gives its owner the right to sell a stock at the strike price during a set time period. Scholes and his coauthor, the late Fischer Black, derived the formula for pricing a stock option in 1970. They submitted the article to the Journal of Political Economy, and it was rejected without even being reviewed. merton miller (who received the Nobel Prize in 1990) and Eugene Fama, two financial economists at the University of Chicago, where the journal is edited, persuaded the editors to take another look, and the journal published the article in 1973. The issue of how to price stock options may sound unimportant, but it is hugely important. Stock options, like other financial derivatives, are attractive for one main reason: they allow people to reduce risk at a low cost. This has given huge benefits to major companies and even to small investors. Say you have invested in a stock index fund and you are comfortable with the risk of a 15 percent drop in the Standard and Poor’s (S&P) 500 index, but you want to cover yourself in case the S&P 500 falls by more than 15 percent. Then you can buy a put on the S&P 500 with a strike price 20 percent below the current price. You have just used the options market to buy insurance. Virtually all major firms now use options and other derivatives to hedge against changes in exchange rates, raw-materials prices, and interest rates. Financial derivatives, in fact, have played an underappreciated role in making recessions less severe. Before Scholes’s and Black’s work, no one knew how to value options precisely. Traders understood the basics. The higher the strike price, for example, the lower the value of a call option. The longer the time period in which the option could be exercised, the higher the value of an option. The higher the interest rate, the lower the value of an option. But how to handle risk? Scholes and Black worked away on the risk issue until they had a “Eureka” moment: they realized that the risk was already embodied in the price of the stock. They showed that risk canceled out of the relevant equation, which means that they did not need to know risk in order to value the stock option. Coincidentally, the Chicago Board Options Exchange (CBOE) was begun in April 1973, just one month after the Black-Scholes article was published. Now options traders had a tool for scientifically pricing options. The effect was electric—literally. By 1977, traders were roaming the CBOE floor with special financial calculators programmed with the Black-Scholes options-pricing model. In his Nobel lecture, Scholes told of his request to Texas Instruments for royalties. TI refused, citing the fact that the formula was in the public domain. Said Scholes, “When I asked, at least, for a calculator, they suggested that I buy one. I never did.”1 Even though economists often have insights about the markets they study, rarely do the day-to-day players in those markets draw directly on what economists know. They usually do not need to. When an economist finds, for example, that an increase in the minimum wage causes employers to fire low-skilled workers, employers do not need to know that—they are already doing it. But the research on options pricing actually did improve the day-to-day activities of options traders. As economist J. W. Henry Watson and economic journalist Ida Walters wrote, “This marked the first time economic models became an explicit, integral part of a major market.”2 By 1984, the CBOE was second only to the New York Stock Exchange in the dollar value of financial assets traded. Many important theories and findings in economics rely on options-pricing theory. These include the theory of the capital structure of a firm, analyses of the value of federal deposit insurance, decision making under uncertainty, and the value of flexibility. Scholes was born in Canada. He earned his B.A. in economics at McMaster University in Hamilton, Ontario, and his M.B.A. (1964) and Ph.D. (1969) degrees at the University of Chicago. He was a professor at MIT from 1968 to 1973, at the University of Chicago from 1973 to 1983, and at Stanford University from 1983 to 1996. Since 1996 he has been a professor emeritus at Stanford. Along with co-winner Robert Merton, Scholes helped form Long Term Capital Management in 1993. LTCM exploited small arbitrage opportunities on a big scale; in Scholes’s memorable phrasing, LTCM acted like a giant vacuum cleaner sucking up nickels that everyone else had overlooked. The strategy worked well for a few years but turned out not to be risk free. The Federal Reserve Board helped arrange a bailout in 1998, and LTCM was liquidated in 2000. Virtually all observers agree that had Fischer Black not died in 1995, he would have been a co-recipient of the 1997 prize. Selected Works   1972 (with Fischer Black). “The Valuation of Option Contracts and a Test of Market Efficiency.” Journal of Finance 27 (May): 399–418. 1973 (with Fischer Black). “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81: 637–654. 1976. “Taxes and the Pricing of Options.” Journal of Finance 31: 319–332. 1992 (with Mark A. Wolfson). Taxes and Business Strategy: A Planning Approach. Englewood Cliffs, N.J.: Prentice Hall. 1996. “Global Financial Markets, Derivative Securities and Systemic Risks.” Journal of Risk and Uncertainty 12: 271–286.   Footnotes 1. See http://nobelprize.org/economics/laureates/1997/scholeslecture.pdf.   2. J. W. Henry Watson and Ida Walters, “The New Economics and the Death of Central Banking,” Liberty 10, no. 6 (1997): 21.   (0 COMMENTS)

