The Palgrave Companion to LSE Economics [1st ed.] 978-1-137-58273-7, 978-1-137-58274-4

Table of contents :
Front Matter ....Pages i-xiii
Front Matter ....Pages 1-1
LSE and Econometrics (Jim Thomas)....Pages 3-33
Economic History at the London School of Economics and Political Science: A View from the Periphery (Colin M. Lewis)....Pages 35-78
Accounting and the Influence of Economics at LSE (Christopher J. Napier)....Pages 79-111
Business History at LSE: An Empiricist Voice (Leslie Hannah)....Pages 113-143
LSE’s Contributions to the Economics of Social Policy (Howard Glennerster)....Pages 145-164
Economica and LSE Economics (Jim Thomas)....Pages 165-194
Front Matter ....Pages 195-195
Edwin Cannan (1861–1935) (Keith Tribe)....Pages 197-214
Arthur Lyon Bowley (1869–1957) (Adrian Darnell)....Pages 215-238
William Henry Beveridge (1879–1963) (Atsushi Komine)....Pages 239-262
R.H. Tawney (1880–1962) (Noel Thompson)....Pages 263-287
Hugh Dalton (1887–1962) (John E. King)....Pages 289-310
Frank Walter Paish (1898–1988) (Robert A. Cord)....Pages 311-328
Arnold Plant (1898–1978) (Robert A. Cord)....Pages 329-346
Lionel Robbins (1898–1984) (Susan Howson)....Pages 347-371
Friedrich Hayek (1899–1992) (Peter J. Boettke, Ennio E. Piano)....Pages 373-397
Abba P. Lerner (1903–1982) (Warren Young, Daniel Schiffman, Yaron Zelekha)....Pages 399-429
John R. Hicks (1904–1989) (Harald Hagemann)....Pages 431-461
Henry Phelps Brown (1906–1994) (Peter A. Riach)....Pages 463-485
Evan Durbin (1906–1948) (Catherine Ellis)....Pages 487-514
R.G.D. Allen (1906–1983) (Jim Thomas)....Pages 515-531
Richard Sidney Sayers (1908–1989) (Alec Cairncross, Charles Goodhart)....Pages 533-554
Ronald H. Coase (1910–2013) (Alain Marciano)....Pages 555-577
A.W.H. Phillips (1914–1975) (James Forder)....Pages 579-613
Ezra J. Mishan (1917–2014) (Euston Quah, Yew-Kwang Ng)....Pages 615-629
James Durbin (1923–2012) (Andrew Harvey, David Bartholomew)....Pages 631-640
Michio Morishima (1923–2004) (Naoki Matsuyama)....Pages 641-666
John Denis Sargan (1924–1996) (David F. Hendry, Peter C. B. Phillips)....Pages 667-695
Ralph Turvey (1927–2012) (Roger Middleton)....Pages 697-721
Richard G. Lipsey (1928–) (Max Steuer)....Pages 723-742
Richard Layard (1934–) (Richard Jackman)....Pages 743-763
Charles Goodhart (1936–) (Donald Kohn)....Pages 765-789
Meghnad Desai (1940–) (P. N. (Raja) Junankar)....Pages 791-804
Nicholas Adrian Barr (1943–) (Stuart Astill)....Pages 805-830
Stephen J. Nickell (1944–) (Jan C. van Ours)....Pages 831-856
Christopher A. Pissarides (1948–) (Etienne Wasmer)....Pages 857-893
Back Matter ....Pages 895-957

Citation preview

The Palgrave Companion to LSE Economics

Robert A. Cord Editor

The Palgrave Companion to LSE Economics

Editor Robert A. Cord Researcher in Economics London, UK

ISBN 978-1-137-58273-7 ISBN 978-1-137-58274-4  (eBook) https://doi.org/10.1057/978-1-137-58274-4 Library of Congress Control Number: 2018943850 © The Editor(s) (if applicable) and The Author(s) 2018 The author(s) has/have asserted their right(s) to be identified as the author(s) of this work in accordance with the Copyright, Designs and Patents Act 1988. This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: Stephen Finn/Alamy Stock Photo This Palgrave Macmillan imprint is published by the registered company Springer Nature Limited The registered company address is: The Campus, 4 Crinan Street, London, N1 9XW, United Kingdom

