Dear fellow faculty, administration, staff and not at least students: Poets & Quants chose the Cornell Teach MBA as the program of the year. See the article here.
Congratulations and well deserved!
Kenneth J. Arrow, the youngest economist ever to be awarded a Nobel (jointly with John R. Hicks) for “for their pioneering contributions to general economic equilibrium theory and welfare theory”, died aged 95. Arrow, undoubtedly one of the most brilliant minds of recent times, is considered a founding influence of several sub-fields of Economics and among the architects of the advancement of Economics as a science in the twentieth century.
Many share the opinion that his ground-breaking contributions to social choice, innovation, health economics and the economics of risk have been even more ground-breaking for the Economics community than his work on general equilibrium theory for which he was awarded the Nobel Memorial Prize in 1972. Arrow is among a selected very few who consistently made it on the bookies’ list to win another Nobel.
I have briefly pondered about writing a piece on his research contributions to make the unbelievable wealth of his ideas accessible to a broader audience. There is, however, no need to reinvent the wheel. My former classmate Kevin Bryan (who btw considers Arrow to only be the second greatest economist of all time), professor at the University of Toronto, and among other things an expert in the history of Economic Thought, started a brilliant mini series of four posts on Ken Arrow today on his blog A Fine Theorem.
The recently established Cornell College of Business, umbrella to the Charles H. Dyson School of Applied Economics and Management, the School of Hotel Administration, and Samuel Curtis Johnson Graduate School of Management, has been renamed Cornell SC Johnson College of Business after a $150 million gift from SC Johnson and its CEO H. Fisk Johnson who holds five Cornell degrees. Due to parts being dedicated as a challenge grant the potential impact of the gift amounts to $300 million.
Read the Wall Street Journal’s account here.
Keith Murninghan, professor at the department of Organization & Behavior at the Kellogg School of Management, Northwestern University lost his fight against cancer last Friday. While increasing vertical specialization of PhD programs leads us typically not to know most professors of other departments (while physically close there are academically enormous distances), I was lucky enough to meet Keith several times during my executive MBA teaching stints at the Evanston and Miami campuses of Kellogg. Certainly not being an expert in his research field, I am, however, aware that Keith has been a major contributor to the literature of conflict resolution, in particular opposing group and individual behavior.
More importantly though, from my subjective perspective, he was a special person treating every MBA and PhD student with the utmost respect, always showing genuine interest in one’s work. I had the opportunity to get to know him a little during social events at executive MBA teaching weekends. Not only did he possess an extraordinary interdisciplinary interested mind, but he was also one of the kindest persons I have met during my time at Kellogg. Thus it did not come as a surprise to me that I met him at multiple private graduation events of Kellogg students.
Here you can find the official Kellogg notification.
On Sunday, November 30, Joseph Stiglitz advertised his new book “The Great Divide” at the Vienna University of Economics and Business Administration (WU). Neither did I attend the lecture nor do I have access to any recording. My only record of his words is a German article in the Austrian daily newspaper “Der Standard” (which can be accessed here). That means, Stiglitz has been first translated into German and in what follows I re-translate into English. Given this sounds like an instance of the children’s game telephone, there might well be content lost in translation.
Nevertheless, I was quite surprised by what I read. According to the article (as objectively translated as I could) Stiglitz said:
“Demanding solidarity is not easy in good times. It becomes, however, politically dangerous if poverty and unemployment are on the rise since [in this case] it generates breeding grounds for right wing extremist parties. This also holds true for countries like Germany and Austria. Society should not only solidarize with refugees but also with low-income (and low-skill) workers. Those should be increasingly supported by the wealthy elites in these countries by re-distributional policies to avoid social tensions. Necessary funds could be generated by “wealth taxes” [private capital or equity taxes].”
There certainly is a deeper truth to this statement anywhere in the world. Also, it hardly comes as a surprise. However, I was somewhat startled to see it applied to Germany and Austria, admittedly the two countries with the biggest refugee influx per capita recently, but also two countries among the world-leading in equality and the extent of tax funded social services.
Economist Noah Smith, assistant professor for Finance at Stony Brook University, recently wrote a post titled “Most of What You Learned in Econ 101 is Wrong” on Bloomberg view. He basically argues that standard introductory Economics textbooks—citing Mankiw’s “Principles of Economics”—solely refer to (outdated) basic models and do not incorporate advances in the profession. Although he did not choose the catchy title of the Bloomberg post himself, he claims that “… Mankiw’s book, like every introductory econ textbook I know of, has a big problem. Most of what’s in it is probably wrong.”