  Reinhard Selten shared the 1994 Nobel Prize in economics with John Nash and john harsanyi “for their pioneering analysis of equilibria in the theory of non-cooperative games.” One problem with various Nash equilibria is that they are not always unique. Selten applied stronger conditions to reduce the number of possible equilibria and to eliminate equilibria that are unreasonable economically. In 1965 he introduced the concept of “subgame perfection,” his term for this winnowing down of possible equilibria. “At that time I did not suspect that it often would be quoted, almost exclusively for the definition of subgame perfectness,” Selten wrote in his Nobel autobiography.1 An example of subgame perfection is Selten’s “chain store paradox.” Imagine that firm A has a number of chain stores in various locations and that firm B contemplates entering in one or more of these locations. If firm A threatens a price war, then firm B might be dissuaded from entering, not just in a particular market, but in any of A’s markets. In that case, it could well be worthwhile for A to threaten and, indeed, to carry out a price war in a single market. Knowing this, B does not enter. This is a Nash equilibrium. But Selten also saw that another Nash equilibrium was for B to enter. The reason: B would realize that A would have losses in each market in which B entered and A carried out a price war. These losses, cumulatively, would not be worthwhile. By looking forward and reasoning backward, B realizes that A will not carry on a price war, and therefore B enters. Which Nash equilibrium is the “right” one? Selten argued that it is the one where B enters because B thought through the whole sequence and realized that, from A’s viewpoint, a price war would be irrational. B’s strategy of entry and A’s strategy of avoiding a price war are “subgame perfect.” Interestingly, this discussion of game theory was carried on long after economist Aaron Director, in 1953, offered a similar argument that “predatory pricing” is an irrational strategy. John S. McGee, following Director’s hunch, examined the trial transcripts of U.S. v. Standard Oil New Jersey, which was thought to be one of the best-documented cases of “predatory pricing”—that is, pricing below a rival’s costs to put the rival out of business. Sure enough, McGee found no evidence that Standard Oil of New Jersey had ever engaged in predatory pricing.2 Indeed, the U.S. Supreme Court has accepted this reasoning and, in judging the antitrust laws, has given wide latitude to firms to cut prices in a price war.3 Selten realized, though, that there can be situations in which even the requirement of subgame perfection is insufficient. This led him to his next major contribution, the “trembling-hand” equilibrium. Imagine that each “player” thinks there is a small probability that a mistake will occur—that is, that someone’s hand will tremble. A Nash equilibrium in a game is “trembling-hand perfect” if it obtains even with small probabilities of such mistakes. Selten was born in Breslau, Germany, now the city of Wrocław, Poland. Growing up half-Jewish, he learned an important lesson from the virulent anti-Semitism he saw around him. As Selten put it, “I had to learn to trust my own judgment rather than official propaganda or public opinion.”4 Selten became interested in game theory after reading about it in Fortune in the late 1940s. He earned his master’s degree in mathematics at the University of Frankfurt in 1957 and his Ph.D. at the same school in 1961. He was a full professor of economics at the Free University of Berlin from 1969 to 1972. This was a period of student “unrest,” which, wrote Selten, “made teaching difficult and sometimes impossible.” For other reasons, though, he moved to the University of Bielefed in 1972 and stayed there until 1984, when he moved to the University of Bonn. He often collaborated with fellow future Nobel winner John Harsanyi. Selected Works   1965. “Spieltheoretische Behandlung eines Oligopolmodells mit Nachfrageträgheit [An oligopoly model with demand inertia].” Zeitschrift für die Gesamte Staatswissenschaft 121: 301–324 and 667–689. 1975. “Reexamination of the Perfectness Concept for Equilibrium Points in Extensive Games.” International Journal of Game Theory 4: 25–55. 1988. Models of Strategic Rationality. Dordrecht: Kluwer.   Footnotes 1. Available online at: http://nobelprize.org/nobel_prizes/economics/laureates/1994/selten-autobio.html.   2. John S. McGee, “Predatory Price Cutting: The Standard Oil (N.J.) Case,” Journal of Law and Economics 1 (October 1958): 137–169; see esp. p. 138, fn. 2, where McGee thanks Director for his strictly logical reasoning that predatory pricing makes no sense.   3. In Matsushita Electric Industrial Co. v. Zenith Radio Corp. (1986), the U.S. Supreme Court stated that “predatory pricing schemes are rarely tried, and even more rarely successful.”   4. See http://nobelprize.org/economics/laureates/1994/selten-autobio.html.   (0 COMMENTS)