For Helen and David

Introduction

This is a volume about the economics and economists associated with the London School of Economics (LSE). It is the second in a series to be published by Palgrave examining the many and varied contributions made by important centres of economics. With only a very few exceptions, the focus of most history of economic thought studies, at least in terms of books,1 has been on schools of thought. Such an approach provides valuable insights into how competing schools interact and how some come to predominate, for whatever reason and length of time, while others fall out of fashion or indeed never attain any particular notoriety. However, a key deficiency of such a modus operandi is that it often fails to illuminate the many processes and tensions that can and do occur at the level of the individual university, the personnel of which may be fighting internal battles for supremacy while at the same time trying to establish external hegemony. Each volume in the series will consist of two parts. The first will contain a set of chapters which will consider the contributions made by a centre where these contributions are considered to be especially important, and this subjects to a mixture of personal preferences and soundings from those who know better. The second, longer part will be made up of chapters discussing the contributions of individual economists attached to a particular centre. ‘Attached’ is the crucial word. Some economists are easy to identify with a single institution as they may, for example, have spent their whole academic careers at it. Those who have moved from institution to institution 1 Articles

are of course another matter.

vii

viii     Introduction

are the more difficult case. One way forward in these instances is to place an economist in the institution where they carried out their most important work, although this, in its turn, carries with it the danger of disagreement over what ‘their most important work’ was or is perceived to be and how this has changed over time. Another factor perhaps worthy of consideration is an economist’s education. Where such an education has been received at the knee of a master, to what extent has this influenced the subsequent work of the noted pupil and how should this be considered when that pupil has flown the nest and settled at another institution? Issues of leadership style, discipleship, loyalty, access to publication outlets and to financing also enter the frame. Finally, there are issues of practicality, including space constraints and unavailability of contributors, among others. Given this matrix of possibilities, disagreement about who should be in which volume is inevitable. However, I hope that the outrage will not be too great given the overarching goal of the series. The next volume in the series will examine the University of Oxford. Robert A. Cord

Contents

Part I  Themes in LSE Economics 1

LSE and Econometrics 3 Jim Thomas

2

Economic History at the London School of Economics and Political Science: A View from the Periphery 35 Colin M. Lewis

3

Accounting and the Influence of Economics at LSE 79 Christopher J. Napier

4

Business History at LSE: An Empiricist Voice 113 Leslie Hannah

5

LSE’s Contributions to the Economics of Social Policy 145 Howard Glennerster

6

Economica and LSE Economics 165 Jim Thomas

ix

x     Contents

Part II  Some LSE Economists 7

Edwin Cannan (1861–1935) 197 Keith Tribe

8

Arthur Lyon Bowley (1869–1957) 215 Adrian Darnell

9

William Henry Beveridge (1879–1963) 239 Atsushi Komine

10 R.H. Tawney (1880–1962) 263 Noel Thompson 11 Hugh Dalton (1887–1962) 289 John E. King 12 Frank Walter Paish (1898–1988) 311 Robert A. Cord 13 Arnold Plant (1898–1978) 329 Robert A. Cord 14 Lionel Robbins (1898–1984) 347 Susan Howson 15 Friedrich Hayek (1899–1992) 373 Peter J. Boettke and Ennio E. Piano 16 Abba P. Lerner (1903–1982) 399 Warren Young, Daniel Schiffman and Yaron Zelekha 17 John R. Hicks (1904–1989) 431 Harald Hagemann 18 Henry Phelps Brown (1906–1994) 463 Peter A. Riach 19 Evan Durbin (1906–1948) 487 Catherine Ellis

Contents     xi

20 R.G.D. Allen (1906–1983) 515 Jim Thomas 21 Richard Sidney Sayers (1908–1989) 533 Alec Cairncross and Charles Goodhart 22 Ronald H. Coase (1910–2013) 555 Alain Marciano 23 A.W.H. Phillips (1914–1975) 579 James Forder 24 Ezra J. Mishan (1917–2014) 615 Euston Quah and Yew-Kwang Ng 25 James Durbin (1923–2012) 631 Andrew Harvey and David Bartholomew 26 Michio Morishima (1923–2004) 641 Naoki Matsuyama 27 John Denis Sargan (1924–1996) 667 David F. Hendry and Peter C. B. Phillips 28 Ralph Turvey (1927–2012) 697 Roger Middleton 29 Richard G. Lipsey (1928–) 723 Max Steuer 30 Richard Layard (1934–) 743 Richard Jackman 31 Charles Goodhart (1936–) 765 Donald Kohn 32 Meghnad Desai (1940–) 791 P. N. (Raja) Junankar

xii     Contents

33 Nicholas Adrian Barr (1943–) 805 Stuart Astill 34 Stephen J. Nickell (1944–) 831 Jan C. van Ours 35 Christopher A. Pissarides (1948–) 857 Etienne Wasmer Notes on Contributors 895 Index 907

