Roads to Wisdom, Conversations with Ten Nobel Laureates in Economics I dedicate this book to the memory of my parents, Jürgen Horn and Ilse Ritter, born way back in the twenties, both economists, endowed with endless sympathy and a great appetite for the world of ideas. Roads to Wisdom, Conversations with Ten Nobel Laureates in Economics Karen Ilse Horn Head of Berlin Offi ce, Institut der deutschen Wirtschaft Köln, Germany Edward Elgar Cheltenham, UK • Northampton, MA, USA © Karen Ilse Horn 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2009928616 ISBN 978 1 84844 670 0 (cased) Printed and bound by MPG Books Group, UK Contents Acknowledgements vii PART I ALL THOSE ROADS TO WISDOM: QUESTIONS Purpose and theory 3 Choices and method 13 PART II THE INTERVIEWS Paul A. Samuelson 39 Introduction 39 Interview 43 Kenneth J. Arrow 58 Introduction 58 Interview 62 James M. Buchanan 85 Introduction 85 Interview 90 Robert M. Solow 110 Introduction 110 Interview 115 Gary S. Becker 132 Introduction 132 Interview 137 Douglass C. North 153 Introduction 153 Interview 158 Reinhard Selten 173 Introduction 173 Interview 177 George A. Akerlof 198 Introduction 198 Interview 203 v vi Roads to wisdom, conversations with ten Nobel Laureates in economics Vernon L. Smith 221 Introduction 221 Interview 226 Edmund S. Phelps 241 Introduction 241 Interview 246 The questionnaires 265 PART III ALL THOSE ROADS TO WISDOM: ANSWERS Findings and insights 285 Conclusion 323 Bibliography 326 Index 359 Acknowledgements I would like to thank some people without whose support this book might not have seen the light: Johannes Ritter, my soul mate, for his loving care, his unfailing encour- agement, thoughtful advice, patience and understanding, for sharing the fun and also the burden. Michael Wohlgemuth, a true friend, for his invaluable support in discuss- ing my concept and method, in drawing my attention to some relevant literature and even providing it, and of course in shouldering the tedious task of fi rst proofreading. Ulrike Hotopp for her example as much in faithful friendship as in work ethic, for her enthusiasm, support, and intelligent comments, as ever. Wolfgang Schürer, Chairman of the Board of the Foundation Lindau Nobelprizewinners Meetings at Lake Constance, and his wife Monika, who encouraged me substantially and insistently enough to get me started. Edward Elgar and his entire staff , for their friendly enthusiasm, prompt- ness and absolutely outstanding professional work. And of course the ten Nobel laureates who so kindly agreed to share many hours with me talking about their path. Those conversations often made my day and much more. vii PART I All those roads to wisdom: questions Purpose and theory ‘All roads lead to Rome’. Everybody has heard this phrase plenty of times. Maybe a little less if one belongs to a religious group other than Catholicism. One of the current etymological explanations of this saying is that in the Middle Ages, that city, with the Vatican in its center, was viewed as the (spiritual) center of the Christian world. The saying itself is derived from the ‘Liber Parabolarum’ written by Alanus de Insulis in the twelfth century, where he says: ‘Mille viae ducunt hominem per saecula Romam’ (a thousand roads lead mankind always to Rome). While this was of course meant in a positive sense, the phrase was later also used pejoratively, denouncing Rome’s overarching imperial control and intru- sion. A more secular explanation just refers to the road system in ancient Rome, where all the empire’s roads radiated out from the capital city. The metaphorical meaning stays the same: if one has a goal, the essential thing is to get there – and one will get there. It doesn’t matter which way. There is not ‘the’ one right road. Everything depends on where one is and when, what means one disposes of, what one’s preferences are and what one thinks one should and shouldn’t do. The same can be said about academic progress, which is the core topic of this book. For scholars making their individual contributions, the essential thing is probably just to get there – provided that once you get there, you aren’t confronted with the bad surprise that ‘there is no there there’, as Gertrude Stein famously quipped in her book Everybody’s Autobiography1. and there may in fact be multiple instances of bitter dis- illusionment. But all these caveats put aside, for any scientist, it is progress as such that is important. As George J. Stigler has it, ‘the great fascination of scientifi c endeavor . is