  “Can capitalism survive? No. I do not think it can.” Thus opens Schumpeter’s prologue to a section of his 1942 book, Capitalism, Socialism and Democracy. One might think, on the basis of the quote, that Schumpeter was a Marxist. But the analysis that led Schumpeter to his conclusion differed totally from Karl Marx’s. Marx believed that capitalism would be destroyed by its enemies (the proletariat), whom capitalism had purportedly exploited, and he relished the prospect. Schumpeter believed that capitalism would be destroyed by its successes, that it would spawn a large intellectual class that made its living by attacking the very bourgeois system of private property and freedom so necessary for the intellectual class’s existence. And unlike Marx, Schumpeter did not relish the destruction of capitalism. “If a doctor predicts that his patient will die presently,” he wrote, “this does not mean that he desires it.” Capitalism, Socialism, and Democracy is much more than a prognosis of capitalism’s future. It is also a sparkling defense of capitalism on the grounds that capitalism sparks entrepreneurship. Indeed, Schumpeter was among the first to lay out a clear concept of entrepreneurship. He distinguished inventions from the entrepreneur’s innovations. Schumpeter pointed out that entrepreneurs innovate not just by figuring out how to use inventions, but also by introducing new means of production, new products, and new forms of organization. These innovations, he argued, take just as much skill and daring as does the process of invention. Innovation by the entrepreneur, argued Schumpeter, leads to gales of “creative destruction” as innovations cause old inventories, ideas, technologies, skills, and equipment to become obsolete. The question is not “how capitalism administers existing structures, … [but] how it creates and destroys them.” This creative destruction, he believed, causes continuous progress and improves the standards of living for everyone. Schumpeter argued with the prevailing view that “perfect” competition was the way to maximize economic well-being. Under perfect competition all firms in an industry produce the same good, sell it for the same price, and have access to the same technology. Schumpeter saw this kind of competition as relatively unimportant. He wrote: “[What counts is] competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which … strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” Schumpeter argued on this basis that some degree of monopoly is preferable to perfect competition. Competition from innovations, he argued, is an “ever-present threat” that “disciplines before it attacks.” He cited the Aluminum Company of America as an example of a monopoly that continuously innovated in order to retain its monopoly. By 1929, he noted, the price of its product, adjusted for inflation, had fallen to only 8.8 percent of its level in 1890, and its output had risen from 30 metric tons to 103,400. Schumpeter never made completely clear whether he believed innovation is sparked by monopoly per se or by the prospect of getting a monopoly as the reward for innovation. Most economists accept the latter argument and, on that basis, believe that companies should be able to keep their production processes secret, have their trademarks protected from infringement, and obtain patents.     Schumpeter was also a giant in the history of economic thought. His magnum opus in the area is History of Economic Analysis, edited by his third wife, Elizabeth Boody, and published posthumously in 1954. In it Schumpeter made some controversial comments about other economists, arguing that Adam Smith was unoriginal, Alfred Marshall was confused, and Leon Walras was the greatest economist of all time. Born in Austria to parents who owned a textile factory, Schumpeter was very familiar with business when he entered the University of Vienna to study economics and law. He was one of the more promising students of Friedrich von Wieser and Eugen von Böhm-Bawerk, publishing at the age of twenty-eight his famous Theory of Economic Development. In 1911 Schumpeter took a professorship in economics at the University of Graz. He was minister of finance in 1919. With the rise of Hitler, Schumpeter left Europe and the University of Bonn, where he was a professor from 1925 until 1932, and emigrated to the United States. In that same year he accepted a permanent position at Harvard, where he remained until his retirement in 1949. Schumpeter was president of the American Economic Association in 1948. Selected Works   1912. The Theory of Economic Development. Leipzig: Duncker and Humblot. Translated by R. Opie. Cambridge: Harvard University Press, 1934. Reprint. New York: Oxford University Press, 1961. 1939. Business Cycles. 2 vols. New York: McGraw-Hill. 1942. Capitalism, Socialism and Democracy. New York: Harper and Brothers. 5th ed. London: George Allen and Unwin, 1976. 1951. Ten Great Economists. New York: Oxford University Press. 1954. History of Economic Analysis. Edited by E. Boody. New York: Oxford University Press.   (0 COMMENTS)