List of Tables

Chapter 6 Appendix 1 Distribution of Articles and Reviews in Economica (Old Series) 182 Appendix 2(a) List of Editors of Economica (New Series) by Date 183 Appendix 2(b) Alphabetical Listing of Editors of Economica 186 Appendix 3 Articles Published in Economica by LSE Economists by Year (1931/1932–1997/1998) 187 Appendix 4 Ranking of Journals Based on Citations 188 Appendix 5 Journals Cited in LSE Economists’ CVs in 2017 189

Chapter 28 Table 1 Turvey (1951a): four types of inflationary process 702

xiii

Part I Themes in LSE Economics

1 LSE and Econometrics Jim Thomas

1 Early Developments Lionel Robbins, the head of the Economics Department at LSE from 1929 to 1961, was a sceptic when it came to the value of statistical estimation in economics. In his Nature and Significance of Economic Science (Robbins 1935: 108–109), he satirised the efforts of ‘the wretched Blank’, who, in 1907–1908, estimated the elasticity of demand for the common herring (Clupea harengus ) to be 1.3: Rough computations of this sort are not really very difficult and may have considerable utility for certain purposes. But what reason is there to suppose that he was unearthing a constant law? No doubt the herring meets certain physiological needs which are capable of fairly accurate description, although it is by no means the only food capable of meeting these needs. The demand for herring, however, is not a simple derivative of needs. It is, as it were, a function of a great many apparently independent variables. It is a function of fashion, and by fashion is meant something more than the ephemeral results I am grateful to Olav Bjerkholt, Sue Donnelly, Charles Goodhart, Vassilis Hajivassiliou, Javier Hidalgo, David Hendry, Sue Howson, Richard Layard, Peter Phillips, Steve Pischke, Peter Robinson, Nigel Rogers and Marcia Schafgans for helpful comments. Since I did not follow all of their suggestions, I remain responsible for all sins of commission and omission.

J. Thomas (*)  London School of Economics, University of London, London, UK e-mail: [email protected] © The Author(s) 2018 R. A. Cord (ed.), The Palgrave Companion to LSE Economics, https://doi.org/10.1057/978-1-137-58274-4_1

3

4     J. Thomas

of an Eat British Herrings campaign, the demand for herrings might be substantially changed by a change in the theological views of the economic subjects entering the market. It is a function of the availability of other foods. It is a function of the quantity and quality of the population. It is a function of the distribution of income within the community and changes in the volume of money. Transport changes will alter the area of demand for herrings. Discoveries in the art of cooking may change their relative desirability. Is it possible reasonably to suppose that coefficients derived from the observation of a particular herring market at a particular time and place have any permanent significance – save as Economic History? (ibid.; italics in original).1

Robbins’s answer was negative and it is perhaps not surprising that there was little interest shown in econometrics by members of the Economics Department at LSE for some considerable time. The early econometric developments at the School came from two members of the Statistics Department: A.L. Bowley and R.G.D. Allen.2 The foundation of the Econometric Society resulted largely from the efforts of Ragnar Frisch over a considerable period of time. In 1926, when he sought support for his plans, one of the four colleagues he contacted was Bowley (see Louçã and Terlica 2011: 59). When the conference to establish the society was held in December 1930, Bowley was one of the ten men elected to serve on its Council (see ibid.: 63). When the first Econometric Society meeting was held in Lausanne in September 1931, Bowley was scheduled to present a paper, though he was forced to cancel it and did not attend the meeting (see Bjerkholt 2015a: 1160). However, Bowley was responsible for organising some of the early European meetings of the society. A further link came from Bowley’s collaboration with Allen in a study of family expenditure, in which the Preface states that of the three converging sources of the investigation, ‘One is an article in Econometrica, 1935, “The Action of Economic Forces in Producing Frequency Distribution, etc.” followed by an unpublished communication to the Econometric Society in 1934 on “The Variation of Expenditure”’ (Allen and Bowley 1935: v). Allen’s links with the Econometric Society were also developing: in 1934, he published two articles in Econometrica (Allen 1934a, b), and in 1935, he was elected a Fellow of the society. Things progressed further and in 1937,

1The extent of Robbins’s knowledge of statistical theory is discussed in Thomas (2009: 411–412), where the evidence suggests that he did not take the theoretical section of the compulsory course in statistics which he should have attended as an undergraduate when studying at LSE. 2See Chapter 8 in this volume for an evaluation of Bowley and Chapter 20 for an assessment of Allen.