In reply, David Henderson, research fellow at the Hoover institution and associate professor of Economics at the Naval Post-Graduate School in Monterrey, defending the Econ 101 textbook points out: “Here’s what’s striking. In an article that purports to show that Mankiw is wrong on many issues, he [SMITH] doesn’t point out how he [MANKIW] is wrong on ANY issues.” To be fair, it should be mentioned here that Smith moderates in his reply: “… is that “right” and “wrong” are not very descriptive, helpful adjectives in this situation.”
In my opinion, Noah Smith is correct that “right” and “wrong” are problematic adjectives to evaluate basic theory in Economics. On the other hand, I agree with Henderson that Smith dropped some strong claims in the original Bloomberg view post but only supports them half-heartedly. The truth—if there is any—is, as so often, probably more moderate. In what follows I explain why and to which extent I agree with Smith’s opinion on introductory Econ classes and why not:
Why I disagree with Noah Smith
Known to every economist and valid as ever before, Joan Robinson once famously said “A model which took account of all the variegation of reality would be of no more use than a map at the scale of one to one.” I have frequently experienced students untrained in Economics to come to class and strive for the most complicated model there is to take into account and depict every eventuality of a real world situation. Every economist, who at least once attempted to write down a model, is perfectly aware of the fact that such an approach is frankly quite useless. Econ 101 ideally teaches students the ability to abstract from an incomprehensible environment to focus on questions of matter.
As an example for a stylized model N.S. mentions the basic minimum wage model, which predicts that the introduction of a lower price floor—the lowest wage employers may legally pay in a given market environment—leads to an increase in unemployment. Naturally, this (and similar stylized) model(s) do(es) and cannot apply to every real-world labor market. The validity of this model necessitates well-behaved preferences, rational behavior and an also otherwise friction-less environment. Moreover, it neglects various indirect benefits of minimum wages. While I deeply hope that decision makers do not base their actions solely on such a model, it is, in my opinion, still a valid and tremendous starting point for a comprehensive analysis. In addition, it serves an enormous educational purpose as a vehicle to teach students to abstract. This holds true for both theoretical and empirical analysis likewise unless we are eager to revert to ad-hoc estimation techniques.
Why I agree with Noah Smith
I disagree with N.S.’s claim “There’s no reason a college econ student shouldn’t learn how to run regressions in 101.” While teaching introductory regression to students both in Austria and at Northwestern I have experienced an eagerness of students to apply their newly acquired skills exorbitantly over-interpreting results which are far from robust. Thus, I do not believe that theory is necessarily to blame when Economics graduates in professional jobs over-interpret their stock of knowledge to make far-reaching decisions. Results from a basic regression analysis are equally likely as stylized models to be over-emphasized. An issue about which I entirely agree with Smith, if I interpret his contributions correctly, is the missing link between theory and empirics in basic Economics education. As of now, we are teaching stylized models in introductory classes and basic regression analysis parallel, often in the same quarter, not succeeding in highlighting their connection and necessary interplay for well-founded decision making.
I was fortunate enough to attend a class by Dale Mortensen on Labor Economics a couple of years ago. He picked five central theories of Labor Economics and devoted two classes to each of them. The first introduced a model rigorously on mathematical grounds whereas the follow-up class discussed stylized facts, available data, empirical contributions and the limitations of theory. Although I did not exactly end up being a Labor Economist, I have always admired the design of Dale’s class and plan to replicate his approach—when feasible—in the future. The course I am referring to, however, was a PhD elective and I am uncertain to which extent this interplay is replicable in freshman or sophomore classes. But I agree with Noah Smith’s discussion of theory and empirics in Econ 101 in so far as I believe that the missing link is the link itself.
I have written a commentary in the Austrian newspaper “Der Standard” about recent events around the Austrian Institute of Advanced Studies (IHS),
a leading European educator of graduate students in Economics, where I completed my Master’s degree before attending Northwestern. Since the article is written in German, please find my translation below (The original in German can be accessed here) :
The Economic research division at the institute faces hard times. Termination of the Master’s degree program has already been confirmed
The Vienna Institute of Advances Studies has most definitely already seen better days. After a successful period under former head Bernhard Felderer, the institute, or at least its Economic research division fears closure during the spell of current interim director Sigurd Hoellinger.
The institute was founded in 1963 by world-leading Austrian researchers Oskar Morgenstern and Paul Lazarsfeld with financial assistance of the Marshal plan. Initially, it set out to revive Austrian Social and Economic Sciences which lacked competitiveness internationally after WW2. Ever since its foundation the institute has been organizing a two year graduate program in Economics (nowadays graduates are awarded a Master’s degree upon completion).