In 1998, Amartya Sen received the Nobel Prize “for his contributions to welfare economics.” Much of Sen’s early work was on issues raised by kenneth arrow’s “impossibility theorem.” Arrow had shown, much more generally than Condorcet had in 1785, that majority rules often lead to intransitivities. A majority may prefer a to b and b to c, but it does not follow, as it does for an individual, that the majority prefers a to c (see public choice). If the majority prefers c to a, then there is an intransitivity. With coauthor Prasanta Pattanaik, Sen specified certain conditions that eliminate intransitivities. He did later work on his own that resulted in a 1970 book that added to Arrow’s initial insights. One major theme was his skepticism about utilitarianism. The Nobel committee cited this work in awarding the prize. Sen also pointed out that the standard measure of poverty in a society, the proportion of people who are below a poverty line, leaves out an important datum: the degree of poverty among the poor. He came up with a more complicated index to measure not only poverty but also its degree. Sen studied famines in various parts of the world and pointed out that they sometimes occurred even when there was no decline in food output. Some famines occurred when the real income of specific groups fell so that these groups could no longer afford to buy food. In such cases, most economists would advocate giving money to such people so that they could buy food and make their own trade-offs between food and other things. Along with coauthor Jean Drèze, Sen, though no strong believer in economic freedom, defended this standard economist’s view and argued mildly against price controls on food because such controls would reduce the amount of food produced. Sen was a moderate defender of free markets who sometimes put the moderate case brilliantly. He wrote: To be generically against markets would be as odd as being generically against conversations between people (even though some conversations are clearly foul and cause problems for others—or even for the conversationalists themselves.) The freedom to exchange words, goods or gifts doesn’t need defensive justification in terms of their favorable but distant effects; they are a part of the way human beings in society live and interact with each other (unless stopped by regulation or fiat).1 Sen also wrote articles in 1990 and 1992 in which he argued that there were 100 million fewer females in China, India, and other Asian countries than there should have been. He assumed, reasonably, that this was because of discrimination against women by men and by governments. Many wondered if the Chinese government’s one-child policy (which encouraged abortion when the expectant mother thought she was having a girl) might be one of the culprits behind this “missing women” phenomenon. More recent research, though, has found that about half of the female undercount can be explained without resort to female mortality. It turns out that women who are carriers of hepatitis B tend to have more boys than girls, and that the incidence of hepatitis B is high in these Asian countries.2 Sen was born in India. He completed his early academic education there and earned his doctorate from Cambridge in 1959. He was a professor at the University of Delhi from 1963 to 1971, at the London School of Economics from 1971 to 1977, at All Souls College in Oxford from 1977 to 1988, and at Harvard University from 1989 to 1997. He is now Master of Trinity College at Cambridge University. Selected Works   1969 (with Prasanta K. Pattanaik). “Necessary and Sufficient Conditions for Rational Choice Under Majority Decision.” Journal of Economic Theory 1, no. 2: 178–202. 1970. Collective Choice and Social Welfare. San Francisco: Holden-Day, 1970. 1976. “Poverty: An Ordinal Approach to Measurement.” Econometrica 44, no. 2: 219–223. 1976. “Real National Income.” Review of Economic Studies 43, no. 1: 19–39. 1977. “Starvation and Exchange Entitlements: A General Approach and Its Application to the Great Bengal Famine.” Cambridge Journal of Economics 1, no. 1: 33–59. 1981. Poverty and Famines: An Essay on Entitlement and Deprivation. Oxford: Oxford University Press. 1989 (with Jean Drèze). Hunger and Public Action. Oxford: Oxford University Press. 1990. “Food, Economics, and Entitlements.” In Jean Drèze and Amartya Sen, eds., The Political Economy of Hunger. Vol. 1: Entitlement and Well-Being. Oxford: Oxford University Press, 1990. 1990. “More than 100 Million Women Are Missing.” New York Review of Books, December 20. 1992. “Missing Women.” British Medical Journal 304: 587–588.   Footnotes 1. Amartya Sen, Development as Freedom (New York: Alfred A. Knopf, 1999), p. 6.   2. Emily Oster, “Hepatitis B and the Case of the Missing Women,” Harvard University, August 2005, online at: http://www.people.fas.harvard.edu/∼eoster/hepb.pdf.   (0 COMMENTS)

  Franco Modigliani, an American born in Italy, received the 1985 Nobel Prize on the basis of two contributions. The first is “his analysis of the behavior of household savers.” In the early 1950s Modigliani, trying to improve on Keynes’s consumption function, which related consumption spending to income, introduced his “life cycle” model of consumption. The basic idea is common sense, but it is no less powerful for that. Most people, he claimed, want to have a fairly stable level of consumption. If their income is low this year, for example, but expected to be high next year, they do not want to live like paupers this year and princes the next. So, Modigliani argued, people save in high-income years and spend more than their income (dissave) in low-income years. Because income begins low for young adults just starting out, then increases in the