Economics Cambridge

Cambridge Faculty of Economics Alumni Newsletter

Welcome from Andrew Harvey Profi le: he fourth Alumni newsletter contains pieces on the Marshall and Stone lectures, new arrivals, conferences, Clare Spottiswoode CBE Tdistinguished alumni and visiting professors. We also The Swing of the Pendulum have an article by Angus Deaton on his experiences in 1960s Cambridge and another set of recollections on Cambridge 30 years later, from Tavneet Suri. Last year’s piece by Kenneth ank accounts, life insurance policies and gas Arrow about his visit in the academic year, 1963-64, prompted bills. These seemingly mundane yet crucially some correspondence about the so-called `secret seminar’. In Bimportant artefacts of contemporary living particular, Aubrey Silberston contacted me and we are delighted defi ne much of Clare Spottiswoode’s activities over to include an article by him on the topic. Any other views the past twenty years. She is often seen as the on this or other activities in times past would be more than consumers’ feisty standard bearer in the face of welcome! powerful business interests. But this is an image she rejects, saying fi rmly that her public interest Hamid Sabourian is stepping down from the Chairmanship of the Faculty, having served four years. He will shortly be escaping to Hong commitment and the role she plays are “to make Kong, where he will be spending some of his well-earned sabbatical sure the pendulum [of the market] does not swing leave. Richard Smith, our Professor of Econometric Theory and too far in one direction or the other”. Economic Statistics, will be taking over. We all wish him well in a job Continued overleaf that has become increasingly challenging over recent years.

The big event this year was the conference held in June to mark the 75th Anniversary of the publication of Keynes’ General Theory. The big event next year will be the Royal Economic Society Annual Conference, which will take place in March 2012. It has not been held in Cambridge for many years and we are delighted to have the opportunity to host it. The local organisers are Solomos Solomou and Pramila Krishnan, while Chryssi Giannitsarou is the Deputy Programme Chair. Keynote speakers will be Elhanan Helpman and Ariel Pakes of Harvard University and Nancy Stokey from Chicago. More details on www.resconference.org.uk

There were conferences in June to mark Geoff Harcourt’s 80th birthday and Hashem Pesaran’s 65th. The annual garden party for staff and graduate students provided the opportunity to say farewell to William Peterson and Ken Coutts, both of whom have made a massive contribution to the running of the Faculty. They have been with us for a long time and will be sorely missed. (Having said that I have managed to persuade William to help with the Newsletter this coming year).

Finally a reminder that the Alumni Weekend will, as usual, take place in September, 23-25th to be precise. The Phillips machine will again be coaxed into action.

Issue number 4 Autumn 2011 In a satisfyingly eponymous manner, as was regarded as fl awed, because One of the Commission’s proposals, the co-education wave got underway suppliers could – and did – infl ate their which has already been received with in Cambridge, Clare was the fi rst costs rather than reduce their prices in approval by the Treasury, is that in woman undergraduate to be admitted order to meet their effi ciency targets. diversifi ed banking groups, the income to Clare College (1972-75), where she Instead, the British approach has been fl ows and assets associated with retail read Mathematics for Part 1 of the to drive effi ciency up and costs down banking should be ring-fenced from Tripos before transferring, as she had by holding regulated industries’ price investment banking and other more planned, to Economics for Part 2. Both increases below the general rate of risky activities. This is provoking robust she and her soon-to-be husband, an infl ation (so-called RPI-X). reactions from the larger banking architect, then won Mellon scholarships groups who are concerned about the to Yale, where she gained an MPhil in To do this effectively called on Clare and implications of such a measure for their Economics. her small team to build an economic international competitiveness and for model for price regulation based on the increased cost of funds which, they Until her current spell as a member detailed knowledge of the natural say, will result from the need to hold of the government-appointed gas sector, at the same time avoiding more reserve capital. Independent Commission on Banking, becoming overly dependent on the Clare’s best known role has been as gas suppliers for information and But alongside their concern that the Director-General of Ofgas (1993-1998), advice. For this she needed all her banking system as a whole should the former regulatory body for the skills in economics, which had been natural gas industry in the UK. She well sharpened during her spell at the have suffi cient reserves of capital to came to this after time spent working in Treasury. For most of her time there allow it to absorb any future fi nancial the economics section of the Treasury, her brief was almost single-handed shocks, Clare and her colleagues are which she followed by not only starting responsibility for ‘World Economic placing equal weight on the consumers’ her own computer software business Prospects, Europe and Developing interest. They are recommending that but starting her family as well. Countries’. She reported to Denis the Financial Conduct Authority, the Healey and then to Geoffrey Howe as regulator, should have a primary duty As Head of Ofgas, which was later Chancellors of the Exchequer and had to promote effective competition. In incorporated into a combined her policy papers on Europe returned this way, aspects such as transparency regulatory body for the gas and with annotations in Mrs Thatcher’s own of product pricing and ease of account electricity markets as a whole (Ofgem), hand. switching would be improved, and she was faced with building a service innovation and new entry framework for regulation and policy The next swing of the pendulum encouraged. And, against the more or less from scratch during the saw Clare, in a post approved by background of the overall capital early stages of privatisation in Britain. the Financial Services Authority, safeguards, it would be possible for She needed her skills in managing representing the interests of individuals individual banks to fail. Now that the swing of the market pendulum with life insurance policies underwritten would mark a signifi cant swing of the from the fi rst day. In sharp distinction by Norwich Union, now Aviva. pendulum. to the Conservative government’s Revenues from premiums had over time later approach to the privatisation of exceeded payments against claims, so Refl ecting on her time in Cambridge electricity supply and to railways, British that the company had accumulated an in the 1970s, Clare has found the Gas Corporation, the former monolithic ‘inherited estate’ of funds amounting grounding in Mathematics she had state-owned enterprise, had been to £6 billion. Policyholders feared that in Part 1 invaluable and regrets that transferred virtually unchanged to the the company would retain most if not moving from one Tripos to another now private sector. Despite the regulator all of this for its own use. Working seems to have become rather more being charged with maintaining an on their behalf, Clare negotiated a diffi cult. She recalls the dominance in even-handed approach to the industry 70/30 distribution in favour of the Economics teaching of macroeconomic and its customers, the screensaver on policyholders in return for them waiving analysis, interpreted mainly from a left- one of her senior colleagues’ computer their rights to any further distributions, wing point of view, although classes exclaimed boldly ‘I hate British Gas’. an outcome more than double what had been achieved in previous cases. and tutorials with Mervyn King provided Following the lead set by Steven something of an antidote. Somewhat Littlechild, the architect of regulatory Last year, Clare became a member wryly, she wonders whether her interest policy in Britain, a large part of Ofgas’s of the Independent Commission in, and commitment to, effi cient responsibilities was to act as a surrogate on Banking, charged with advising markets and consumer sovereignty is in for the competitive process in an government on reforms to the banking spite of all this – or perhaps because of industry whose inherited structure gave system so as to promote fi nancial it. And as she compares the Economics the dominant supplier considerable stability and competition. The Faculty then and now, she notes that market power. The American approach Commission published its interim report yet another pendulum has clearly of ‘rate of return’ regulation, by in April and, after consultation with swung. which the regulator set limits on profi t customers and providers, is due to make margins as a proportion of revenues, its fi nal recommendations in September. Tony Cockerill