precisely in the speculative pursuit of new ideas that will widen the horizon of our understanding of the world’.2 After the fact, it doesn’t matter how he or she got prepared for making a contribu- tion to progress in the fi eld. As long as it was effi cient, it was good. The goal is the goal. Contrary to the popular Chinese saying, after the fact, the specifi c individual itinerary doesn’t matter so much. The essential thing is to have this one decisive idea, to make these one or more original contri- butions that qualify as a move in the right direction, or progress, however one chooses to defi ne it exactly. Or wisdom, if I am allowed to use an even more encompassing, elevated notion. Wisdom is more than knowledge, 3 4 Roads to wisdom, conversations with ten Nobel Laureates in economics it is a state of mind. It is love of learning, and it is this knowledge judi- ciously applied in order to solve problems. As Confucius said, wisdom comes from refl ection, imitation and experience. Adam Smith speaks of ‘prudence’ here.3 I have chosen the notion of ‘wisdom’ as part of the title of this book not solely because I happen to take delight in puns,4 but much more so for the sake of clearly indicating that I have drawn some of my inspiration from the remarkable work of the great Austrian economist and social philoso- pher Friedrich August von Hayek (1899–1992). Hayek’s research has pro- vided us with an important defense of classical liberalism and free-market capitalism against socialist and collectivist thought in the mid-twentieth century. He taught at the London School of Economics, in Chicago, in Freiburg (Germany) and in Salzburg (Austria). He shared the 1974 Nobel Prize in Economics with his ideological rival Gunnar Myrdal, which is one irony. The other, more bitter irony is that he received the prize for his ‘pioneering work in the theory of money and economic fl uctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena’ – and not exactly for his outstanding social philosophy. Summing up his own contributions, Hayek always liked to say that, throughout his academic career, he had made one discovery and two inventions. The discovery was the knowledge-assembling and knowledge- generating features of the price system in decentralized, competitive markets. The inventions were the denationalization of money and a spe- cifi c system of government with two chambers. Hayek’s discovery clearly was more fundamental than the two inventions. I have to stress that, other than the pun, meant as reverence only, there is no substantial analogy intended with Hayek’s famous book. The Road to Serfdom was an alarming outcry voiced in 1944, grown out of Hayek’s impression that collectivist and totalitarian forces were winning the upper hand again everywhere. More than sixty years later, his concern hasn’t lost any of its acuteness and his warning none of its importance; quite the contrary.5 However, my book is just about the determinants of individual itineraries that contribute to the advancement of economic theory, not about the general state of the world, or the ideological undercurrents directing it. And even here, in my much more limited fi eld, my purpose is not to warn the profession that it is moving in a fatally wrong direc- tion – or else I would have had to call my book ‘The Road to Random’ or ‘The Road to Boredom’ instead, for example. While it is indeed true that I view the development of the economic sciences with a substantial dose of skepticism, especially after the recent fi nancial crisis that exploded in the autumn of 2008, this is not the major thrust of my book. Purpose and theory 5 The inspiration that I have taken from Hayek and which serves as my starting block here is his one major philosophical discovery, namely his insight about the ‘division of knowledge’ in markets through which evolu- tion and – perhaps – progress take place, in an analogy to Adam Smith’s division of labor.6 Both ‘divisions’ are aspects of those processes of social interaction in which no central body has or even needs oversight over eve- rything that is going on. There is no super mind directing it all. The spon- taneous processes of anonymous social self-coordination through markets are ‘marvels’, as Hayek puts it.7 Here, in this book, the focus will be on the division of knowledge in the process of social self-coordination not with respect to the provision and allocation of goods and services in general, but with respect to the generation of knowledge itself – that is, within science.