sign in sign up
<<
Home , Frank Hahn

Cambridge Economics

Cambridge Faculty of Economics econ.cam.ac.uk Alumni Newsletter

of more than £65 billion of taxpayers’ Adair Turner: money to prop up the merged Lloyds- Welcome After the Deluge HBOS and RBS in order to support the FROM PROFESSOR WILLY BROWN financial system.

Our sixth Alumni newsletter once This experience, and that of the again places the current work of following four and a half years as the the Faculty in the perspective of its FSA worked to stabilise and reform past achievements and our subject’s financial services, has shaped Turner’s future challenges. Some feel for critical yet constructive views on the what is going on now is given by strengths and weaknesses of the pieces about Esther Duflo, who gave market mechanism; on the nature the Marshall Lecture, a conference on religion and economics, and and role of policy making and of the research of some prominent regulation; and on the current state Faculty members. Looking back, of economic theory and analysis. At we celebrate the very different Cambridge (Caius, 1974-78), he read intellectual contributions of the first History and then Economics, after lives of Frank Hahn, Robin Marris which his career included McKinsey, the and Dorothy Wedderburn. But international management consultancy; economics as a subject has always the Confederation of British Industry, been most effective when it has as Director-General; and Merrill Lynch, not been at ease with itself, and Paul Seabright castigates its current the investment bank, before leading the introversion. In the same spirit, FSA. we lead with Adair Turner’s robust reflections on where his experience Theory and practice of the financial crisis leaves At the FSA, Turner inherited an economic theory. n September 20th 2008, in organisation whose policies were the midst of the whirlwind founded on ‘light touch’ regulation of We are keen to keep in touch with our released by the onset of banks and other financial institutions alumni and welcome your feedback on O the global financial crisis, Adair in a system where monetary policy, Turner(1) became Chairman of the banking supervision, macro-prudential [email protected] UK’s Financial Services Authority responsibility, and fiscal policy were – until recently the statutory body split between different bodies. The responsible for the monitoring and FSA’s approach to achieving competitive regulation of the financial services and efficient financial markets by industry. Five days before, Lehman forbidding or removing obstacles to Brothers had filed for bankruptcy self-generating adjustment drew on the after the US Treasury had declined general equilibrium models of modern to bail it out. And at home, just two neo-classical microeconomics. In these days earlier Lloyds TSB bank had been models, complete and competitive persuaded to come to the rescue of markets for factors, products and HBOS, a mortgage and corporate capital balance simultaneously within lender, which was on the brink of a framework of sustainable economic collapse. Two weeks later, Royal growth and low and stable inflation. Bank of Scotland, at the time the For the many adherents of the ‘efficient world’s largest bank by assets, failed. markets hypothesis’, the ‘Great Government had to provide a total Moderation’ period of faster growth

Issue number 6 Autumn 2013 and low inflation that lasted from many other sectors, are far less valid often overlooked. He reflects on what the mid-1990s until the Crash was in finance. He notes that financial he labels “the strange amnesia of seen as proof of the essential truth markets cannot only create endogenous modern macroeconomics” which he of this analysis. In the face of this, instability, but also generate large suggests has ignored insights about the Turner drew quickly and deeply on his opportunities for rent extraction. He importance of the financial system and knowledge of History and Economics highlights the danger that in many of credit and money creation processes and on his professional experience. He financial markets the pursuit of these which were central to the work of both recognised that the financial sector is opportunities is not moderated by social and Friedrich not the passive and compliant creature interaction or by pride in physical end Hayek even though they drew different of competitive markets’ theory. Rather products, which contain the unbridled conclusions from their analysis. it is prone inherently to fluctuations and pursuit of self-interest in many other to instability. sectors of the economy. The digits on In Turner’s view, it is baying for the the screen are so remote from reality moon to hope for a ‘scientific’ paradigm He explores three reasons for that money becomes the measure of all for Economics, where experiments can turbulence in financial markets. One things. The people involved are not evil, be replicated and fundamental and is that all financial markets, including but we need a culture under which they enduring principles can be established. those for equities, debt securities or are made aware of the consequences of Economic analysis will always involve foreign exchange, can be subject to their actions. discourse, debate and dissent – indeed, herd and momentum effects, and that is its fascination. But theory now thus to periods in which valuations Turner is trenchant on the failure of needs to move forward - on two fronts are fundamentally irrational. This economic theory to relate to, anticipate in particular. First, it must take into contradicts the efficient market and explain turbulence in markets. account the broad range of evidence hypothesis, which he sees as based on During his time in Cambridge as a and theories that research in Economics a failure to understand the distinction student, the Keynesian consensus, and other disciplines makes available, between risk and uncertainty and on which had been dominant throughout including those from paradigms and the erroneous assumption that human the post-second world war period, was analyses that are currently out of beings are wholly rational. breaking apart in the face of falling fashion with mainstream thinking. output and employment accompanied Such work is complex and difficult but Second, Turner stresses the particular by rising prices (‘stagflation’). This is very important. Following directly features of debt contracts, which in the paradigm came to be replaced from this, his interest in History comes economic upswing can be created in by versions of the ‘Washington into play when he urges awareness and excessive quantities because investors Consensus’, promoted in large part by understanding of both economic history ignore “tail risks”, and which in the the IMF, in which active fiscal policy and the history of economic thought: downswing create economic disruption was discouraged in favour of targeting the latter, he points out with a hint of because of the rigidities inherent in inflation and economic growth through criticism, has not been taught explicitly default and bankruptcy processes. the use of monetary policy instruments, in the Economics Tripos for some years. Referencing the work of Harvard in particular interest rates. Flexible and economist Andrei Shleifer he suggests competitive markets, it was claimed, Looking forward that many of the debt securities created would then ensure equilibrium. Although having come to the end of in the years before the crisis “owed his term as FSA Chairman, Turner is their very existence to neglected risk”. Washington retrospective still vitally engaged in the debate on The Washington Consensus and economic policy. In the light of the Minsky moment its aftermath are now under heavy extended recession in the UK and Third, Turner recalls the work of the attack from both inside and outside elsewhere since the Crash, and of the American economist Hyman Minsky, Economics. Turner joins in the criticism strident debate about austerity, he has who illustrated how credit creation on three main grounds. First, the put forward the case for Overt Money by banks can fuel asset price rises, in reliance of the analysis on rational Finance (OMF) to reduce fiscal deficits. particular in real estate, generating self- expectations, which assumes that This calls for central banks permanently reinforcing cycles which end in crisis agents work in pursuit of their own self- to monetise additional budget followed by deleveraging and recession. interest with complete or near-complete deficits so as to boost consumption He stresses in particular the point that, information, is inadequate and and investment in both the private contrary to many simplistic descriptions, potentially misleading, given evidence and public sectors without raising banks do not merely intermediate pre- on individual and group behaviours expectations that policy would be existing savings, but create credit and from branches of knowledge reversed at some future date, perhaps money de novo. This fact he believes is that include biology, psychology sharply, which would negate the central to understanding why market and sociology. Second, analytical incentive to spend. He recognises that economics can suffer extreme and frameworks are frequently presented if the taboo against money finance is harmful instability. as internally consistent and complete broken there is a danger that politicians in themselves, whereas reality is might use this tool to excess and in the Overall Turner is convinced that complex and sometimes contradictory. many circumstances where it would financial markets are quite different Lastly, the distinctive characteristics be harmful as well as the few where from most product and service markets, of the financial sector – in particular it is required. But he argues that it is and that the propositions in favour its significance in the economy and possible to locate decisions on the use of market liberalisation, strong in its tendency towards instability – are of money finance within independent