1  LSE and Econometrics     5

when the Cowles Commission was looking for a new Director of Research, Allen was proposed as one of the candidates: The names considered during or after the [1937 Cowes Commission Research] conference were in addition to Tinbergen, Marschak and Yntema, also R.G.D. Allen, Oskar N. Anderson, Ernest H. Phelps Brown, and Costantino Bresciani-Turroni; other names may also have been mentioned … It can be noted there seemed to be a premium on Europeans for the position as CC research director (Bjerkholt 2013, 2015b: 15).

Furthermore, Frisch held…Allen in very high regard. In October he informed Cowles that Allen had got a one-year Rockefeller fellowship and advised Cowles to get in touch with Allen and persuade him to spend time at the Commission, adding “the more I have thought the matter over the more I have come to the conclusion that Allen is the man to consider as a candidate for directorship taken everything into account”. Frisch’s overall record for later years shows perhaps that he did not always hit the mark in personal assessments but he held sound opinions in 1937– 1938 … He tentatively concluded to Cowles that he placed Allen, Marschak, and Tinbergen above the others. He also threw in the name of Phelps Brown but the proposal was not pursued (ibid.: 16).

In July 1938, Allen and his wife attended the Cowles Commission Annual Research Conference on Economics and Statistics in Colorado Springs, where Allen presented two papers, the first entitled ‘Some Statistical Measures of Labour Mobility in England’ and the second ‘Patterns of Family Expenditure: The Effect of Social Level and Family Composition’. Among those present were Harold Davis, Elmer Working, Abraham Wald, Gerhard Tintner, Henry Schultz and Alfred Cowles.3 Meanwhile, in the LSE Calendar 1935/1936, Allen offered a course of 15 lectures under the title ‘Some Problems in Econometrics’. The details were: SYLLABUS—The first part of the course consists of an account of the main statistical methods used in the description and analysis of economic phenomena. The treatment is largely non-mathematical, and the essential mathematical notions are put as simply as possible. 3See

Cowles Commission for Research in Economics (1939). I am grateful to Sue Howson and Olav Bjerkholt for bringing Allen’s connections with the Cowles Commission to my attention.

6     J. Thomas

The second part is concerned with some particular problems in econometrics, with the testing of theoretical constructions and the evaluation of fundamental economic concepts. The topics considered include the deduction of elasticities of demand and supply from market data, the analysis of family budget collections and the measurement of the cost of living (LSE 1935: 112).

In 1936–1937, the same course was on offer, but now consisting of ten lectures, whereas it was back to 15 lectures in 1937–1938. In 1938–1939, it was listed, but now as ten lectures to be given in 1939–1940. Finally, in 1939–1940, it had become nine lectures to be given in 1940–1941 and there was a note that it was to be given in alternate years. As the war took Allen off to official duties elsewhere, the course disappeared. However, the Calendar 1939/1940 listed a new course to be taught by Allen: The Econometric Approach to Business Cycle Problems, consisting of nine lectures. The details were: SYLLABUS—The course will be concerned with an exposition of recent work by Tinbergen, Frisch and others on econometric business cycle research. The emphasis will be laid as much on the statistical methods used and the nature of the ‘dynamic’ economic relations involved as on the conclusions reached in the testing of theories of cyclical fluctuations. BOOKS RECOMMENDED—Tinbergen, Econometric Approach to Business Cycle Problems, ‘Einige Grundfragen der mathematischen Konjunkartheorie’ (Archiv für mathematische Wirtschafts-und Socialforschung, 1937), ‘On the Theory of Business Cycle Control’ (Econometrica, 1938), A Statistical Testing of Business Cycle Theories, Business Cycles in the U.S.A., 1919–1937; Frisch, ‘Propagation Problems and Impulse Problems in Dynamic Economics’ (Economic Essays in Honour of Gustav Cassel ) (Given in alternate years.)