Reorganization at the expense of science
Astonishingly, the current interim board – with apparent support by local politicians – plans to disestablish the current department structure (Economics, Political Science, Sociology) in order to regroup researchers into interdisciplinary areas. This appears to initiate the end of an era of successful research in Economics at the institute as there is hardly any successful example of such an act of restructuring in fundamental research in Economics. It seems natural to assume that a downgrade of Economic research and the cessation of graduate education will significantly diminish if not destroy any appeal of the institute to leading researchers. The current events reinforce the suspicion that restructuring is the politically smoother idiom for downgrade.
Argument 1: Questionable financial hardship
The motivation for those measures appears to remain a mystery. An argument recurrent in the Austrian media landscape is insufficient funding, which seems ridiculous. Whereas it is per se questionable to require fundamental research to fund itself the Austrian Institute of Advanced Studies is in general externally funded to a larger degree than comparable institutions in the German speaking world.
What is more, funding an Economic research group is preposterously inexpensive when compared to other research disciplines. This fact is mainly caused by comparatively low-cost equipment necessary for Economic research: A notepad, a pencil, nowadays a laptop and eventually data; with cost for the latter being rather negligible due to a rather theoretic and small research group at the IHS. Finally, wages at the institute are at most average when compared to international competitors.
In recent weeks at least scarce mentioning of the institute was observable in the Austrian media. First and foremost I would like to refer to Hanna Kordik’s article in the Austrian newspaper “Die Presse” and to former IHS researcher Alex Stomper’s commentary in the Austrian newspaper “Der Standard”. Alex Stomper, as of today professor of Finance at the Humboldt University in Berlin, Germany, mentions the IHS’ master’s class of 2011 as an example of recent success when graduates went on to pursue doctoral education at Yale, Northwestern or the London School of Economics. Mentionable instances of former successful graduates are Ernst Fehr – a recurring favorite for the Noble prize in Economics – or Wolfgang Pesendorfer, at the time of his inauguration among the youngest professors of Economics at Princeton.
Argument 2: (Insufficient) education at public universities
Another napless argument against the maintenance of an Economics research group at the institute is its substitutability in terms of education by Austrian universities. Personal experience and those of many friends and colleagues shows that demand for Economics graduates of Austrian public universities at potential top class employers is scarce. Public Austrian universities are – primarily due to chronic underfunding – incapable of regularly meeting high international standards in terms of supervision and mentoring both in terms of quality and quantity.
On occasions, contributions in the national media have questioned why an Austrian institution is indirectly funding American top universities with human capital. This perspective is unfortunately out of context. Austria does not subsidize such research institutions. It is rather the case that IHS graduates are rewarded with world-class education for their efforts as research or teaching assistants at those organizations. It goes without saying that a degree from an international top 10 university opens doors of both academia and private enterprises alike worldwide.
Three goals of economic importance
Due to the fact that a significant ratio of graduates does either not leave the country in the first place or returns after successful completion of an international doctoral degree the graduate education program at the Vienna Institute of Advanced studies ensures achievement of three long term economic objectives: (1) supply of highly educated economists for strategically significant jobs in Austria, (2) excellent networking with international decision makers in the private sector and academia and (3) attraction of Austria as research location for international scientists to consult and exchange scientific ideas (visitors to the IHS in recent years were Larry Blume, Mark Machina, Dale Mortensen, Joergen Weibull, etc.);
Relative to its size and population Austria looks back at an impressive and proud history of scientific achievements. However, the large part of those took place more than half a century ago since back then the dark era of WW2 destroyed our excellent conditions for fundamental research, which depends to such a large extent on inter-generational supervision and transmission of ideas. While rehabilitation in academia traditionally could not keep up with developments of the Austrian economy, the IHS has served Austria well for a long time producing internationally competitive research output and human capital. Conversing with non-German speaking internationally renowned economists the Vienna Institute appears to be among the most frequent topics after the Habsburg dynasty and the Vienna opera house.
No demand for excellence?
It might be suspected that the de facto closure of the Economic research division is linked to some dubious political quid pro quo pact. This raises the question whether Austrian politics understand it to be inappropriate nowadays to harbor a claim for excellence in our country. I am a fiery advocate for free access to education in Austria – as a measure to set economic impulses, increase the average quality of life and prevent a multi-level society – not necessarily in this succession. However, it appears to me that equality of opportunity ex ante is generally confused with the same ex post. Even in a country rightfully proud of its solidary statutes, merit may be rewarded and – quite more importantly – should be met with promotion.
Thomas Jungbauer is PhD candidate at the Kellogg School of Management at Northwestern University in Evanston, a northern suburb of Chicago, Illinois. Before his education at the Austrian Institute of Advanced Studies (IHS) (Class of 2011) he studied at the Vienna University of Economics and Business (WU) and the Vienna University of Technology (TU).