2 central banks pursuing appropriate the development of a technique for stocks. High frequency trading now inflation or nominal GDP targets. smoothing estimations (the ‘marginal accounts for about 30 per cent of all integration’ method) which helps equity trades in the UK and possibly Turner has now become a Senior Fellow improve the accuracy of the output more than 60 per cent in the US. While of the Institute for New Economic of non-linear models. The technique advocates of these methods assert that Thinking, and is working on a major is simpler than ‘backfitting’, the main they enhance the efficiency of financial book on the financial crisis and alternative method, and can now be markets by speeding-up adjustment to the deficiencies of both policy and reconciled with it. changing market conditions through economic analyses which led to it. He increasing information and improving also holds University Professorships Esoteric though this work may be, it transparency, critics allege that they at the London School of Economics has direct relevance and application to aggravate asset price movements and and the Cass Business School at City the operation of financial markets, in volatility by encouraging speculation University. particular the causes and consequences which can lead in turn to price ‘bubbles’ of unpredictable and unanticipated and instability. But after a full and as yet not complete price volatility. An important focus career, what comes next? He isn’t within this setting is the analysis of Markets and instability saying. data sets associated with very short Linton has been a member of the Expert term, high-frequency, and irregular Group for a report on the future of Tony Cockerill and Willy Brown movements in the prices of financial computer trading in financial markets, assets, where feedback loops may be undertaken by the Department for 1. Lord Turner of Ecchinswell (1955– ). expected to influence the outcomes. Business, Innovation and Skills of the Chairman: Financial Services Authority, 2008–13; (1) Climate Change Committee, 2008–12; Pensions In these circumstances it is often very UK Government . The report finds that Commission, 2003–06; Low Pay Commission, difficult to identify, to study, and to computer-based trading has helped to 2002–06. Vice-Chairman, Merrill Lynch Europe, understand the fundamentals that improve the functioning of financial 2000–06. Director General, Confederation of underlie asset price movements and markets by increasing liquidity, reducing British Industry, 1995–99. McKinsey & Co., 1982– 95. Gonville and Caius College, Cambridge, 1974 hence to take an informed view of the transactions costs and assisting better –78. stability of financial markets. price discovery. But it has also from time to time contributed to instability, Professor Oliver Linton The practical application of this work in particular by giving rise to temporary is to very high frequency algorithm- but intense periods of illiquidity, the based computer trading of financial consequences of which for market

liver Linton came to Cambridge from the London School of OEconomics in 2011. His research stretches widely across theoretical and empirical analysis, bringing together the development of new forms of computable econometric models with their application to financial markets’ operations. His work on econometric methods stems out of his frustration with the limits to modelling imposed by the conventional linear models that require initial assumptions to be made about their ‘functional form’; that is, the nature and characteristics of the system that is to be investigated.

He calls this limitation ‘the curse of dimensionality’. To extend the accuracy and realism of analysis, he is contributing significantly to the development of nonparametric and semi-parametric methods of estimation. These make it possible for econometric models to be flexible and adaptive, with feedback loops that help the model – and hence the investigator – to ‘learn’ about the system that is being proposed and studied. To illustrate his point, Linton makes comparison with models of evolution and adaptation in biology. His main contribution in this area is