2 My Cambridge in the 60s and 70s

came to Cambridge in the 60s in the DAE, who were unstintingly great mathematical economist and intending to be a mathematician and generous once they realised just how statistician, who managed to live in Ia rugby player (“Fitzwilliam College little I knew. Ken Wigley patiently both camps, but somehow never built a needs good second-row forwards, explained to me what a t–value was, bridge between them. Mr. Deaton”.) The fi rst ambition only and Geoff Whittington, then also in briefl y outlived the second (idleness the DAE, encouraged and listened to And then there was the tearoom and waning interest), and I changed me; he had (and still has) a rare ability where, in my time, Nicky Kaldor and to economics in time to take Part II of to show his admiration for a younger Joan Robinson were king and queen, the Tripos. I was fortunate to fi nd a colleague’s work, and to help improve each surrounded by a group of dedicated and inspiring supervisor in it, even in the face of overwhelming courtiers, but with comments thrown Ken Wigley of the DAE, and quickly evidence of its fl aws. Another friend from group to group. (“An international learned that I had fallen on my feet; and mentor was Gwyn Aneuryn-Evans, pig standard, Nicky! What are you I loved the weekly round of reading, terribly and incomprehensibly isolated talking about?” “You are deaf, Joan, thinking, writing, and discussion and I from the faculty, who lived (and soon not a pig standard, a brick standard.” realised, after years in the mathematical died) in a thick cloud of tobacco smoke The brick standard was one of Kaldor’s wilderness, that I could write and liked in a small offi ce inside the front door (many) pet schemes; bricks are made to. Lectures were less important to me, on the ground fl oor (now the reception under constant returns from readily and were not much emphasized by the faculty. I remember struggling with David Champernowne’s econometrics course whose text was Malinvaud— even in French more approachable than the lectures. Because my undergraduate exposure to economics had been brief and involuntary, I had not seriously considered that I might do well, nor thought about academic economics as a career. But after a miserable period in the Bank of England (very different then), I managed to persuade Jack Revell to bring me back to the DAE as a research assistant. Jack very soon accepted a chair in Wales, and I was left funded but uncommitted, and began learning economics seriously, albeit in a haphazard way, talking to people, reading, and trying my hand at things that interested me.

Revell’s project was an offshoot of Richard Stone’s growth project (of which Ken Wigley was also a member) and Dick quickly became not only my supporter and my friend, but in his work, his writings, and his life an area). He was an inexhaustible font of and widely available materials, so price exemplar of what I wanted to be. Dick econometric and statistical knowledge, stability is guaranteed, if I remember led by example, not by teaching; I who worked with me in spite of my the argument.) When Frank Hahn came cannot remember him ever explaining ignorance, and in exchange only for back to Cambridge in 1972, there was anything to me, but I avidly read his someone who recognised his existence. a third court, and there were many books and papers, and I was often At that time, the faculty had little other individuals I remember, including invited to share his and Giovanna’s interest in, and some hostility to the use (not-yet-a-building) Austin Robinson social life in Millington Road. I got of econometrics and formal statistical (“You are a grandpa again, Austin” to know his friends, including James methods, and that contributed to the from across the room), Phyllis Deane, and Margaret Meade, as well as isolation, not only of Gwyn Evans, Mike Farrell, Charles Feinstein, Brian many international visitors who came who had been “brought in” to teach Reddaway, Bob Rowthorn, Ajit Singh, to dinner – I have clear memories econometrics, but also of Dick Stone, and David Champernowne, as well as of Galbraith, Kantorovich, Leontief, who was also marginalised at that a cohort of closer contemporaries, Tony Modigliani, and Tinbergen. I learned time. David Champernowne, who Atkinson, Christopher Bliss, Michael how to do research from my colleagues became my PhD advisor, was a truly Ellman, Oliver Hart, Mervyn

