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December 31, 2006
David Warsh, Proprietor

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The Year in Economics

There’s a toplofty headline if ever there was one.  You would have to range freely over all the globe to make good on its promise.  There was no exhilarating breakthrough, like the proof of the Poincaré conjecture in mathematics — or if there was, I don’t know it.

As it happens, the big story in economics in 2006 happened in Cambridge, Mass.– the ouster of Lawrence Summers as president of Harvard University.

Summers’ firing has reverberated throughout the economics profession, because of his prominence as an economist in his own right, his close relations with Harvard’s economics department, one of the best in the world, and department members’ intricate connections with the rest of the profession.

Some significant part of the university’s loss of confidence — it’s impossible to say exactly how much — stemmed from alarm at Summers’ conduct throughout Harvard’s long-running Russia scandal. (The tenth anniversary of that scandal’s inception is coming up in April.)

A capsule description: as a young assistant professor in 1979, Summers befriended Andrei Shleifer while the teen-age Soviet émigré was a Harvard undergraduate. A vivid intellectual collaboration ensued. A decade later, Summers arranged for Shleifer, by then a professor at the University of Chicago, to return to Harvard; then, as Undersecretary of the Treasury for International Affairs, Summers helped arrange for him to direct an advice-giving mission to Russia on behalf of the US government, after the Soviet Union collapsed.

After the US Agency for International Development fired Shleifer in 1997 for investing in Russia while dispensing supposedly disinterested advice, Summers stood by, first as Treasury Secretary, then as president of the university, while Harvard, expensively and ultimately unsuccessfully, defended his friend against a government suit for fraud.  At one point, the newly-installed president urged Faculty of Arts and Sciences dean Jeremy Knowles to take pains to keep Shleifer at Harvard.

Summers had many other problems in his five years as president.  One after another, he alienated many factions in the university he was hired to change.  But in the end, it was probably the Russia project that provided the fulcrum by which he was levered from the job. “When the president responded in a manifestly untruthful way to questions that were asked about the Shleifer case, [at a crucial meeting of the faculty], it had a devastating effect on the views of people who were to that point uncommitted, people who, like me, were strong supporters of his agenda,” professor Robert Putnam, a political scientist, later told Sara Ivry of The New York Times

A few months later, former Harvard president Derek Bok, who is serving as acting president while Harvard seeks a new chief executive, told a small audience about the advice he would give to his successor, stressing the importance of basic integrity (his talk was reported by Katherine Gray in The Harvard Crimson):  “If a president comes out and tells something that’s exposed as a clear lie, or engages in some other obviously indefensible behavior, the moral authority just disappears, and the president isn’t effective. When something like that happens, they always resign.”

From the beginning, the case against Shleifer was elementary: that in making prohibited investments while ostensibly teaching the Russians the rules of the game of a market economy, he was in fact offering a textbook illustration of corruption, American-style, cynically breaking the very law he had been hired to teach.  That Shleifer meanwhile presented himself to the profession as an expert on bribery and other forms of dishonesty — publishing an article called “Corruption” in the Harvard-sponsored Quarterly Journal of Economics, of which he was co-editor at the time — merely added piquancy to the charge.

Yet the astonishing thing about Shleifer’s misadventure is not the transgression itself.  That’s easy enough to understand in a 31-year-old émigré returning to Moscow’s epic gold rush in 1992 with no training in Western civic culture (aside from intoxicating bull sessions as a grad student), and no adult supervision. The astonishing thing all along has been Harvard’s defense of its errant professor — an illustration of the familiar dictum that it is the attempted cover-up, not the deed itself, which brings the real woe.

For example, consider a scene, described by investigative reporter David McClintick (whose lengthy chronicle in Institutional Investor helped bring the matter to a head). In 1994, nearly two years after he took the job, Shleifer boasted of his Russian investments at a party given by Harvard professor Dale Jorgenson.  Did some wise old head take the youngster aside to warn him that such investments were, at best, unseemly? Hardly. Instead, Harvard professor Martin Feldstein asked Shleifer to introduce him to the manager of his private equity fund. (Ultimately, Feldstein decided not to invest with him.)