Economics 3 Cambridge volatility have been exaggerated by in diverse locales, including Kenya, students by providing studentships self-reinforcing feedback effects. It is in Bangladesh, and the United States. and scholarships, and awarded its first this area of the study that Linton’s work seed fund grants, designed to provide into modelling non-linear relationships Coen Teulings (PhD University of flexible support for new exploratory and endogeneity (feedback) in financial Amsterdam, 1990) will be joining research. The Institute will welcome markets has had most impact. Among the Faculty as the Montague Burton three new postdoctoral research fellows its many recommendations, the Professorof Industrial Relations and this autumn. report emphasises the importance Labour Economics. He plans to continue for regulators of making sure that his past research focused on labour market institutions (wage setting, Faculty News and appropriate ‘circuit breakers’ are in unions, minimum wages, employment place in the sequences of financial Successes protection, education, and income market interactions so as to guard distribution), as well as pursuing against critical failure. research into cities and land prices for residential real estate. Coen joins the Linton graduated in Mathematics from Faculty after seven years as General LSE and completed his doctorate in Director of the Netherlands Bureau for Economics at Berkeley (University of Economic Policy Analysis (the Dutch California). After a Research Fellowship equivalent of the UK Office of Budget at Nuffield College, Oxford, he had Responsibility) where he was active in professorial appointments at Yale the debate about policy responses to before returning to LSE in 2000. His the fiscal crisis and austerity. He will latest book, Financial Econometrics, will continue to contribute to this debate in be published shortly. As Professor of his new role. Political Economy at Cambridge, Linton is in direct line of succession from We would like to welcome Vasco Alfred Marshall, who would approve Carvalho (PhD University of Chicago, strongly his capability of fusing together 2008) who will be joining the Faculty as Reader. Our new University Lecturers rigorous theory and policy-oriented are Meredith Crowley (PhD University empirical analysis. of Wisconsin, 2001) from the Federal Reserve Bank of Chicago; Dmytro Tony Cockerill Hryshko (PhD University of Houston, 2006) from the University of Alberto; Note and Nicholas Zammit (PhD University 1. Foresight: The Future of Computer Trading in Financial Markets (2012). Final Project Report. of Warwick, expected 2013). The Government Office for Science, London. Accessible at: Tom Crossley and Sule Alan will be leaving the Faculty to take up Chairs bis.gov.uk/assets/foresight/docs/computer- Robert Evans (pictured, top) and trading/12-1086-future-of-computer-trading- at the University of Essex. Giammario in-financial-markets-report.pdf Impullitti will also be leaving this Hamish Low (pictured, below) have autumn. We thank them for their been promoted to Professorships. contributions to the Faculty’s teaching Robert Evans is an economic theorist Staff comings and and research. who specialises in game theory and goings contract theory. His main contributions INET Centre and Keynes to economic theory fall in four areas: Kaivan Munshi (PhD Massachusetts bargaining theory, infinitely repeated Institute of Technology, 1995) has Fund games with renegotiation, models joined the Faculty as the Frank Ramsey of reputation, and contract theory Professor of Economics. Professor The Cambridge-INET Institute and (or mechanism design) without Munshi’s research career has been the Keynes Fund were both set up in commitment. Bargaining theory is devoted almost exclusively to the the last year. They have commenced concerned with coalitional bargaining analysis of communities and their a number of activities with the aim and also with negotiation between interaction with economic activity. of supporting path-breaking research asymmetrically informed players who His early research focused on social in economics at the University of share a common value for the object. learning in the adoption of agricultural Cambridge. The Keynes Fund, which In an infinitely repeated game with and contraceptive technology, and the was initiated in order to fund research renegotiation the players are able to identification of migrant labour market agree at any stage to change their networks. His subsequent research related to the current economic crisis, strategies in a co-ordinated way, which has examined the effect of community gave out several grants in its first two networks on education, health, and funding cycles. The Cambridge-INET substantially narrows down the set of mobility, which are key determinants Institute supported economic research equilibria, compared with the standard of growth and development. Much of through a variety of programmes. theory. Reputation theory concerns this research has been situated in India, The Institute hosted a number of infinitely repeated games in which some where caste is a natural social domain distinguished visiting scholars and held players have private information about around which networks are organized. several conferences and workshops. their preferences, so that they can However, other work has been situated The Institute also supported doctoral build a reputation for being a particular

4 type of player. Finally, the work on wall of separation between church were two sessions introducing new mechanism design is concerned with and state’ Jefferson once wrote about datasets, including a session from the settings in which the participants in the religion in a letter from Monticello on Association of Religion Data Archives mechanism, or contract, are not fully 1st September 1820 thus: (ARDA). We were particularly delighted committed to the contract, for example to have exciting sessions on laboratory because they could jointly agree to It excites in him the gratifying reflection and field experiments on religion, renegotiate it. that his country has been the first to the application of network theory to prove to the world two truths, the most counter-insurgency efforts, and the Hamish Low’s research focuses on two salutary to human society, that man keynote session in honour of Carmel broad questions: first, what sort of risks can govern himself, and that religious and Barry Chiswick. do individuals face over their life-times freedom is the most effectual anodyne and over the business cycle? Second, against religious dissension: the maxim Participants at the conference included how well insured are individuals against of civil government being reversed in academic economists from around the these risks? Insurance comes through that of religion, where its true form is world (with plenty of representation individuals own decisions, such as over "divided we stand, united, we fall." from our own graduate student how much to work or to save, as well community in Cambridge Economics) as through social insurance such as The diversity of the topics addressed as well as other scholars, researchers unemployment and disability insurance. by our conference made me wonder and policymakers from the World His research focuses on using computer if both the study of religion, as indeed Bank, Microsoft Research, the Pew simulations of behaviour to model the study of economics more generally, Global Trust and the National Science these mechanisms in a realistic way that addressing as they do some of the Foundation. matches up to what is observed in the most complex and difficult issues data. for our times, still do have much to Having spent a whole year coordinating learn from Jefferson’s wisdom. The and planning the conference with other Hamid Sabourian, Professor of conference papers were presented colleagues in the US and elsewhere, Economics and Game Theory, has in sessions that encompassed a ably assisted by one of our students, been elected as a Fellow of the British range of broad areas that included Zsoka Koczan, who is moving to the Academy. international religious freedom, the IMF to start work in Washington DC in economic effects of religion, historical the autumn, a very nervous programme Conference on the perspectives, politics and religion, chair was immensely relieved in the game theory, evolution and religion, end that it all went smoothly. It was a Economics of Religion experimental economics, as well as pleasure to organise the conference religious violence, conflict, crime and program for ASREC 2013 and I will look he Association for the Study of terrorism. Some sessions offered a more forward to doing it all over again next Religion, Economics and Culture philosophical approach, contemplating year when the ASREC 2014 Annual T(ASREC) held their 12th Annual the language of religion and the Conference will be held from 21st -22nd Conference in Washington DC from medium of religion. Sessions on culture March 2014 in Chapman University, 11th -14th April 2013. Offering an more broadly examined ethnicity, Orange County, California. exciting programme of 100 papers, culture and identity, integration and these meetings are the largest immigration in developed countries, Naturally, I will still miss the cherry international annual meetings of as well as the interactions between blossoms next year, but I will await economists and other social scientists religion, culture and gender. On data hopefully the orange blossoms instead. who work on the economics of religion and methodology, a very important and culture. The papers presented part of future religion research, there Sriya Iyer ranged across disciplines including economics, law, politics, sociology and philosophy. In the end, we had a very interesting programme that provided many different perspectives on religion and culture.