3 King, David Livesey, David Newbery, Roger Witcomb, and for periods, Joe Ken Arrow, James Meade and the Secret Seminar Stiglitz and Eric Maskin. Bob Solow, Ken Arrow, Hyman Minsky, Roy Radner and Axel Leijonhufvud were James came to Cambridge. The memorable visitors. Although much supporters of Richard and Joan were of the discussion fl ew over my head, there, together with several others I picked up a lot, including just how – at different times, Nicky Kaldor, much there was to know. One notable Richard Goodwin, Brian Reddaway, lesson was the breadth of economics; David Champernowne, Harry Johnson, many different positions were held in Jan Graaf (quite outstanding), Robin that room, often well-thought through Matthews, Luigi Pasinetti, Ruth Cohen, and eloquently defended in what Michael Posner, Kenneth Berrill, myself could be a cacophonous and even and others. Piero Sraffa was invited but bitter debate. Joan Robinson’s constant very rarely came. He confi ned himself challenges to neoclassical economics to Sunday walks with Richard and Joan. have stayed with me, not the detail but Distinguished visitors to Cambridge the notion that something was (and were often invited, including, on at to me still is) deeply wrong. I learned least one occasion, Paul Samuelson. that economics and politics could not James Meade was invited to attend and should not be separated. Nicky the secret seminar, and did so initially. Kaldor’s intelligence, wit, eloquence, He felt however that the atmosphere and deep knowledge of economics was not friendly to him, and after a shone brilliantly in a group where none time he withdrew, and started a lunch of those qualities were in short supply. time seminar for all Faculty members. He was the best debater I have ever This was not a great success, and heard, but his dismissals and arguments remember well Ken Arrow’s year in eventually James returned to the could wound, no less so for their the Faculty in 1963-4. He was not secret seminar, which could certainly wittiness and the merriment that they the only distinguished visitor that I be a very stimulating group. Pasinetti, provoked. The tea-room atmosphere year. Robert Solow was there also. in his recent book (Keynes and the did not favour those with a limited taste They shared a room next to mine in Cambridge Keynesians, CUP 2007), for this sort of thing, and James Meade the relatively new Faculty (now Austin has much of interest to say on its and Richard Stone were rarely present. Robinson) building. Their presence was background and its atmosphere, That the tea-room is now the Stone a great joy to us, or to nearly all of us. together with his assessment of its room marks a welcome recognition that Ken Arrow’s main contact was of course achievements and failures. would not have been forthcoming 35 Frank Hahn. Bob Solow however had years ago, although it is also hard to a less happy relationship with Joan As the 1960s progressed, however, the escape the irony. Robinson, who attacked him relentlessly seminar began to lose its edge. Some at every opportunity. of the principals were ageing, several Cambridge in the early 1970s was issues that had preoccupied the group full of great economists, drawn Ken Arrow is quite right that James were losing their interest, and there from many schools, countries and Meade’s election was not universally were problems about which younger traditions. It was an environment in popular, especially among the Faculty members to invite. Finally, which undergraduates, researchers, Keynesians, who had hoped that around 1970, Kahn sent round a curt and faculty could learn and develop. Nicky Kaldor or Joan Robinson would note. The meeting (he never called it If the old Keynesians were nominally be elected. James’s fi rst contact with a seminar) had served its purpose, he in charge, almost all of the elements Cambridge, after his election in 1957, said, and would be wound up. of modern economics were well- was certainly not a happy one. He represented. In spite of (or perhaps received a phone call from Austin In time of course James became fi rmly because of) the chaos – little serious Robinson, Chairman of the Faculty established in the Faculty and was undergraduate teaching (Brian Board, who told him that the second widely liked and admired, attracting Reddaway used to say ironically that year theory lectures, traditionally such economists as Christopher Bliss, we academics needed to stick up for given by the Professor of Political Geoff Heal and Tony Atkinson, to the 40-hour year), no graduate courses, Economy, and thus previously by Dennis name only a few. He retired from his haphazard supervision of PhD students Robertson, were henceforth to be given chair early, in 1967, saying that one and a bias against formal empirical by Joan. James long remembered this reason for this early retirement was work (wouldn’t it have been great if all bitter welcome. that he wanted to avoid the burden of that scepticism had been devoted to examining. He stayed on as a fellow of improving econometrics, rather than Ken Arrow is, however, wrong about Christ’s, won the Nobel Prize in 1977, dismissing it?) – it worked, certainly for the secret seminar. This took place and remained a uniquely important me. weekly on Mondays during term in fi gure in Cambridge economics. Richard Kahn’s rooms in King’s. It had Angus Deaton been going for several years before Aubrey Silberston

4 Sir Richard Stone Profi le of a Pitt Professor: Annual Lecture Gary D. Libecap

he third in the series of the Centre for Research in TMicroeconomics (CReMic) Sir Richard Stone Annual Lectures at the University of Cambridge was held on 11 November 2010.

The Lecture, entitled ‘The Shape of the World: Measuring Global Development’, was delivered by Angus Deaton of Princeton University (see article, page 3). The central issue addressed by Angus was entirely appropriate for the Annual Lecture being a topic very much of a concern to Richard Stone. His subject was that of measurement in the global context. Angus highlighted the intrinsic diffi culties associated with attempts to construct measures ater, land, forests and fi sheries Environmental Science and of cost-of-living and income – the circumstances under Management and Department of for different countries that are Wwhich property rights to Economics, University of California, internationally comparable. In natural and environmental resources Santa Barbara. He is also a Research particular, different patterns of can be defi ned and enforced to Associate at the National Bureau of demand and relative prices across address the problems of open access, Economic Research and a Sherm and countries create an immediate and how or when markets might be Marge Telleen Research Fellow at the problem for the construction of developed as options for more effective Hoover Institution, Stanford University. relevant international purchasing resource management and allocation, power parity based measures. As are some of the most important and During his stay at Cambridge, Gary exemplifi ed by the International policy-relevant questions for our planet started two new book projects, Comparison Program for 1993 and today. Gary D. Libecap, currently the A New View of Environmental 2005, an improved basis for their 2010-2011 Pitt Professor of American Regulation: A Public Choice Economic construction can induce dramatic History and Institutions at the University History, Resources for the Future and changes in the poverty line with of Cambridge, and Professorial Fellow Environmental Markets: A Property of St. Catharine’s College, focuses on consequent policy implications. Rights Approach, with Terry L Anderson, these vital questions. Gary examines Ideally when attempting under contract with Cambridge the bargaining and transaction costs to construct internationally University Press. He travelled to Chile in involved in collective action to establish comparable price indices, goods late March as part of a National Science property institutions and markets. His should be comparable across Foundation sponsored team to begin work encompasses economics and countries and locally common and analysis of the management of aquifers representative, objectives that are law, economic history, natural resource economics, and economic geography. in the Atacama Desert – the driest part likely to be incompatible. Even if His latest books refl ect his varied of the planet, but also the source of quality-matching is successful, the interests: Owens Valley Revisited: A one-third of the world’s copper, where respective weighting of goods in Reassessment of the West’s First Great mines use processes that are water the consumption basket may be Water Transfer, (Stanford University -intensive. quite inappropriate domestically. Press, 2007) and The Economics of All is not lost, however. Angus Climate Change: Adaptations Past and Gary Libecap is a native of Montana, emphasised that alternative Present, co-edited with Richard Steckel is married to Ann Libecap and has approaches based on global (University of Chicago Press and NBER, two children. While in the UK, he surveys such as the Gallup World 2011). and his wife have explored the British Poll could offer a solution that Isles - often on foot - and in the US, provides reliable and internationally Gary is based in sunny Santa Barbara he spends his free time fl y fi shing near comparable measures. where he is the Distinguished his family cabin in Montana - in an Professor of Corporate Environmental environmentally sustainable way of Richard Smith Management, Bren School of course!