The lectures were scheduled for October 1939.4 At the onset of the Second World War, LSE was evacuated to be accommodated at Peterhouse College, Cambridge, and many academics, including, as noted, Allen, left to undertake war service.5 4Despite the close links reported above between the statisticians at the Cowles Commission and the Econometric Society, it seems that the first LSE academic to publish an article in Econometrica with the word ‘econometric’ in the title was an economist, Victor Edelberg (Edelberg 1936). A second article with ‘econometric’ in the title was Edelberg (1940). Edelberg was appointed as an Assistant (what would today be called a Teaching Assistant) in the Economics Department in 1935, but in the early 1940s he had a severe mental breakdown from which he never really recovered (see Howson 2011: 254 and Thomas, forthcoming). 5The outflow of academics from both institutions meant that teaching duties fell to a relatively small number of teachers, and as a result, students from LSE and Cambridge shared courses. According to the Calendar 1942/1943, one of the shared courses offered in the summer term by Rothbarth was a course of ten lectures under the title ‘Introduction to Econometrics’. The course was offered for a second time

1  LSE and Econometrics     7

Allen returned to LSE after the war, and in the 1946–1947 session, he taught a ten-lecture course on ‘Problems of Econometrics’ that was essentially his 1939–1940 business cycle course with the addition of Leontief ’s input–output analysis. The course was repeated in the 1947–1948 session, but then discontinued and econometrics disappeared from the LSE syllabus for a number of years.6 In the 1951–1952 session, a 10-lecture course appeared taught by Geoffrey Penrice of the Statistics Department and entitled ‘Introduction to Econometrics’. This course was provided as an option for students specialising in Statistics in the BSc(Econ), with the following syllabus: ‘Scope of Econometrics. Derivation of Supply and Demand curves by regression analysis and simultaneous probability equations. Production and Consumption functions. Problems of identification and aggregation. Connection between micro-economic theory and macro-economic models. Problems of obtaining suitable statistical data’ (LSE 1951: 353). By the following session, the course had expanded to 20 lectures and was being taught by Mr. Booker and Dr. Morton.7 The following session, it expanded again to 24 lectures and Booker and Morton were joined by W.J. Corlett, an econometrician from University College London (UCL). The course now settled down and continued in this format until the 1959– 1960 session, though with game theory and linear programming appearing in the syllabus.8 The following year, the teachers were listed as ‘Mr. Corlett and others’ and the syllabus reverted to its original 1951 format, with game theory and linear programming being dropped.9

in the summer term of the following session (LSE 1942, 1943). Erwin Rothbarth came to LSE with one of the first bursaries for students who had been displaced from Germany, graduated in 1936 and carried out research at the school until 1938, when he moved to Cambridge as a research assistant to Keynes working on national income statistics. He returned to Cambridge from internment to teach but volunteered for the British Army and was killed in Holland in November 1944. So far, I have not been able to obtain any information on what was taught on the Rothbarth course. However, perhaps one may speculate from the fact that he reviewed the second volume of Tinbergen’s League of Nations study (Rothbarth 1941) and, in an obituary of Rothbarth, the authors wrote: ‘But his most striking achievement was perhaps that he made himself a master of the new mathematical technique of writers of econometrics, such as Slutsky, Frisch, Koopmans and Tinbergen, and adapted their methods for his own work’ (Champernowne and Kaldor 1945: 131). See also Cuyvers (1983, 1983–1984) and Toporowski (2013: 122–124). 6For an account of Allen’s important contributions to economic theory, see Chapter 20 in this volume. 7In 1952, Penrice left LSE for a distinguished career in the UK Civil Service, the OECD and the IMF. 8Dr.

George Morton was a mathematician who taught game theory and linear programming. It is interesting to note that the proportion of the reading list devoted to those two topics expanded during the period when he was involved in teaching the course. 9See Gilbert (1989) for a further discussion of the teaching of econometrics during this period.

8     J. Thomas

Another important contribution from the Statistics Department was made under the direction of Professor Maurice Kendal who was interested in the analysis of time series and encouraged James Durbin to come to LSE.10 Durbin provided a number of courses that were important to the development of time series econometrics.