Sitting on the steps of the Jefferson Memorial, watching Washington’s monuments bathed in the spring sunshine, the Tidal Basin adorned festively with the pale pink beauty and fragrance of hundreds of cherry blossoms, I could not but reflect on what Thomas Jefferson would have made of us economists thinking about religion on his doorstep. Famous of course for creating the phrase ‘the

Economics 5 Cambridge enterprise opportunities which lowers The Marshall Lectures 2012–13 their productivity in business compared to men, so reinforcing the vicious cycle that traps people in poverty.

Paternalism, Freedom, and Hope in the Fight Against Poverty This brings her argument back to Professor Esther Duflo, Massachusetts Institute of Technology paternalism. Initiatives aimed at alleviating poverty should be shaped to empower those for whom they are intended by offering to them a carefully sther Duflo’s thoughtful Marshall To illustrate the difficulties that this focused and constrained set of choices Lectures are based upon her recent approach presents, Duflo refers to aid- that are realistic and relevant to their Ebook Poor Economics, co-authored financed initiatives to improve health in economic and social circumstances. with Abhijit Banerjee, drawing out two poor countries. Tests for malaria may Limiting choice is not inimical to themes that underlie their thinking on be offered and vaccinations for this and freedom. Indeed, as Duflo argues, this poverty and poverty alleviation. These other diseases provided, but typically might give the poor the opportunity themes include how in the fight against the unprompted take-up of such to think about things in life other than poverty, paternalism might form a services is very low, in sharp contrast to their material needs, providing them basis upon which we might increase the experience in rich countries. The with, as she puts it, the ‘freedom to our freedom to pursue what is most people to whom the services are offered stumble’. She reminds us of Amartya important in life. The second theme is are likely to lack both the time and the Sen’s emphasis on the freedom to how stress- and hopelessness-induced resources to travel to the treatment achieve, which calls for the poor to be poverty traps keep the poor from centres, may find it hard to understand given the opportunity and motivation achieving their full potential. the information they are given, may to develop appropriate capabilities and not trust those who are providing the goals. To illustrate these themes, the first service, and may have more pressing lecture, on Paternalism and Freedom, and immediate concerns for their Escaping from the poverty trap forms revisits the present-day fashionable families than paying attention to their the theme of the second lecture: Hope discomfort of aid donors and others own longer-term health. as Capability. Duflo begins by casting a about ‘knowing better than the critical look at the causes of the poverty poor’ in seeking ways to alleviate Trust trap that are usually quoted. She poverty. Duflo begins by referring to Achieving self-motivated participation in points out that inadequate nutrition, the economic and religious origins such initiatives as these requires people interventions that are too small in scale of paternalism in France in the 19th to have trust in their governments and to be effective, and a lack of credit are in the policies they implement. This century, deriving as in England from some possible explanations for poverty marks a defining difference between the self-interest of employers in the traps but are by no means exhaustive. those who live in the rich world and welfare of their workers (‘le devoir du The weight of evidence overall shows those who dwell in poverty. It leads patron’) so as to achieve productivity that an increase in income, starting in turn to the problem of the freedom and loyalty. Although ‘enlightened’ to from a low level, is associated with to choose, which is seen by many increases in the consumption of food of some degree, this self-interest is widely as an essential part of the model higher quality and of non-food items, seen as exploitative: workers had jobs of democracy that informs much rather than being spent on buying still but were often rewarded in part with development aid. Duflo makes two more basic foodstuffs. Very small scale goods in kind, were forbidden to join points strongly. First, the poor live projects, applied at village level, can social (trades union) organisations, had in an environment where they need have disproportionate and sustainable no involvement in management, and to exercise active choice in order to effects on income. She illustrates this were given no financial provision for arrive at a desirable outcome, while with the example from her own work of retirement and old age. the rich are often protected by a set of the benefits that can come by providing favourable default options. For example, one family with a cow. And the Today, some direct similar criticisms the water the rich drink comes clean increasing availability of micro-finance apply towards development aid. out of the tap, while the poor must do means that lack of credit is less and less Donors are seen as acting largely in something to clean it. Second, choosing a barrier to income growth. their own self-interest and that of the is costly and risky; information has to (rich) countries they represent. Their be collected, absorbed and evaluated, It is the lack of hope – hopelessness charity is a salve to their conscience and notwithstanding this, the wrong – that plays a much more important but may deny the poor a voice, the choices might still be made. This is part in the poverty trap. The evidence initiative, or the power to make their so particularly for those in poverty for this is that enabling people to own decisions. The developed world, since many live under conditions of improve their confidence, optimism, working from its own perspectives of continuous stress that constantly and self-awareness – their mental poverty, stresses information and choice requires their attention and decisions. health – is a key factor in helping for the least advantaged as essential For an example she refers to the them to lift themselves out of poverty. waypoints on their path to ‘freedom’, immediate pressures of home life that, Duflo stresses that it is the fear of a stance that informs aid programmes for women in particular, unavoidably malnutrition, of unreliable sources of and policies. divert attention from employment and aid, and of not being able to get a loan,

6 rather than the underlying conditions themselves, that can sometimes be the true cause of the poverty trap.