5 Profi le: Giancarlo Corsetti

olicy-relevant research and teaching markets and exchange rate movements • How do fi nancial shocks impact on in macroeconomics – once the clearly have profound effects on output, credit markets, giving rise to ‘toxic’ Phallmark of Cambridge economics employment, prices and investment assets and resulting in problems of – is set to regain its international profi le in all sizes of economy. In the NOEM global illiquidity and solvency? with the arrival in the Faculty last year models, general equilibrium is reached of Professor Giancarlo Corsetti. Since in markets that are characterised by • How did relative asset prices – the early-1990s, he has been at the imperfect competition and incomplete he cites residential real estate forefront of the development of New global integration, and by frictions prices in particular – get so out Open Economy Macroeconomics that reduce the speed of adjustment of line as to seriously misallocate (NOEM), whose Keynesian antecedents to shocks, from either the demand or resources, becoming associated he readily acknowledges. As the supply side. An important feature with persistent global savings economists know well, both the of these models is the presence in and investment imbalances and strength and the weakness of Keynes’ equilibrium of output and employment generating an unsustainable original framework of analysis is that it gaps, implying welfare detriment as boom? refers largely to a closed economy – one compared with the outcome under the without a foreign sector. Mundell and assumption of competitive markets. Part of his current research is into the Fleming incorporated a demand-side There are clearly interesting and role of ‘over-borrowing’ in contributing driven foreign sector into the model important challenges for monetary and to global imbalances. In the NOEM so that, with well-functioning goods fi scal policies, and for their international framework, excessive borrowing comes about because of the effect on wealth that occurs when a country’s real exchange rate appreciates, for example because of a positive global demand shock that improves its terms of trade (the export-import price ratio). In the M-F model, the rise in the exchange rate stabilises the economy – export competitiveness is reduced, output is directed to the home market and demand-side overheating is contained.

In Corsetti’s model, by contrast, there is a second-round event with feedback effects which is de-stabilising – precisely the opposite outcome from M-F. This is because the increase in demand against constrained production capacity will boost corporate profi ts and personal incomes – the wealth effect. As global fi nancial markets are more or Giancarlo Corsetti, Stephen Morris and Kiyohiko Nishimura at the Keynes less impaired because they are not Conference completely integrated, this increase in wealth cannot be invested in a fully- diversifi ed global portfolio of fi nancial and assets markets, and with interest co-ordination, in improving and assets; that is, there is limited risk- rates exogenously determined by global stabilising macroeconomic activity. sharing opportunity. forces, the economy could reach a new general equilibrium. This is the In the wake of the global fi nancial crisis, The additional wealth will encourage an model of the small open economy, the Corsetti lists three key questions that increase in current period consumption equilibrium outcome being infl uenced need to be addressed in the next stage on the part of the country’s residents. by the behaviour of prices (assumed of NOEM research: They can leverage this by (over-) to be sticky) and by policy towards the borrowing from abroad. The capital exchange rate (usually assumed to be • Why did conventional models and infl ow is then by defi nition the fi xed-rate). policies for supplying liquidity to counterpart of the defi cit on the current the banking system fail in the face account of the balance of payments. NOEM has been motivated by the need of unprecedented uncertainty The upward movement of the exchange to go beyond the Mundell-Fleming (M- shocks that sharply increased rate has resulted in a misalignment of F) model in a globalising world in which risk premia and destabilised prices in both the goods and the assets the functioning of international asset international fi nancial markets? markets. This leads to a non-optimal

