Leading Economic Indicators
As the Department of Economics celebrates its 50th anniversary, we count the ways it has influenced the field.
By Kate Perry
More than 6,000 miles away from the River Campus, in Room B7 at Kyoto University in Japan, there is a replica of Lionel McKenzie’s office.
The books and boxes of papers are shelved exactly as they were in Harkness Hall, and scholars from all over the world sift through the 2,200-piece collection. McKenzie, the Wilson Professor Emeritus of Economics and the first chair of the University’s Department of Economics, is known as “the father of Japanese mathematical economists,” according to the Kyoto Newspaper.
He’s been inducted into the Order of the Rising Sun, a governmental honor rarely bestowed on American professors. And he’s received honorary degrees from Kyoto and from Tokyo’s Keio University.
The international acclaim is a small example of the far-reaching influence Rochester’s economics department has had since 1957, when it was separated from the business administration program and launched as its own academic unit.
At the heart of that influential legacy is McKenzie, a former Rhodes Scholar who arrived in Rochester with the mandate to build a program that would make a name for itself. McKenzie’s approach: Combine economic theory with mathematics and appoint young faculty who were intellectually limber enough to help blaze that path.
“I was attracted to building a department according to my own ideas,” McKenzie says.
The approach has always been finely focused, McKenzie says, noting that the department is best known for scholarship that is technical, mathematical, and intended to be influential among top scholars and policymakers.
“Economics the way we study economics is like physics the way the physicists study physics,” he says. McKenzie recognized the potential of hiring scholars who, like him, were eager to make their mark on the field.
Ron Jones, now the Xerox Professor of Economics, who joined McKenzie during the department’s founding year, was one of those young scholars. Richard Rosett, who went on to chair the economics department at the University of Chicago, was another.
Jones says McKenzie was crafting something unique from the beginning.
“The choices made here overwhelmingly favored selecting young, new graduates from Ph.D. programs rather than appointing already established stars,” Jones says.
Mark Bils, the current chair, says the department continues its strengths in macroeconomics, theory, labor economics, and trade, while remaining committed to its roots as a place where young scholars have the opportunities to establish themselves.
“While I’ve been here, it’s been as exciting and productive a time as the early years,” Bils says.
Nobel laureate Robert Solow, professor emeritus of economics at the Massachusetts Institute of Technology, says he’s long admired Rochester for its wide-ranging productivity. During commencement this spring, where he received an honorary degree, Solow noted that he helped recommend McKenzie to lead the then fledgling department.
Since then, he has watched as the University’s economics department built a reputation by continuously delivering high-caliber scholarship.
“If you were to ask me or any other observer what’s so special about Rochester,” Solow says, “It wouldn’t be ‘Oh yes, they are really hot on this topic or that topic,’ it’s just that it’s a department that’s aimed consistently for quality and originality, and they’ve consistently got it. That’s the story.”
In recognition of the department’s 50th anniversary—to be celebrated during Meliora Weekend this fall—here are a few sample highlights from that story.
Can you put a monetary value on human life? In 1974, professor Sherwin Rosen and then student Richard Thaler ’74 (PhD) pondered that question in their paper, “The Value of Life: A Market Estimate.”
The pair’s statistical technique for looking at wage premiums changed the way governments and companies allocate spending on things like highway traffic safety and airport safety.
Rosen was a professor at the University of Chicago at the time of his death in 2001. Thaler, the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago, is considered a founder of the field known as “behavioral economics.”
Eric Hanushek, who joined the department in 1978, gave policymakers a lesson in economics when his groundbreaking work showed that there is little direct correlation between class size and achievement. His 1998 paper remains one of the most widely cited works in the field. Hanushek, who is now a fellow at Stanford’s Hoover Institution, demonstrated that the most important factor in spurring student achievement was the quality of the teacher, not the size of the class.
The idea was confounding to historians and economists: Could it be that, from an economic standpoint, Civil War-era slaves on Southern plantations were better off than wage-earning workers of Northern factories? That was one of the conclusions of Robert Fogel and Stanley Engerman’s 1975 book, Time on the Cross. The book, which won the prestigious Bancroft Prize, ushered in an era of economic history that drew as much from detailed analysis of data as it did from traditional historical narratives. Fogel, who joined the Rochester faculty in 1960 and is now the Walgreen Professor of American Institutions at the University of Chicago, won the Nobel Prize in 1993 for his work as an economic historian. Engerman, who is the John Munro Professor of Economics, is a leading economic historian and has published extensively on economic growth.
General Equilibrium Theory
If the government decides to raise taxes, lower interest rates, or lift trade tariffs to make sure everyone gets a Beanie Baby for Christmas, you could predict the fallout of those actions using general equilibrium theory.
Lionel McKenzie, the Wilson Professor Emeritus of Economics, is one of three scholars credited with the modern conception of the theory that researchers use to predict the results of government actions involving money.
McKenzie published what is considered his most impressive paper on the topic, “On the Existence of General Equilibrium for a Competitive Economy,” in 1959, just two years after coming to the University.