This leads people to adopt a pessimistic outlook and to be averse to taking on risk. She quotes small farmers’ reluctance to use fertilizer to boost their crops (‘not worth it’); and of people’s unwillingness to learn, in the (potentially false) expectation that their income gains will be transitory and small. Institutional inequality can be a problem here too: evidence shows that in some cultures low caste children are given lower grades when their teacher knows that they are low caste, thus perpetuating their poverty. Interestingly, Duflo reports early results from current work into the physiological consequences of stress. Stress is found to be associated with the production of cortisol, a steroid hormone that may impair memory and motivation, leading in particular to avoidance of thinking about the future, and placing an emphasis on present satisfaction a thesis titled ‘Three Essays in Empirical essential characteristics such as age, – an outcome that the economist Development Economics’, a study which gender and experience, one then would attribute to a high rate of time set the scene for her outstanding work being subject to a set of interventions discount. that was to follow. intended to promote a specified outcome (the ‘treatment group’) while From theory to policy Prior to all of this, she first studied the other (the ‘control group’) is not. Duflo’s work and interests are about the Economics and History in Paris before design and socio-economic impacts of taking a taught Master’s course offered This approach forms the basis of her small-scale interventions intended to jointly by three prestigious French studies of the effects on health and alleviate poverty at a local level in the schools: the École Normale Supérieure, other aspects of economic and social developing world. Yet in concluding her review of the challenge of poverty the École Polytechnique and the wellbeing, usually at village level, of and of the contribution of her own École Nationale de la Statistique et de small-scale initiatives such as: adding work, she is able to point to important l’Administration Economique (ENSAE). fluoride to drinking water or iron to opportunities and implications for Her book, written with her long-time flour at the milling stage; providing policy. First, it is essential to ensure collaborator Abhijit Banerjee, ‘Poor remedial education for basic language minimum levels of income and health Economics: A Radical Rethinking of the and numeracy skills; encouraging protection. These then form the basis Way to Fight Global Poverty’, won the vaccinations; and enabling women for the growth of aspirations and Financial Times/Goldman Sachs Business to develop and engage in income- capabilities which need to be related Book of the Year Award in 2011. generating activities. These studies to realistic and achievable goals. For which began with Michael Kremer’s example, where women’s participation Esther developed her interest in the work in Busia in Kenya were extended in politics is increased, aspiration levels opportunities for systematic field later to many parts of the world. are raised and the gender gap in experiments and other applied research achievement is narrowed. into the causes and perceptions of As her two lectures made clear, the poverty – and hence into practical studies show encouraging results in Esther Duflo has been a Faculty and sustainable measures to lift the improving overall individual and social member of the Economics Department burden on the poor - through her welfare, including better physical and at The Massachusetts Institute of initial graduate studies. Influenced by mental health and the ability and Technology (MIT) since 1999 and scholars such as Michael Kremer, Josh motivation to take part in enterprising currently holds the Abdul Latif Jameel Angrist and Abhijit Banerjee, she saw activities. Although experiments are at Chair of Poverty Alleviation and that the value of empirical work on the heart of her work, Esther stresses Development Economics, a title which poverty was being weakened by the the importance of setting the studies underscores her active outreach and lack of carefully controlled experiments. in their socio-economic, spatial and engagement with the world’s poor She adopted the methodology of political context. Evidence from studies and the challenges and opportunities randomised control trials from medical in disciplines alongside Economics, both which they face. Esther joined MIT as a science, in which two cohorts of quantitative and qualitative, must also doctoral candidate in 1996, presenting participants are matched in terms of be taken into account in the analysis,

Economics 7 Cambridge although she acknowledges the difficulties of combining quantitative Thoughts on the direction of economics research and qualitative work effectively. Perhaps stemming from her own diverse experience, she is passionate Toulouse School of Economics and Institute for Advanced Study in Toulouse about the need for lead investigators and students to spend significant into thinking about the macro-economy amounts of time in the field. and the political influences on policy- making. Fieldwork Esther’s main involvement in the We are learning more every day about research is in conceiving, planning and how such influences as testosterone, carrying out pioneering interventions, conformism, status-seeking, hyperbolic and analysing and publishing the discounting, and the neglect of small findings. This informs her contribution and unquantifiable risks affect the to applied theory in development decisions taken by market participants. economics. Yet she is encouraged by But we know almost nothing about the work of development agencies how these same factors affect the and others in extending the scale and scope of appropriate projects behaviour of regulators and policy- and in making sure that they are makers, though it seems reasonable to capable of being sustained. Looking conjecture that such people are drawn ahead at the future of development from the same population as the market economics research, she believes that, participants. We teach our students in increasingly, development economics Photograph by Stéphanie Renard impressive detail how regulators can will benefit from and contribute to respond to market failures. But we do not teach them how markets in turn other areas of economics, including he lamentable failure of the respond to regulatory failures, and political economy and industrial economics profession to predict, indeed create new regulatory failures organization, and to other academic avoid or repair the financial and T through exploiting the complacency of disciplines, the behavioural sciences economic crisis that began in 2007 and in particular. She sees greater creative continues to this day has prompted regulators. Like retired generals at staff synergies between laboratory and a certain amount of soul-searching college we lecture in detail about the field experiments; as well as better among our colleagues – but not, it must last war, much less about the previous linkages between microeconomic be said, very much. There is no shortage one, and without noting that the and macroeconomic studies of of economists from one school or tribe reason the last war happened the way development. Her advice to those pointing the finger of blame at other it did was because too many generals who, early in their careers, would schools and tribes, usually to claim that thought they had learned the lessons of follow in her footsteps into applied the first group was right all along. But the previous one. We could learn a lot development economics is first to take there has been little overt change of from the way in which biologists study time out to gain direct experience in mind by economists who command the co-evolution of predators with their the field by assisting some of the least respect among their peers. This prey. advantaged in our global village. contributes to a startling discrepancy between what it feels like from the We lack lucidity about our own Esther enjoys being in MIT’s inside to be doing economic research profession, failing to note that whereas ‘intellectual bubble’ (as she describes – that there has never been a better most industrial innovations come from it), appreciating the diverse, lively, time to be doing this, never better outside the circle of established firms, challenging and non-hierarchical data, methods and opportunities – and we operate hiring policies based on society of which she is part. Listening the widespread perception among publications edited by a small circle of to her thoughtful views and insightful policymakers, journalists and the public the profession’s most admired insiders. Marshall Lectures this year, we that the economics profession has never It’s as if the only route to success in could not help but be reminded floundered more helplessly in the face the restaurant business were to submit of her former MIT colleague Paul of world events. your meals in advance to a committee Samuelson’s philosophy that when of established chefs who would taste we do economics, it is important both True, depressions and financial crises are them, suggest improvements to the to do ‘economics with a head’, but not the only economic developments recipe and eventually approve them equally, ‘economics with a heart’. that matter. Much of the innovative several years after first submission. Perhaps then it is no slight coincidence research action is in microeconomics Certainly, ideas keep fresh for longer that with her charming demeanour where new data and methods (notably than food, but still… and creative research, Esther lab and field experiments) have epitomises both qualities of head and transformed our understanding of In spite of it all, it remains a wonderful heart in such ample measure. economic decision-making and the time to be doing economic research! impact of policy, in certain domains. Tony Cockerill and Sriya Iyer But we have been slow to translate this Paul Seabright