6 allocation of resources, giving the The conference featured many of the came were world leaders in the fi eld potential for an aggravated economic leading names in macroeconomics and of econometrics and included many of cycle that is associated with endemic fi nance, including Markus Brunnermeier Hashem Pesaran’s current and former global imbalances, culminating in (Princeton ), Barry Eichengreen students as well as numerous co- turbulent ‘boom and bust’ adjustments. (Berkeley), John Geanakoplos (Yale), authors. Financial support was provided In these circumstances, conventional Charles Goodhart (LSE), Guido by the Bank of England, the European international coordination efforts by Lorenzoni (MIT), Albert Marcet (LSE), Central Bank, John Wiley and the bodies such as the IMF will be of little Stephen Morris (Princeton ), Kiyohiko Cambridge Endowment for Research in use. Nishimura (Bank of Japan), Jose Finance. Scheinkman (Princeton), Frank Smets But, with an impish grin, Corsetti notes (European Central Bank) and Michael there may be a ‘second best’ outcome Woodford (Columbia University). to all this. If limited risk-sharing Hamid Sabourian and Hashem because of impaired global fi nancial Pesaran of the Faculty of Economics markets restricts credit and results in also featured on the programme. sub-optimal capital asset investment, an The plenary lecture, ‘Mr Keynes and ‘irrational’ fi nancial bubble may help to the Moderns’, was delivered by Paul overcome this under-investment – for a Krugman of Princeton University. time at least. Various papers and videos are available on the conference website Giancarlo Corsetti has come to Cambridge from the European www.econ.cam.ac.uk/keynes- University Institute in Florence, where conf-2011/papers.html Hashem Pesaran and Vanessa Smith he worked primarily on international monetary and fi scal transmission CIMF/IESEG Conference mechanisms and their effects on Staff Comings and macroeconomic interdependence. On 1st and 2nd September 2011 Among several professional affi liations, The Centre for International Goings he is a Fellow of the Centre for Macroeconomics and Finance in the Economic Policy Research (CEPR) in Faculty of Economics in conjunction We are pleased to welcome the the UK. His doctorate is from Yale. with the IESEG-School of Management following people to the Faculty from Together with his Faculty colleagues at Lille Catholic University organised a the Michaelmas Term 2011: and the doctoral candidates in conference on issues related to recent macroeconomics, he is looking forward developments in the links between Oliver Linton (PhD Berkeley, to building a strong research group in macroeconomics and fi nancial markets, 1991) from the London School of Cambridge. with special emphasis on the yield Economics will be Professor of Political curve. One of the aims of this two-day Economy. His research interests are in Tony Cockerill conference was to offer the opportunity nonparametric methods in Financial to exchange views between experts Econometrics. Faculty about the implications of the recent fi nancial crisis for research in macro- Our new University Lecturers are Jane Conferences fi nance. The conference was sponsored Cooley Fruehwirth (PhD Duke, 2006) by the European Central Bank. Keynote from the University of Wisconsin- 75th Anniversary of the General speakers were Paul Fisher from the Bank Theory of England, Glenn Rudebusch from the Madison; Pontus Rendahl (PhD Federal Reserve Bank of San Francisco, European University Institute, 2007) The Faculty, together with Cambridge Frank Smets from the European Central from the University of California, Finance, held a conference in June Bank and Philip Turner from the Davis; Björn Wallace (PhD Stockholm to mark the 75th Anniversary of Bank for International Settlements. A School of Economics, 2011) from Keynes’ General Theory. The aim was selection of papers will be published the Stockholm School of Economics; to provide a forum for a forward- by Cambridge University as part of the Sorawoot Srisuma (PhD LSE, 2010) looking discussion of a broad range series on Modern Macroeconomic Policy from the London School of Economics. of themes, from economic policy Making edited by Jagjit Chadha and Sean models to the theory of fi nance, Holly. Ken Coutts and William Peterson refl ecting the different dimensions are retiring from the Faculty. We of Keynes’ contributions. The global Conference in Honour of M Hashem thank them for their outstanding crisis that has erupted in recent years Pesaran contributions to the Faculty’s teaching, means that many of the themes administration and research. They will addressed by Keynes in the 1930s are On 1st and 2nd July 2011 the Faculty be sorely missed. still relevant today. The new Chair of held a Conference to mark the 65th Macroeconomics, Giancarlo Corsetti, birthday of Professor Hashem Pesaran Christoph Vanberg, Mauricio Prado played a prominent role in organising and his contribution to the Faculty and and Jayant Ganguli will be leaving the the event. Econometrics worldwide. Those who Faculty in Michaelmas Term.

7 The Marshall Lectures 2010–11: James J Heckman University of Chicago

his year’s Marshall Lectures on suitability for employment, rather than parenting and other interventions) ‘The Economics and Psychology signifi cantly improving their stock of is optimised to achieve greater Tof Human Development and human capital. productivity and lower inequality. Inequality’ were given by James Heckman, who has conducted Heckman’s current work, on which the Non-cognitive abilities are personality numerous studies of the impact of lectures were based, investigates the characteristics, or traits. Heckman education and training on earnings, link between differences in abilities uses the well known acronym OCEAN health, labour supply and household and inequalities in incomes and life to summarise the dimensions of production. His analyses measure opportunities, with particular reference personality that are widely used by differences between socio-economic to the socially disadvantaged. He also psychologists: groups in the economic benefi ts of addressed the origin of abilities. At the Openness education, including public and private outset he quotes Marshall: “ I have Conscientiousness costs. devoted myself for the last twenty- Extraversion fi ve years to the problem of poverty, Agreeableness The conventional measure of skill of a and very little of my work has been Neuroticism person is the number of years of full- devoted to any inquiry which does not time study undertaken (‘schooling’). bear on that. “(Report to the Royal Of these, conscientiousness has been A standard problem in examining Commission on the Aged Poor, 1893). found to be the most predictive of the link between schooling and Heckman distinguishes between a variety of life outcomes, including earnings is unravelling the interaction cognitive abilities and non-cognitive educational attainment, wages and between the amount of education abilities, such as persistence and health. A crucial issue that arises and a person’s abilities in producing commitment. Both cognitive and non- is whether personality traits and earnings. While the amount of cognitive abilities are in part innate and intelligence are innate – that is, schooling can be directly observed, in part amenable to change through fi xed by a person’s biology at birth abilities often cannot. Furthermore, the schooling, parenting and interventions – or whether they are malleable – contribution of abilities to a person’s through other social institutions. To that is, capable of being changed employment and earnings may be better understand the nature and over the course of a lifetime by largely independent of schooling. infl uence of non-cognitive abilities, experience (social conditioning), Job performance and earnings may he draws on personality theory and which may include the intermediation depend mainly on abilities, with evidence from psychology. He develops of schooling, parenting and other amounts of schooling and associated a production function framework infl uences. The ability (or inability) to formal qualifi cations such as degrees familiar to economists, but less so to change the traits that govern individual and diplomas doing little more than psychologists, in which the input of behaviour is at the heart of the well- signalling to employers a person’s scarce resources (education, training, known ‘nature versus nurture’ debate.