2 The Contribution of A.W.H. ‘Bill’ Phillips Bill Phillips played an important role in getting the Economics Department to focus on the need to increase the mathematical and statistical content in its provision of teaching and research. Coming from an engineering background, he also brought a different approach to the interpretation of macroeconomic models of the economy, by seeing the need to treat them as dynamic systems, rather than analysing them through the conventional comparative statistics. The Phillips Machine provided a dynamic simulation of a macroeconomy that could trace out over time the actual paths of adjustment of key variables to changes in parameters, such as changes in interest rates, the money supply or government expenditure.11 Phillips saw that the feedback mechanisms that engineers used to control dynamic systems (proportional control—the action taken is proportional in magnitude and opposite in sign to the error to be corrected; integral control—the action taken is proportional in magnitude and opposite in sign to the cumulated error up to that time; and derivative control—the action taken is proportional in magnitude and opposite in sign to the rate of change of the variable to be controlled) had potential similarities to the economic policies used by the government and/or other agencies in an attempt to control the economy. In two theoretical articles (Phillips 1954, 1957), he explored the theory of optimal control in dynamic models. The innovations

10James Durbin and Denis Sargan were both undergraduates at St. John’s College, Cambridge, in the 1940s. Durbin was invited back to Cambridge in 1948 by Richard Stone to work in the Department of Applied Economics. At the time, there was a good deal of research going on there on time series problems, with Guy Orcutt and Donald Cochrane working on their test and transformation for dealing with first-order (AR1) autocorrelated errors. Durbin worked on the problem with Geoffrey Watson, and this led to the development of the Durbin–Watson test. His interest in time series problems led to Durbin being appointed as an Assistant Lecturer in the Statistics Department at LSE and his involvement with econometrics teaching and research. For a full account of Durbin’s work at LSE, see Chapter 25 in this volume. 11See Chapter 23 for more information on Phillips and the Phillips Machine. For an excellent biography of Phillips and a non-technical account of his research and importance, see Bollard (2016). See also Phillips (2000).

1  LSE and Econometrics     9

were: (i) that policy should not be thought of in a static mode but rather in a dynamic mode; (ii) policy is best thought of in terms of rules; (iii) it is very hard to assess the interaction of policy and system dynamics; and (iv) some useful observations about the nature of policy were presented as a result of the simulations performed (see Pagan 2000: 130–131). At the time, most econometricians who were interested in macroeconomic modelling followed the Cowles Commission’s methodology and were estimating the parameters in a set of simultaneous equations using data collected discretely. Phillips’s approach faced a new problem: Theoretical models were formulated in continuous time, but the data were collected at discrete points of time. This problem was addressed in a number of publications (see Phillips 1956, 1959; Phillips and Quenouille 1960), with this work having important implications for later econometric developments at the School.12 In addition to the gradual increase in the teaching of econometric theory and mathematical economics at LSE, there was one interesting development that took place with respect to applied econometrics in the form of the establishment of a seminar to formulate models and submit them to statistical testing.

3 The Methodology, Measurement and Testing (M2T) Seminar The early development of applied econometrics at LSE resulted from a negative reaction by a number of the younger members of the Economics Department to the arguments put forward in Robbins’s Nature and Significance. The reaction has been well summarised by the leader of the group, Richard Lipsey (2009: 845).13 The first stage in the development of the group was methodological. Group members spent time in discussions with Dr. Joseph Agassi, a junior member of the Philosophy Department, concerning Karl Popper’s philosophy of science (see De Marchi 1988). The methodology that emerged from these discussions was, in simple terms, that, to be taken seriously, models 12While continuous time modelling was largely ignored elsewhere, Rex Bergstrom was influenced by Phillips in his work in this area and both Peter Phillips and Clifford Wymer worked on continuous time modelling as PhD students at LSE (see Mizon 1995). 13Other members of the group were Chris Archibald, Bernard Corry, Kurt Klappholz, Kelvin Lancaster, Maurice Peston and (later) Max Steuer.