8 ticket. Indeed Frank was eventually to change his mind. He had extremely high Obituaries say that general equilibrium’s major standards that he applied even more contribution was a negative one. It was harshly to himself than to others. He has to make precise the conditions that had left an indelible mark on the thinking of to hold for what he perceived to be serious members of the profession and I Frank Hahn 1925–2013 Adam Smith’s conjecture, that greedy doubt if we will see his like again. people in a competitive environment could bring about a sort of social G.C. Harcourt optimum Frank Hahn, who died 29th January Frank’s great love of mathematics led 2013, was an economist of international him always to strive for preciseness stature. With his inspirational intellect, in analysis, hence his attraction to Frank attracted both young economists general equilibrium. But increasingly he in Cambridge and the future Nobel recognized that for the economics of laureates from the United States, Keynes to be properly developed; it may encouraging and entertaining all be better sometimes to be “vaguely right around him with constructive attacks on rather than precisely wrong”. A most received, sometimes simplistic theory. At succinct statement by Frank of this view the same time he was willing to battle is in his courageous 1982 Birmingham other economists both in Cambridge, lectures, Money and Inflation, in in Whitehall and around the world, for which he criticizes the new classical their theoretically illiterate attacks on the macroeconomics of the Lucasians, beautiful and logically consistent General Equilibrium theory, about which he co- Photograph by kind permission of the Master and writing that he had been forced to Fellows of Churchill College make at times “plausible” rather than authored a definitive text with the visiting “clinching” arguments. Overseas Fellow and Nobel Laureate, In this tribute to Frank Hahn I , in their 1971 General concentrate on his understanding of Frank had a deep understanding of Competitive Analysis. and contributions to the economics the nature of money and its link to an of Keynes. These start with his LSE inescapable environment of fundamental Frank Hahn was born on 26 April doctoral dissertation, “The share of uncertainty in which all major economic 1925 in . He moved to Prague in wages in the national income. An decisions had to be made. With his 1931 and left for England in 1938. He enquiry into the theory of distribution”, colleagues he built on this base analysis became a navigator in the air force in the Second World War, and then resumed Frank amalgamated Keynes’s aggregate of the implications of missing markets for his interrupted higher education at the demand and supply analysis, with the the processes at work in the economy. London School of Economics, marrying then state-of-the-art theories of the firm Earlier on he had made an astute analysis Dorothy Salter in 1946 and obtaining and entrepreneurial behaviour. He related of the implications for accumulation a lectureship at Birmingham in 1948. the short-period level of overall activity and growth theory of the same insight. He was subsequently elected Reader in to the share of wages in the national With Bob Solow he investigated the at Birmingham income, exploiting the implications of the implications of imperfectly competitive before taking a post as a Lecturer in differences in the marginal propensities market structures within the Keynesian system, developments that have Economics at Cambridge in 1960, the to save of wage-earners and profit- year that Churchill College was opened receivers. increased our positive understanding as well as contributing an incisive critique and took in its first fellows. of the results of modern, non – anti – As well as his many articles, Frank The late 1960’s were exciting if fraught Keynesian macro analysis. was associated with (at least) three times in the Cambridge Faculty of major treatises: the 1964 survey of Economics. The battle between the the theory of economic growth in The Frank had very clear views on the links between theory and policy and was “neo-Ricardians” and the neoclassicals Economic Journal, written with Robin was in full swing. Frank collected Matthews, the role model for survey extremely modest about what could be claimed – hence his considerable ire for around him the bright young turks of articles ever after; the 1971 definitive Cambridge – Chris Bliss, Jim Mirrlees, volume on modern general equilibrium those who claim that their policies are based on coherent theoretical structures Geoff Heal, Partha Dasgupta, Joe Stiglitz, theory written with Ken Arrow; and the which show that their predicted results , and myself. Together 1995 critique from within of modern will follow from implementing their with more senior economists such as macroeconomics, written with Bob advocated policies. Nevertheless, with James Meade, Michael Farrell and David Solow. Increasingly he came to accept Robert Neild and then with the 364 Champernowne, we confronted the that general equilibrium theory was not British economists, he went after the old guard, led by Lord Kahn and Joan the appropriate approach with which to ill-informed and damaging policies Robinson, who claimed to inherit the tackle Keynes’s insight, that the monetary implemented by Geoffrey Howe as mantle of Keynes. When Frank returned and real aspects of the processes at work Chancellor of the Exchequer in the early to the chair in Cambridge in 1972, in capitalism had to be integrated from 1980s. he decided to abandon the exclusive the start of analysis, and could not be Monday Political Economy Club at King’s captured within a general equilibrium Frank Hahn was a serious intellectual and set up a rival Churchill Economic framework where money is at best a who thought deeply and was willing to Theory seminar also on Monday