8 Heckman’s analysis enquires into at later ages. Interventions for did his doctoral work at Princeton the conditions that give rise to the disadvantaged adolescents are most University and taught fi rst at long-term economic and social successful if they target non-cognitive Columbia University before moving disadvantages suffered by particular skills. Heckman shows that the highest to Chicago. His research led to work individuals and groups that are linked rates of return to human capital for on the statistics of selection bias, in turn to inequalities in skills and the disadvantaged are obtained when in which he created the celebrated outcomes that may be propagated interventions are targeted to the ‘Heckman correction for self-selection’, across generations. As is well known, early years rather than to on-the-job which is a cornerstone of empirical an important element in social training much later in the life-cycle. research in economics today. His conditioning is family background, The valuable lesson he draws is that contributions to the statistical analysis in particular the set of household over the life cycle, investing in the of economic data, identifi cation and characteristics that include marital early years of child development is of heterogeneity are very much at the status, parenting, employment and fundamental importance to reducing heart of contemporary research in family size. Recent research shows inequality in society, and, at the same applied econometrics and social policy how disadvantage literally gets under time, to boosting productivity. evaluation. the skin and affects the biology of the Heckman formalises his analysis in poor, and the children of the poor, terms of an augmented production Talking after the lectures, Heckman and their children’s children. Heckman function in which productivity (the outlined two policy prescriptions that presented epigenetic evidence output term) is determined inter alia resonate with the current education suggesting that factors infl uencing by investment in both cognitive and and training debate in Britain. One is social conditioning may also have an non-cognitive abilities. Drawing on about the value of formal vocational enduring biological impact by affecting psychological evidence, these two training. Earlier work of Heckman and the expression of a person’s genes. factors interact in the production others has found that at low levels of Gene expression is heritable through function, indicating that interventions skill the rate of return on investment RNA (ribonucleic acid), not DNA. to improve productivity and hence to in training as it is currently confi gured Characteristics associated with physical raise the relative earning capacity of can be negative. It is better, therefore, and social disadvantages are inherited the disadvantaged are most effective for young people to make the most and in turn affect gene expression and if done at an early stage in life. of their endowment of abilities by hence opportunities available to the Compensating for impaired cognitive getting a job, their development being next generation. abilities becomes more diffi cult with encouraged by workplace-based age. This is less true for compensating incentives and practical workplace Interventions to enhance cognitive for impaired non-cognitive skills. skills. Workplace-based training fosters and non-cognitive skills such as those non-cognitive skills through learning- designed to relieve poverty, reduce In his model, parents are assumed to by-doing and mentoring. But such discrimination in the workplace, and invest in enhancing their children’s efforts require there to be an active improve access to schooling can skills and life opportunities for altruistic and accessible labour market in which compensate in part for economic and reasons. The optimal social rate of social disadvantage, but the process investment, and its timing, will be employers hire on the basis of evidence can be a lengthy one. Interventions are impaired if fi nancial market failures of abilities rather than of prior formal most effective early in a person’s life. make it diffi cult to borrow against the qualifi cations. (uncertain) expected future income In this context, he stresses the of the child to support his education The other prescription concerns the importance of early child development, and training. This is obviously a major challenge of raising college attainment focusing on early childhood parenting factor in prolonging disadvantage. levels among disadvantaged groups. and surrogate parenting programmes. In the US, it is a persistent feature For example, Heckman argues, as In concluding a fascinating and that, in spite of free schooling for Marshall himself once did, that accessible set of Marshall Lectures, the disadvantaged, attainment levels building ‘character’ is important Heckman eloquently reinforces vary across socio-economic groups and can be infl uenced by the role his fi ndings that inequality in skills and disadvantage persists. The main of one’s mother. Cognitive skills contributes to multiple inequalities reason for this, in Heckman’s view, and personality are both important in society, and not only those that is their lower abilities, which are a causal determinants of children’s are measured by income differences. consequence, in part, of their adverse achievement. Family life plays an important part early environments. The abilities that in shaping skills. Because of this, his matter can be shaped. Supplementary His analysis is built in part on the formal dynamic models to explain skill parenting can reduce defi cits in ‘technology of skill formation’ that formation, and hence productivity and abilities. shows the great malleability of young earnings, have a strong psychological children’s cognitive skills, but not the and biological foundation. While Heckman is reluctant to draw cognitive skills of adolescents. This cross-country comparisons, the signals explains the greater productivity of James Heckman is a Nobel Laureate for educational policy in Britain are early investment compared to later and the Henry Schultz Distinguished clear. investment in cognitive skills. Non- Service Professor of Economics cognitive skills are more malleable at the University of Chicago. He Tony Cockerill and Sriya Iyer