Thus were three of Harvard’s four active winners of the influential John Bates Clark Medal implicated in the misadventure from the beginning: Feldstein (winner in 1977), Jorgenson (the winner in 1971, who would take over as department chairman not long after USAID fired Harvard) and Shleifer himself (winner in 1999), while the fourth, Summers (1993), kept watch at the Treasury Department.  Given that the Clark medal is designed to identify to all the world the discipline’s intellectual leaders (it is awarded every two years to an economist under forty), there is no way to construe the episode except as a remarkable breach of professional trust.

To this day, no serious defense of Shleifer has been attempted, except by Harvard’s attorneys, who argued his case within the narrowest possible confines of the law (and lost) — not by Shleifer, nor by his many seconds, least of all by his friend Summers, who now writes a regular column for the Financial Times. It is one thing to say that the university doesn’t wish to wash its dirty laundry in public; quite another when its economists continue to deny culpability even after a federal judge has found against the university.

Meanwhile, the aftershocks at Harvard are continuing. They are a matter of rumor and speculation, since interim dean Jeremy Knowles declined to release the report of the Committee on Professional Conduct that studied the Shleifer matter for him, or to disclose what disciplinary action he has taken. (That Shleifer had been stripped of his endowed chair quickly became known.) The latest development is the matter of the economics library stacks. After long years of sharing quarters in mausoleum-like Littauer Center with the government department, the economics department at last has been preparing to remodel, after the political scientists moved into a home of their own.

Not so fast, said the dean and the director of the Harvard libraries last year.  They would be commandeering the antiquated library stacks, two floors in the Littauer basement, for temporary storage of the Fine Arts library, while its home, the Fogg Museum, across the college yard, is renovated — a temporary “loan” that could last a decade or more. That means the loss of much-needed classroom and computer lab space for the university’s largest department — not to mention a move-in period when even faculty offices may be unavailable.  To the economists, the news was all the worse for not having been consulted.

To what extent is the decision connected to the traumatic events of last few years?  It is impossible to really know. Certainly space in and around Harvard Yard is desperately scarce. Certainly, too, there is resentment of the economists, who have enjoyed an unusual degree of latitude within the university for many years.  There is no doubt that Summers, having agreed to shut the Fogg, somewhat casually failed to find a temporary home for its teaching library before he left.  Then again, perhaps there is nothing more to it than the authorities solving a constrained optimization problem as best they can. But it certainly looks like a measure of payback.

If so, it is probably counterproductive. Control of one’s working space is a crucial element of any job. There are many highly talented people teaching in the economics department, only a handful of them closely involved in the Shleifer affair. Surely there are other places to relocate the Fine Arts library — why not the spacious first floor of Pusey Library, whose entrance was symbolically locked during the Summers years?

If the dean wants to send a message, better he should commission an outside-Cambridge opinion on the policies at the Quarterly Journal of Economics, the nation’s oldest economics journal, published by the Harvard department since 1886. It is true that the citation rate per paper has soared at the QJE, relative to four other top journals, during the decade after Shleifer became co-editor in 1989. But it is far from clear exactly why. 

* * *

So much for the big story of 2006. Meanwhile, two extremely influential economists died last year. Milton Friedman, 94, garnered front-page headlines.  But Mark Perlman, 82, a former University of Pittsburgh professor, also will be missed.

The two men were connected. It was during Friedman’s presidential year that the American Economic Association budget swelled to record levels. What to do with the excess cash?  Friedman favored turning the Journal of Economic Abstracts into a full-fledged periodical to catalog, survey and review the growing flood of economic research. When the Journal of Economic Literature was established, he appointed Perlman to edit it.