In 2002 he published a general survey of the subject called Classical General Equilibrium Theory.
An authority on applied economic theory and labor markets, Walter Oi helped persuade the Nixon administration and Congress to end the military draft in the early 1970s while serving as staff economist for the President’s Commission on an All-Volunteer Armed Force. His analysis of the unseen costs of military conscription played an important role in crystallizing the debate that led to the adoption of an all-volunteer military. The commission was spearheaded by former Rochester President W. Allen Wallis, who, as an advisor to Nixon, asked William H. Meckling, then dean of the University’s graduate school of management, and Harry Gilman to study the economics of the draft.
Trade between nations of people has been part of the human economy ever since the inventor of the wheel realized that the people who didn’t have wheels might have something else of value they’d be willing to exchange. In the 21st century, the realm of international trade is a far more complex and nuanced economic dance.
Ronald Jones, the Xerox Professor of Economics, has been a leader in giving economists and policymakers important tools for understanding how trade affects a country’s growth, its distribution of income, and its capital markets. His textbook, World Trade and Payments (coauthored with Richard Caves and Jeffery Frankel of Harvard), has become a standard in the field and is in its 10th edition.
Alan Stockman, the most recent chair of the department, is one of the nation’s most prominent scholars on how the exchange rate between nations affects the economy.
Beginning with the arrival of Robert Barro in 1975, the study of how the sectors of the economy interact has been a particular strength of Rochester. Barro, who is now the Paul M. Warburg Professor of Economics at Harvard, is one of the nation’s most influential economists whose work on government borrowing, monetary policy, and central banking continues to shape government policy.
The macroeconomic tradition is evident today in new work by Mark Bils, who is showing that wages and prices are more responsive to the business cycle than previously thought, and that companies contribute to economic downturns through their pricing behavior. Innovative work by Mark Aguiar, an associate professor, that combines data from time diaries, food diaries, and expenditure surveys received the Paul A. Samuelson Award from TIAA-CREF for the best paper on issues involving lifelong financial security.
An Economics Celebration Friday, October 19
Several prominent economics alumni and former faculty members will be on hand to help the Department of Economics celebrate its 50th anniversary during Meliora Weekend, October 18–21.
The department’s “50th Anniversary Symposium: The New Economics” will feature a panel discussion focusing on developments in the field of economics during the past 50 years—how economists have developed insights into such areas as macroeconomics, economic history, labor economics, political economy, and economic theory.
The panel includes Emmanuel Drandakis ’63 (PhD), professor of economics at the Athens University of Economics and Business; Jose Scheinkman ’74 (PhD), the Theodore A. Wells ’29 Professor of Economics at Princeton University; Michael Mussa (professor from 1971 to 1975), senior fellow at the Institute for International Economics in Washington, D.C.; and Paul Romer (professor from 1982 to 1988), the STANCO 25 Professor of Economics at Stanford University.
Trustee Hugo Sonnenschein ’61—president emeritus and Adam Smith Distinguished Service Professor at the University of Chicago, and a former president of the Econometric Society—moderates.
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Economics for Everyone
Steven Landsburg, who has been teaching at Rochester since 1983, has been one of the field’s most articulate scholars in bringing economics to a lay audience. His 1995 book, Armchair Economist: Economics and Everyday Life, was the first in a later wave of publications by economists attempting to show how insightful the field can be. Landsburg followed up this year with More Sex Is Safer Sex: The Unconventional Wisdom of Economics. He also writes a regular column for the online magazine Slate.
James Friedman, who was on the faculty from 1968 to 1985, brought the study of game theory to the department, developing a theory of repeated games which he applied to competition between firms.
William Thomson, who joined the faculty in 1983, has developed several applications of game theory that focus on efficiency as well as meeting ethical and moral criteria. Two of his students, Tayfun Sönmez ’95 (PhD) and Atila Abdulkadiroglu ’00 (PhD), have applied those ideas in devising better ways to allocate public school assignments in the New York City and Boston public school systems and for matching kidney donors with those who need the organs.
What is the value of new technology? Paul Romer, who taught at the University from 1982 to 1988, can help with that question. Many think his work on new growth theory—which states that new knowledge and technological advancements can stimulate the economy the same way more money and more workers can—will win him a Nobel. Currently the STANCO 25 Professor of Economics at Stanford University, Romer did much of his early work on new growth theory while at Rochester.
In an article naming him one of the “Most Influential Americans” in 1997, Time magazine called Romer “A sage for the silicon age, [he] is upgrading the dismal science to keep pace with the digital revolution.”
Over five decades the department’s alumni have carried the Rochester approach throughout academia. Graduates can be found on the faculty of nearly every economics program ranked among the top 25 by the National Research Council. Internationally, McKenzie estimates, about 10 percent of the department’s Ph.D. graduates are from Japan, where five Rochester alumni have served or have been selected to serve as the president of the leading Japanese economics association. Strong contingents can also be found in India, Greece, Turkey, Korea, and Mexico.
Kate Perry writes about the social sciences for the University Communications Office.