9 Midlands. His success lay in pioneering New Books Obituaries mass production of made-to-measure suits affordable by working men. He was the Henry Ford of British men’s ProfessorP Sheilagh Raymond Burton (1917–2011) tailoring. Well placed to respond to Ogilvie’sO latest book, wartime demand for military uniforms InstitutionsI and aymond and demob suits, by the 1930s there EuropeanE Trade: Burton, were over 500 high street outlets and a MerchantM Guilds, Rwho passed dozen factories, of which the Leeds one 1000-18001 was away at the age was said to have the largest number recentlyr published of 93 earlier this of employees, around 10,000, on one byb Cambridge year, continued site in Europe. Montague Burton was U University Press. a family tradition a far-sighted employer, pioneering A A magisterial of generosity innovative personnel management and n new history of towards the Economics Faculty. A worker welfare. Never forgetting the commercial institutions, this book substantial endowment he made in circumstances of his childhood, he was shows how the study of merchant 2000 has provided precious support also a leading supporter of the League guilds can help us understand which for the Faculty’s research students of Nations and, after it, the United types of institution made trade grow, that will continue in perpetuity. In Nations Association. When knighted in why institutions exist, and how his later life, Raymond was always 1931, the citation was for “furthering corporate privileges affect economic appreciative of the letters he received industrial relations and world peace”. effi ciency and human well-being. regularly from our students who benefi ted from the Raymond Burton An autodidact himself, he was a Ha-JoonH Chang’s Fund. They would tell him of their passionate believer in the importance newn book, 23 very varied international backgrounds, of education in promoting peace. ThingsT They Don’t their economic research work, and Starting in 1929, he endowed several TellT You About their plans for the future. He himself chairs and lectureships of international CapitalismC , was had come up to Trinity College in the relations at British universities. He also recentlyr published 1930s, with his twin brother, to study endowed chairs of industrial relations byb Allen Lane law. But he switched to economics in Cardiff and Leeds and, in 1930, in (Penguin).( The and then went on to Harvard to the Cambridge Faculty of Economics bookb questions prepare himself better for working and Politics. The story was that, when somes of the most in the family’s massively successful he approached Cambridge with the widelyid l acceptedt d policyl propositions tailoring fi rm of Montague Burton. and empirical ‘facts’ in economics in proposal to donate a professorship in After war service as an artilleryman a serious but entertaining way. It has ‘industrial peace’, Keynes objected, in India, he returned to run Burton’s been extensively reviewed in the media, reportedly on the grounds that Marxist newly acquired women’s fashion and has so far been translated into six colleagues like Maurice Dobb might chain. He went on to be Deputy languages with thirteen more to follow. thereby be excluded. Characteristically Chair of what was to become the however, Keynes suggested the Burton Group (later Arcadia) and to solution, which was that Beatrice International Prizes engage with the younger fashion Webb’s term ‘industrial relations’ should market by setting up Topshop. A be used. This was adopted, and the devoted Yorkshireman, Raymond phrase became commonplace. Two of our Faculty have won was a philanthropist for many local prestigious international awards. cultural and environmental causes, as Shortly to retire as the fourth holder of Professor Sir Partha Dasgupta has well as York University and the Jewish the Montague Burton Professorship of been awarded the Zayed International Museum. Industrial Relations, perhaps I can end Prize for Scientifi c and Technological on a personal note. As a child I could Achievements in Environment for his Raymond once told me how glimpse the distant mass of Burton’s contributions to the scientifi c search conscious his family were of the very Hudson Road factory from the back and eco-friendly technologies that push different background of their father, bedroom of the house in Leeds that I environmental efforts towards success. Meshe Osinsky. He had arrived in Hull grew up in. Raymond’s older brother in 1900 at the age of 15, a refugee Stanley was a generous supporter The Association for Evolutionary from the horrors of pogroms in Economics (AFEE) has honoured Geoff of the University of Leeds, where my Harcourt with its highest academic Kovno, in what was later to become father taught for over thirty years. honour – the Veblen-Commons Lithuania. After starting as a door- After I took up the Cambridge job in Award. This award is presented to-door bootlace salesman, by 19 1985, I was fortunate to benefi t from annually to a scholar, or in a few he had established a small shop in the interest and kindness of both these instances, scholars, who in the view Chesterfi eld selling mainly shirts and admirably modest businessmen. I may of AFEE have substantially advanced caps. By his mid 20s he had changed not be quite ‘the full Monty’, but I our understanding of how economies his name, established a factory in am very conscious of how much their actually work, in addition to insights Leeds, and was building a chain of family has contributed. The glory days that advance economic theory. retail outlets across the North and of British clothing manufacture are