middle years and declines on retirement, said Modigliani, young people borrow to spend more than their income, middle-aged people save a lot, and old people run down their savings. The second contribution that helped Modigliani win the Nobel Prize is the famous Modigliani-Miller theorem in corporate finance (see corporate financial structure). Modigliani, together with Merton Miller, showed that under certain assumptions, the value of a firm is independent of its ratio of debt to equity. Although Modigliani claimed his two articles with Miller were written tongue-in-cheek, that is not how Miller, the Nobel Prize Committee, or financial economists took them. Their insight was a cornerstone in the field of corporate finance. Modigliani also wrote one of the articles that started the rational expectations school of economics. In a 1954 article he and coauthor Emile Grumburg pointed out that people may anticipate certain government policies and act accordingly. Modigliani strenuously objected, though, to the lengths to which the rational expectations school has taken this basic insight. Modigliani considered himself a Keynesian. A cartoon on his office door in 1982 said: “With your permission, gentlemen, I’d like to offer a kind word on behalf of John Maynard Keynes.” Modigliani left fascist Italy in 1939 because he was both Jewish and antifascist. He earned his Ph.D. from the New School of Social Research in 1944. Modigliani taught at the New School from 1944 to 1949 and was a research consultant to the Cowles Commission at the University of Chicago from 1949 to 1952. He was a professor at Carnegie Institute of Technology from 1952 to 1960, at Northwestern University from 1960 to 1962, and at MIT from 1962 until his death. He was president of the American Economic Association in 1976. Selected Works   1949. “Fluctuations in the Saving-Income Ratio: A Problem in Economic Forecasting.” In Studies in Income and Wealth, no. 11. New York: National Bureau of Economic Research. 1954 (with Richard Brumberg). “Utility Analysis and the Consumption Function.” In Kenneth Kurihara, ed., Post-Keynesian Economics. New Brunswick: Rutgers University Press. 1954 (with Emile Grumburg). “The Predictability of Social Events.” Journal of Political Economy 62 (December): 465–478. 1958 (With Merton Miller). “The Cost of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review 48 (June): 261–297. 1963 (with Albert Ando). “The Life Cycle Hypothesis of Saving: Aggregate Implications and Tests.” American Economic Review 53 (March): 55–84. 1963 (with Merton Miller). “Corporate Income Taxes and the Cost of Capital.” American Economic Review 53 (June): 433–443.   (0 COMMENTS)

In 1990, U.S. economists Merton H. Miller, Harry Markowitz, and William F. Sharpe shared the Nobel Prize “for their pioneering work in the theory of financial economics.” Miller’s contribution was the Modigliani-Miller theorem, which he developed with Franco Modigliani while both were professors at Carnegie Institute of Technology. (Modigliani had earned the prize in 1985 for his life-cycle model of saving and for the Modigliani-Miller theorem.) The Modigliani-Miller theorem says that under certain assumptions, the value of a firm is independent of the firm’s ratio of debt to equity (see corporate financial structure). Miller once gave a colorful analogy to try to simplify his and Modigliani’s insight: Think of the firm as a gigantic tub of whole milk. The farmer can sell the whole milk as it is. Or he can separate out the cream, and sell it at a considerably higher price than the whole milk would bring. (Selling cream is the analog of a firm selling debt securities, which pay a contractual return.) But, of course, what the farmer would have left would be skim milk, with low butter-fat content, and that would sell for much less than whole milk. (Skim milk corresponds to the levered equity.) The Modigliani-Miller proposition says that if there were no cost of separation (and, of course, no government dairy support program), the cream plus the skim milk would bring the same price as the whole milk.1 Miller was a strong defender of the view that futures contracts, just like other products, are valuable to those who buy them. Therefore, he argued, government regulation of these contracts is likely to do more harm than good. His book Merton Miller on Derivatives is full of insights about derivatives. Miller earned his undergraduate degree at Harvard University in 1944 and went on to work as a tax expert at the U.S. Treasury Department. He later earned his Ph.D. in economics at Johns Hopkins University. He taught at Carnegie from 1953 to 1961, and in 1961 became a professor at the University of Chicago’s Graduate School of Business, where he was the Robert R. McCormick Distinguished Service Professor. He became a public governor of the Chicago Mercantile Exchange in 1990. Selected Works   1958 (with Franco Modigliani). “The Cost of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review 48 (June): 261–297. 1963 (with Franco Modigliani). “Corporate Income Taxes and the Cost of Capital.” American Economic Review 53 (June): 433–443. 1991. Financial Innovations and Market Volatility. Cambridge: Blackwell. 1997. Merton Miller on Derivatives. New York: Wiley.   Footnotes 1. From Financial Innovations and Market Volatility, p. 269.   (0 COMMENTS)