10     J. Thomas

should make testable predictions and that econometrics should be used to test these predictions. This methodology led on to the two other components of the Seminar’s title: the need for relevant economic data to enable testing (measurement) and then the testing itself. The group’s methodology was basic not only in their own research but also in their reaction to the research of other economists: a number of visitors to the Seminar who came to present a model based on ‘plausible’ assumptions were nonplussed on being given an M2T grilling and being told that the model being discussed did not seem to predict anything that could be tested. Not all members of the group were concerned with all three of these components. For example, Kurt Klappholz was mainly interested in methodology (see Klappholz and Agassi 1959; Klappholz and Mishan 1962), while Chris Archibald concentrated his research on investigating whether a selection of mainstream models actually yielded testable predictions (see Archibald 1960, 1961). Others carried out empirical analyses, notable examples being Dick Lipsey’s re-estimation of the Phillips curve (Lipsey 1960, 2000) and Lipsey and Max Steuer’s attempt to test a model of inflation proposed by Kaldor (see Kaldor 1959; Lipsey and Steuer 1961).14 The M2T Seminar had a gradual impact on the teaching of applied economics: whereas in the 1950s courses in applied economics had involved plotting economic data against time and telling plausible stories about their movements, courses now began to present the results of empirical testing and discuss statistical significance and goodness of fit. In its purest form, the M2T Seminar began to change in the mid1960s with the departure from LSE of a number of the original members: Archibald and Lipsey moved to the new University of Essex, Bernard Corry and Maurice Peston went to Queen Mary College to meet an expansion in the teaching of economics within the University of London, and Kelvin Lancaster was a visitor at Columbia University in New York before deciding to stay there.15 The Seminar continued as a general meeting for the presentation of empirical research for a number of years under the chairmanship of Max Steuer, but lost its relevance and was discontinued after the development of alternative seminars within the specialised branches of economics. 14Kelvin Lancaster was an economic theorist who explored the possibility of making testable predictions in qualitative economics (see Lancaster 1962), while Bernard Corry published empirical studies of the labour market (see Corry 1961). 15The departure of this group of younger members of the staff led to a sense of disappointment on the part of some of the MSc students and was reflected satirically in one of a number of similar items performed in a cabaret at one of the Staff-Student Weekend Schools held in the 1960s: ‘Where have all the Great Men gone?’, was the lament, with Robbins being blamed for driving them away.

1  LSE and Econometrics     11

4 The Coming of the Econometricians The 1960s saw dramatic changes in the composition of the Economics Department. Robbins’s attempt to become Chairman of the Financial Times while continuing as an academic was rejected, and this, together with his appointment to chair the Commission on Higher Education, led to his retirement from LSE in 1961. A number of the long-serving senior members of the Department also retired in the years that followed (dates in parentheses show the period the professor spent in the Economics Department): Sir Arnold Plant (1930–1965), Frank Paish (1932–1965), Sir Henry Phelps Brown (1947–1968) and Richard Sayers (1947–1968).16 Following Robbins’s retirement, there was a short period of confusion during which it was unclear who the head of the department was,17 but the situation was swiftly clarified by a reorganisation of the School’s administration that led to the appointment of departmental Convenors. Convenors were to be heads of departments, but on a rotating three-year basis rather than for indefinite periods. The first Convenor of the Economics Department was Ely Devons, and, having consulted widely among the staff in the Department, he set out to attract new staff and was remarkably successful, so that by the late 1960s the Department had been joined by Rex Bergstrom,18 Denis Sargan,19 Harry Johnson, Frank Hahn and Terence

16See Backhouse (1997) for a discussion of changes that took place at LSE in the context of developments at other UK universities. He notes (p. 44) that Birmingham University introduced an MSocSc degree in 1952, which predated the developments at LSE. The driving forces at Birmingham were Terence Gorman (there from 1949 to 1962), Frank Hahn (1948–1960) and Alan Walters (1952–1968). They had already transformed undergraduate teaching at Birmingham, with courses in ‘Mathematical Economics and Econometrics’ and a compulsory individual ‘Quantitative Economics Project’ for third-year students. All three later moved to LSE. 17My irreverent comment at the time was that it reminded me of the confusion in the Politburo after the death of Stalin. 18Rex Bergstrom was an econometrician from New Zealand who came to LSE as a Reader in Economics in 1962. He returned to Auckland University in 1964 as Professor of Economics, and, when he returned to the UK in 1970, it was to the University of Essex, where he remained until 2005. While at LSE he began his research on continuous time econometrics, but as most of his research in this area was carried out after he left the School, it will not figure in this discussion of LSE’s contribution to econometrics. See Phillips (1988a, 2010) for a full discussion of Bergstrom’s research and publications. 19Durbin played an important part in these appointments. In his ET Interview, he states that: ‘Bill Phillips and I cooperated in getting two new posts at the Readership level at the school: one in the economics department and one in the statistics department. Rex Bergstrom took the post in the economics department for a time and we persuaded Denis Sargan to come from Leeds to the post in the statistics department. Soon afterwards Bergstrom left and Denis migrated to the economics department as a Professor of Econometrics’ (see Phillips 1988b: 135). For an evaluation of the influence of Bill Phillips on econometrics, see Hendry and Mizon (2000).