Economics 9 Cambridge evenings. It triumphed and rapidly Analysis of Markets and Games: Essays in displaced its rival. Honor of Frank Hahn. Of course, Frank could not retire from active economics, Frank’s intellectual energy knew no and promptly took a post in Siena, to bounds and he was an economist held which he would invite his colleagues for in the highest regard internationally. As stimulating conferences in the glorious a mark of that international reputation Certosa outside the city walls in a he was elected President of the monastery on a Tuscan hill – a wholly in 1968–69. In that suitable place for Quakers to meet, capacity, he launched a strong critique though with the gastronomic delights to of the inability of General Equilibrium tempt a pope (Frank always had a secret theory to contain a role for money yearning to be a prelate, a Lord, or at with a research programme to redress least a rural dean). some of the shortcomings of General Equilibrium theory – its lack of a theory Another of Frank’s initiatives was to of unemployment, money and market establish (and secure funding for) adjustments. While very much the the Churchill Lectures in Economics, agenda of the earlier Keynes, this was which enjoyed lectures from Peter to be more rigorously grounded in a Diamond, Paul Milgrom (of spectrum detained in conditions which were not coherent theory of imperfectly informed auction fame), Douglas Gale and Ariel conducive to successful rehabilitation; agent behaviour. Rubinstein, all subsequently published in hospitals where care could be by Cambridge University Press. It was given more effectively and humanely. The resulting project, known informally another example of how he saw the It was important that her empirical as the Risk project, was supported by College as a co-partner with the Faculty investigations were valued for their the then Social Science Research Council and the University in supporting research intellectual merit, but more important and ran until 1991. It attracted an while providing a congenial location for to her was that they were vehicles for amazingly impressive group of young the intense personal interactions that the building explanatory middle range theories which would offer avenues for researchers such as , David galaxy of brilliant economists he gathered making change in policies and practices Kreps, Oliver Hart, Mark Machina, Lou together unleashed. and for the mobilisation of those who Makowski, Douglas Gale, Ben Lockwood, had little voice - the vulnerable, the poor David Newbery Jonathan Thomas, Paolo Gottardi, David or the elderly. Canning, Bob Evans, Paul Seabright, Luca Anderlini, Costas Gatsios, and David Dorothy Wedderburn (1925– It is this theme of seeking change for Kelsey, as well as many members of the 2012) the public good which is woven as a Faculty. The Risk Project also attracted golden thread throughout her rich and distinguished visitors, such as Bob Solow, It was as a research officer of the varied life. She always looked for sound Ken Binmore, John Geanakopolos, Department of Applied Economics analysis to lead to real change. We Herakles Polemarchakis, David Easley, from 1950 until 1965 that Dorothy see this first at Imperial College where Sandy Grossman, Menahem Yaari, and Wedderburn, laid the foundations with Joan Woodward she founded Steve Morris. Most of the researchers for her academic career. She left the the Industrial Sociology Unit, which funded under this project went on to Faculty to build up industrial sociology laid the foundations of the thriving distinguished academic careers. at Imperial College and ultimately to Imperial Business School today. Just become the first principal of Royal as political economy is more than Frank’s weekly internal Risk seminars Holloway, University of London. She economic equations and models; so she were typical of his idiosyncratic but came up to Girton to read economics in knew that technology is more than the effective research style – known as the 1940s, yet she was never persuaded underlying science and its manifestation ‘Quaker’ meetings without a formal of the ubiquity of ‘rational man’ or even, in machines. Technology is infused with agenda but where the spirit moved a phrase more to her liking: ‘rational knowledge, created and used by people participants to speak – if they were woman’. She upheld the fundamental who bring their own interests and quick enough to seize the chalk. Newly importance of academic rigour within concerns into its very existence to impact economic and industrial performance. minted post-docs could hold forth before which mathematics, equations and equilibrium models have their place, It was through her move to Bedford visiting Nobel Laureates, rapidly gaining but in seeking to understand aspects of College where we witnessed the full insights, experience and confidence industrial or political economy, she knew strength of her remarkable academic that stood them in good stead later one had to infuse such analysis with a leadership in the development of the on. These Quakers were intensely sociological imagination. merged Royal Holloway and Bedford productive, producing a steady stream New College. of green discussion papers. In 1989 the She was primarily an empiricist. She project published Economics of Missing documented the what, how and why Dorothy was always fuelled by values and Markets, Information, and Games of things on the ground: in workshops steered by a sense of what would, at a (edited by Frank) that summarised much where there was no equal pay; in particular time and place, be ambitious of the contribution of the group. In factories where redundancies and yet achievable; she was a pragmatist; a 1992 his colleagues presented him with restructuring were necessary through practical visionary determined to advance the suitably weighty Festschrift on his changes in technology or globalisation; equality of access, fairness, academic retirement from Cambridge: Economic in prisons where women were excellence, interdisciplinarity and to build

10 sufficient consensus for change to secure Robin Marris (1924–2012) the future for the better. Robin Marris, who died on 25 September Sandra Dawson 2012, was a distinguished member of the Faculty for a quarter of a century, I first met Dorothy Barnard, as she best known for his work on corporations. then was, when we were both reading Economics Part II in 1945–46. The Economic Theory of Managerial I particularly remember her at Dennis Capitalism (1964) focused on the Robertson’s lectures, along with Harry separation of ownership from management in large firms and the Johnson, Robin Marris, Lesley Cook, weakness of shareholder control, and Robert Neild, among others. which allowed managers considerable I next came across her when she discretion. In Robin’s view, managers joined the Cambridge Department used their discretion to make their firms of Applied Economics as a research grow faster than shareholders would officer. Her research there was nearer prefer, to get higher salaries and status. industrial sociology than economics, The book attracted a lot of academic and among her publications then and attention, and Kenneth Galbraith’s 1967 later were “White Collar Redundancy”, The New Industrial State made it known “Redundancy and the Railwaymen”, to a wider audience. “The Aged in the Welfare State” Earlier, Robin had published Economic (with Peter Townsend), and “Poverty, Photograph by kind permission of the Provost and Inequality and Class Structure”. Her last Arithmetic (1958), an applied statistics Fellows, King's College, Cambridge. publication was “Justice for Women: the text based on his Cambridge lectures. Photograph by Edward Leigh. case for reform”. The Economics of Capital Utilisation (1964) was an innovative study of shiftwork. He argued in How to Save After the DAE Dorothy joined Imperial the Underclass (1996) that universal College, working as a colleague education and liberalisation had personality. Christopher Bliss remembers with Joan Woodward, and with her badly hurt workers with low IQs. that ‘he was an inspiring teacher, who setting up the Industrial Sociology Ending Poverty (1999) summed up his Unit. The pair attracted large sums long involvement with international always made me feel that I was not just a from funding bodies, and their work development. little student, still learning the trade, but on the relationship between structure, rather a full member of the economics technology and performance earned In a fascinating book about Cambridge, profession.’ them worldwide renown. Her work Reconstructing at that time had a major impact on with Imperfect Competition (1991), In the 1950s, Robin helped Piero Sraffa sociological debate and attitudes, as did Robin argued that Keynesian macro direct the Faculty’s research students. her articles in New Left Review and the theory made sense only if it was Geoff Harcourt recalls that ‘when I Socialist Register. combined with the theory of imperfect arrived in Michaelmas 1955, we all competition. Curiously, one man, Richard fronted up to RLM in the old Marshall I encountered Dorothy again when I Kahn, had played a key role in developing library in Downing Street. He was both lines of theory in the 1930s. What joined Imperial College as Professor of extremely lively and helpful to us all. He kept the strands apart, Robin believed, Economics in 1978. I discovered then tried to bring the Keynesians and the were tensions in the triangle of personal how tough she was. She had already Robertsonians together, but had little relationships between Kahn, Keynes and success.’ (I have not been able to identify had a struggle in setting up the Industrial . Sociology Unit and was now working any of Robin’s own PhD students: can any reader help to fill this gap?) hard to establish the new department. Robin came up in 1941. He got a She left Imperial in 1981 to become First in Part I of the Economics Tripos In 1976, seeing no prospect of further head of Bedford College. The College in 1942, but then became an RAF promotion in Cambridge’s divided faced drastic cuts and the loss of its pilot, graduating with another First Faculty, Robin moved to the University Regent Park sites. Dorothy took a major in 1947. His contemporaries included of Maryland and in 1981 to Birkbeck, role in bringing about the merger with Harry Johnson, I. G. Patel and Aubrey London, from which he retired in 1987. Royal Holloway College, becoming the Silberston (all 1946), Robert Neild, and He was a most attractive person and principal of Royal Holloway and Bedford Angus Maddison, a 1948 graduate who wonderful company, remembered in 1985. Faced with government cuts she in an autobiographical sketch mentions affectionately even by most of those with took the difficult decisions to put it on a Robin as one of the fellow-students who whom he crossed swords. sound financial footing, and ensured that influenced him. it had a successful future. After working in the Treasury and the Adrian Wood UN, he returned to Cambridge in 1951 On a personal level she was a loyal and as a fellow of King’s, where he was for enduring friend, and in all respects her many years Director of Studies, and as life was a remarkable and valuable one. More details can be found in obituaries in the a lecturer (later a reader) in the Faculty. Guardian of 14 November 2012 and the January A long series of students, including me, 2013 issue of the Royal Economic Society Aubrey Silberston benefited from his lively mind and warm Newsletter.