Perlman’s father, Selig, a professor of economics at the University of Wisconsin, had been Friedman’s close friend during an ugly episode of anti-Semitism when Friedman taught there in 1940-41. The younger Perlman took the helm of the JEL and in the course of fourteen years made it into a quarterly powerhouse, featuring survey and review articles, book reviews, an annotated bibliography of newly published books, and a list of current dissertations in North American universities. Friedman later called the appointment his “greatest contribution as president.”

Perlman taught for a time at Cornell and Johns Hopkins, then settled down in Pittsburgh.  For more than thirty years, he was a familiar figure on campus — bow-tied, friendly, deeply interested in his students. Such was his impact that a group of colleagues and former students presented him a Festschrift, published in 2002 as Editing Economics: Essays in Honor of Mark Perlman.

Nearly forty years after he began it, the JEL continues to be a prime place to scout for economic news.

Thus William Easterly of New York University (The Elusive Quest for Growth, The White Man’s Burden) continued his quarrel with Columbia University’s Jeffrey Sachs, with a JEL review of Sachs’The End of Poverty: Economic Possibilities for Our Times. Easterly described Sachs as the profession’s leading proponent of mega-reform. “…[H]is recommendation throughout his career has been to it fast, do it big, do it comprehensively, and do it with lots of Western money.”  Big Pushes do not deliver on their utopian goals, argued Easterly; better a piecemeal approach.

Similarly, Naomi Lamoreaux of the University of California at Los Angeles reports on the most recent twists and turns in the QWERTY story in her review of History Matters: Essays on Economic Growth, Technology and Demographic Change.  Economic historian Paul David’s original article in 1985 on the origins of the typewriter keyboard gained much of its force from the assertion that its design was inefficient, she says; Stanley Liebowitz and Steven Margolis countered that it was no such thing. Lamoreaux argues that there is no reason path-dependent processes must lead to inefficient results; it is enough to say that history shapes technological developments in persistent ways.

Robert Skidelsky, the biographer of Keynes, carefully reviews Richard Parker’s John Kenneth Galbraith: His Life, His Politics, His Economics.  Galbraith also died last year, at 98, after a long and happy life. For twenty years in the middle of the twentieth century, Skidelsky notes, probably he was the “best-known” economist in the world.  “But he was not then, and never will be, regarded as a great economist by economists, because he produced no theories, which is what great economists are supposed to do.” Like his hero Keynes, Galbraith was an eminent public intellectual — “moralist, controversialist, stylist, wit.” And Skidelsky gives Parker’s affectionate biography the careful and respectful reading that a long book about a long life deserves. “One senses that the desire to pay homage to the still living Galbraith overcame the natural instinct of a biographer to discover more than his subject is willing to tell,” he writes. And the attempt to rebuild economics along the lines of sociology for which Parker yearns is “obviously doomed to failure.” So mainly the story has much to tell about the shifting tides of the last century, he says — though Galbraith’s grace and wit will serve as an example in any age.       

And R. Preston McAfee, of the California Institute of Technology, tucks with great gusto into Tim Harford’s surprise best-seller of last year, The Undercover Economist. The author of a much more careful book of his own for laymen (Competitive Solutions: The StrategistÕs Toolkit), McAfee praises Harford in the early going — his account of the welfare theorems “is very nice indeed.” He then gleefully dings him for Anglocentrism (“Picking Keynes as the most influential economist of the twentieth century is like picking Bobby Riggs as the most influential tennis star, confusing notoriety with influence…”) and flogs him for gullibility and imprecision. Those “failed” US spectrum auctions?  The Brits copied them down to the last detail, but Harford had swallowed a revisionist history by Oxford economist Paul Klemperer “hook, line, sinker and fishing pole.”  Harford’s account of China’s economic growth is “reasonable though glib,” though it omits the most important reason for China’s success: “China ignored the advice of Harvard economists, Russia did not.” Writes McAfee, “This is a book to make a bishop throw a silver chalice through a stained glass window”– and so he does!  

It’s a fitting symbol of another lively year in technical economics.

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