10 long gone and the capital endowment particularly in setting prices. Its Aberdeen in 1950 and went from there is considerably diminished. But, in outstanding features are the richness to Peterhouse, graduating with a PhD replacing me, the Economics Faculty of detail in a hitherto largely opaque in 1955. He married Aileen in 1956 will be proud to honour Sir Montague’s area of business activity, the careful and they had two children – Donald intention that the Professorship specifi cation of the problem to be and Catriona, and two grandchildren – should improve employment relations studied, and the painstaking process James and Claire. He was appointed to through a better understanding of the of analysis. The fi ndings are that, a University Lectureship in Economics economics of labour. while co-ordination among the cartel and admitted into the Caius Fellowship members gave operating effi ciencies, in 1959. He published The Economic William Brown there were signifi cant welfare losses Development of Japan c. 1868-1941 from price discrimination. in 1987, described by reviewers as Brian M Deakin (1922–2010) a “fi nely crafted text” that “opens After this, Brian’s research interest windows onto a fascinating and rian Deakin, moved to the functioning of the UK important subject”. who died in labour market. His two major studies BDecember published in this fi eld are into short- In his teaching Dr Macpherson fi lled last year at the term measures to support employment the room with his personality and his age of 88, was in the face of severe recession (Effects students loved him for it, in later years until his retirement of the Temporary Employment Subsidy, bestowing upon him the ultimate in 1989 a Senior 1982) and, later, into the effectiveness student accolade – his own Facebook Research Offi cer of the Youth Training Scheme (YTS), an group: The Macpherson Appreciation in the former initiative intended to improve vocational Society “for all those who love Dr W. Department of skills and job opportunities among J. Macpherson … expert in Indian Applied Economics, a research institute young people (The Youth Labour and Japanese Development, a fi ne within the Faculty of Economics. He Market in Britain, 1996). The setting economic history supervisor and repeat became Assistant Director of the DAE for both studies was the steady rise in offender of copyright infringement and was a Fellow of Magdalene College unemployment in the UK during the laws”. He was an unforgettable lecturer and Director of Studies in Economics. second half of the 1970s as the long and supervisor; his wit, energy and period of post-war full employment humanity brought economic history Brian came to the DAE in 1964 from came to an end. to life. Dr Victoria Bateman, now a the Economist Intelligence Unit where fellow at Caius, recalls that supervisions he had been Head of the Industrial The Temporary Employment Subsidy on interwar unemployment were Research Department and then scheme did support jobs and output at coloured by stories of the Jarrow Research Director. Before this and a time of recession and was good value March and General Strike. His wartime after war service, he read PPE at Oxford for money overall when account was experiences guided gripping accounts and then worked as an economist for taken of savings on welfare benefi ts of Indian famine. He drew evocative an international insurance company. and increased taxation receipts. But pictures of Keynes, looking from The unifying theme of his research YTS was associated with signifi cant his King’s College study and asking in Cambridge was estimation of the amounts of ‘deadweight’ spending on himself if the grinding poverty and production function and the impact of training that would have taken place in unemployment that he saw could really market failure on productivity, broadly any case, and with courses that were be the product of individual choice. interpreted. very low in the quality of their content, Academic life and work were lifted by delivery and assessment. Iain Macpherson’s spark, enthusiasm Productivity in Transport (1969) is an and incisive Scottish humour. Geoff analysis of the production function in Tony Cockerill Harcourt, a contemporary from the six British transport sectors: railways, Faculty, describes him as an old- road passenger transport, road Iain Macpherson (1924–2011) fashioned liberal, astute, well-respected, haulage contracting, sea transport, very kind and with a dry wit matched port and inland water transport, orn in 1924, by enormous integrity. He lightened and air transport. The work is path- William the mood of many lengthy, sometimes breaking, chiefl y because of the John (Iain) fractious, fellowship meetings with a W. Yao Liang Yao W. B diffi culties in measuring the output of Macpherson pithy joke. He had an uncanny ability transport services. The research fi nds was brought up to remember a diverse and large conclusively that technical change is and educated number of people and he did not align the single most important force in in Scotland and himself with college or faculty, instead explaining productivity growth in the then served as giving his sage advice generously and transport industries. This was followed a Captain in equitably. He will be deeply missed but by a large-scale investigation into the Queen’s memories of his wisdom, humanity and the economic practices and effects Own Cameron collegiality will live on through the very of freight shipping cartels - Shipping Highlanders and 6th Gurkha Rifl es. many people whom he inspired and Conferences (1973). The focus of Like many men of his generation, his supported. the study is on how the conferences studies were disrupted by the war developed and how they operated, but he graduated with an MA from Michelle Baddeley

11 My Graduate Experience at Cambridge and Beyond

am a development economist, with a and really learned to appreciate the doing now is experimental. I feel like my focus on microeconomic issues in Sub- power of economics and the power of work blends a lot of aspects of applied ISaharan Africa. I read Economics at economic theory in understanding the economics and I like being in that part the University of Cambridge and Trinity world. Given my background (I was of the fi eld. I even have an applied College in the late 1990's, matriculating born and raised in Nairobi), I think I was theory paper! My research focuses on in 1996. After Cambridge, I went on to always interested in development, but the use of technologies in various Sub- do an MA in International Development aside from taking Partha Dasgupta's Saharan economies (my home of Kenya Economics at Yale University, followed regular class, I never took the as well as Rwanda and Sierra Leone, the by my PhD in Economics at Yale. My development options. I always knew last two being post confl ict societies). time in the PhD program at Yale really as an undergraduate that I would go Most of my work tries to understand the successes and failures (and why) of technology adoption across various sectors: agricultural and fi nancial. On the agriculture side, let me quickly mention two very exciting experiments that are currently in the fi eld: the fi rst is with coffee farmers in Rwanda studying the diffusion of the technology through social networks; the second is with staple rice farmers in Sierra Leone studying whether short term subsidies can encourage experimentation with new technologies and hence broader adoption. On the fi nance side, I have been studying the rapid and massive adoption of mobile money in Kenya and the large impacts this has had on the ability of households to smooth risk across space and within their social networks. This work on mobile money is not experimental but has involved designing and collecting many rounds of panel data in the fi eld.

These are, of course, only a few things I have been working on - the most exciting ones - with hopefully, many cemented that I wanted to be an on to further study in economics and more to come. I do feel like my time academic and that is how I ended up so thought the math options would at Trinity and the Faculty of Economics as an Assistant Professor at MIT at their serve me better in the longer run. That was really responsible for how I think Sloan School of Management. turned out to be completely true! But about economics, for building in me this inherent interest in development is an appreciation of the importance of 1996 was the year James Mirrlees what took me to the program at Yale... economic theory in understanding won the Nobel Prize, which in fact and then there was no turning back. decisions, even in Sub-Saharan Africa. was announced right around my As you can probably tell, I absolutely matriculation dinner. Shortly after, Let me speak a little about my work. love what I do. Much as I think I always Amartya Sen joined Trinity College as I am an applied microeconomist at a knew I would go on to further study, I its Master, taught in the Tripos and time when the fi eld is split amongst would never have imagined I would end was also awarded the Nobel Prize folks who do structural work and up being an academic. If you had told in Economics. Cambridge was an those who do reduced form work me this while I was an undergraduate, incredibly vibrant place to be studying (and experiments), though that is I would have laughed hysterically, economics, so I consider myself beginning to change, of course. I have nothing could have seemed farther extremely lucky in that dimension. always felt that both approaches have from the truth then. Now, I cannot Personally, I met some of my best important contributions to make to the imagine doing anything else with my friends while there. Professionally, fi eld of development. My dissertation life! thanks to some amazing supervisors, work would be described by many as I was pushed very hard intellectually structural while some of the work I am Tavneet Suri

Faculty of Economics, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 9DD Tel: 01223 335200 Fax: 01223 335475 Email: [email protected] www.econ.cam.ac.uk Editorial team: Andrew Harvey, Sriya Iyer, Tony Cockerill, Marie Butcher, Yvonne Gibbs