Economics 11 Cambridge Debraj therefore set out an alternative Mervyn King theoretical economic model for conflict based on his recent research which allowed for both individual and group gains (and losses) from conflict incorporating altruism or intra group cohesion. Importantly the central difference with earlier research is that the resultant model incorporates a polarisation measure in addition to fractionalisation which provides a measure of conflict over public goods in contradistinction to the fractionalisation measure that captures conflict over private goods. The Lecture was concluded by an extensive discussion of a detailed empirical investigation which provided strong support for the theoretical model and, in particular, the relevance of Peter Schrank, The Economist polarisation as an explanation for internal conflict. ervyn King (Lord King of Lothbury) ended his ten-year Sir Annual Further details may be found at econ.cam. Mterm as Governor of the Lecture ac.uk/cremic/news/stone.html Bank of England at the end of June. Mervyn graduated (eponymously from Richard J Smith King’s) with a First in Economics in he fifth in the 1969. He then joined the Department series of the Centre Our Graduate Experience of Applied Economics in the Faculty Tfor Research to work with Richard Stone and in Microeconomics at Cambridge Terry Barker on the development of (CReMic) Sir Richard a computable Multisectoral Dynamic Stone Annual e started our graduate experience Model of the UK economy which was Lectures at the as MPhil students in 2008. One the central part of the Cambridge of our lecturers predicted that by was held on 16 May W Growth Project. His focus was on the end of the year, we would need to look 2013 as on previous occasions in the corporate taxation policy and dividend up ‘leisure’ in a dictionary. Although the Bateman Auditorium at Gonville and behaviour. MPhil was tough, it prepared us well for Caius College. The Lecture provides independent research. Selma particularly an opportunity for a leading scholar to This led to two major books: ‘Public enjoyed the Empirical Microeconomics course present and discuss issues of particular Policy and the Corporation’ (1977) taught by Tom Crossley, which covered current research interest. The Lecture and ‘The British Tax System’ (with numerous up-to-date research techniques in a also honours Sir Richard Stone, the John Kay, 1978). During his time in founding Director of the Department of short space of time. the DAE King was also a Fellow of Applied Economics in the University of St. John’s and Director of Studies in Cambridge. There were many things we did not know Economics. After Cambridge, he when we started our PhDs. One important moved to a Chair in Economics at The Lecture, entitled “Ethnicity and skill we had to learn was to develop a clear Birmingham and then to LSE, where Conflict”, was delivered by Debraj Ray, research question before starting a project. he established the Financial Markets Julian Silver Professor in the Faculty More generally, starting a PhD requires a clear Group. of Arts and Sciences and Professor of agenda. It was only halfway into our PhDs Economics at New York University. The that we found ours. Ansgar decided to work In 1991 he became Chief Economist Lecture started with a brief review of how on the theory of financial regulation under at the Bank of England before being conflicts internal to countries have been the guidance of Soenje Reiche. Selma became appointed, first, Deputy Governor far more prevalent and destructive than interested in household economics under the and then Governor in 2003. His wars between countries since the Second supervision of Hamish Low, who inspired her time as head of the Central Bank World War. Moreover, the majority of to aim high. spanned the later stages of the long the internal conflicts have been ethnic in boom and then the global financial character. Popular explanations for the This year, we were on the job market. crisis and its aftermath. He termed origin of internal conflicts have typically Thankfully, it was a short affair, as we were the period before the crash ‘the NICE been based on notions of class and both offered a Postdoctoral Fellowship at the decade’ – non-inflationary consistent economic inequality. A major thesis of ‘other place’. The placement officers Pontus expansion. But he warned against this Lecture is that non-economic markers Rendahl and Alexei Onatski gave us excellent the risk of economic and financial such as ethnicity may provide a powerful advice for our applications and seminars. turbulence as the consequence of and additional or alternative explanation Although we look forward to moving to excessive credit creation. Mervyn is for conflict since it differs between Oxford in October, we will miss the Faculty taking up a visiting professorship at individuals of similar class and income or and everybody in it. We will remember the Stern School of Business, New wealth. However, previous research based Cambridge fondly as the place that allowed York University. on particular measures of ethnicity such us to meet each other! as fractionalisation has failed to provide Tony Cockerill a significant and satisfactory explanation. Selma Telalagić & Ansgar Walther

Editorial Team: Faculty of Economics, University of Cambridge, Austin Robinson Building, Sidgwick Avenue, Willy Brown, Tony Cockerill, Sriya Iyer, William Peterson, Marie Butcher, Yvonne Gibbs Cambridge CB3 9DD [email protected] econ.cam.ac.uk