12     J. Thomas

Gorman.20 Sargan, who arrived at LSE in 1963, summarised the importance of these appointments: In the econometrics field, Gorman and Hahn were unique in moving to LSE from Oxford and Cambridge, where they were already well established. Gorman was already professor at Nuffield College, Oxford, in 1966, and Hahn a leading member of Churchill College, Cambridge. They were friends of long standing; they, Alan Walters and John Wise were sometimes referred to as the “Birmingham mafia” as they had all been teachers or students at Birmingham in the early 1950s. Undoubtedly, Hahn and Gorman only moved to LSE to be reunited together in the hope of founding a pioneering school of econometrics and mathematical economics, at a time when both Oxford and Cambridge were uninterested in these fields. They, together with Bill Phillips and myself, provided the critical mass sufficient to attract good students and faculty from all over the world to take and teach our courses, particularly in our new MSc in Econometrics (Sargan 2003: 433).

Further impetus for change came through changes in degrees at both the undergraduate and graduate levels. In the process of revising the BSc(Econ) degree, which had provided a limited number of courses in mathematical economics and econometrics, a new degree, the BSc(Econometrics and Mathematical Economics), was introduced that offered much more specialisation in those subjects. At the level of the MSc, LSE introduced new one-year taught degrees in 1964, an MSc(Econ) and an MSc(Econometrics and Mathematical Economics). There were conversion courses to enable undergraduates in other disciplines to enter these new degrees, with the result that there was soon a flow of students from science backgrounds with advanced mathematics coming through into the MSc(Econometrics and Mathematical Economics). The final change of interest was in the structure of the PhD, where the Economics Department first persuaded the rest of the School and then the University of London that, as an alternative to the traditional doctorate in which the degree was awarded on the basis of a single magnum opus of 75,000 words, it was possible to submit a number of shorter (and not necessarily connected) pieces of work that demonstrated the required level of originality. These changes produced a flow of outstanding

20Gorman made an important contribution to the development of the BSc(Econometrics and Mathematical Economics) degree by arguing for the inclusion of a compulsory individual ‘Quantitative Economics Project’ for third-year students, as at Birmingham. He insisted on ‘Quantitative’ rather than ‘Econometric’, this allowing for a much wider range of statistical techniques to be used than simply conventional econometric methods.

1  LSE and Econometrics     13

PhD students in econometrics in the late 1960s. The excitement of the period is described by David Hendry, the leading member of this group of Sargan’s students: The student rebellion at LSE was at its height in 1968–1969, and most of Denis’s students worked on the computer at UCL, an ocean of calm. It was a wonderful group to be with. Grayham Mizon wrote code for optimization applied to investment equations, Pravin Trivedi for efficient Monte Carlo methods and modelling inventories, Mike Feiner for “ratchet” models for imports, and Ross Williams for nonlinear estimation of durables expenditure. Also, Cliff Wymer was working on continuous-time simultaneous systems, Ray Byron on systems of demand equations, and William Mikhail on finite-sample approximation. We shared ideas and code, and Denis met with us regularly in a workshop where each student presented his or her research. Most theses involved econometric theory, computing, an empirical application, and perhaps a simulation study (Hendry 2003: 750–751).21

5 Sargan, Hendry and the LSE Tradition in Econometrics22 To understand the importance of the econometric methodology developed at LSE, it is helpful to remember the poor quality of many of the applied econometric studies undertaken in the 1960s. Most of the models being investigated were single equations, to be estimated from time series data. There were some data constraints imposed by short time series, but more important were the severe computational constraints of a pre-computer era in which computation involved mastery of the Doolittle method of matrix inversion using desktop electric calculating machines.23 A typical article might involve Section 1: the discussion of an economic theory that leads to Eq. (1): Yt = β0 + β1 X1t

(1)

with the prediction that 0  0   unobserved heterogeneity σ 2 = 0 , there is significant negative duration dependence (α < 1). However, it is not possible to estimate both parameters at the same time and get sensible results. Later on, a detailed comparison of the papers by Steve and Tony Lancaster was made in Lancaster and Nickell (1980) which has the subtitle ‘Read before the Royal Statistical Society on Wednesday, December 12th, 1979’ and contains a lengthy discussion of the two papers. This discussion is followed by the reply of the authors which was provided later, in writing. An important element in the discussion is whether it is possible to disentangle the effects of unobserved heterogeneity and duration dependence. Elbers and Ridder (1982) show the conditions under which it is possible to separate the two effects. Lancaster’s functional form of unobserved heterogeneity and duration dependence was later on used by many other researchers. However, Nickell’s intuitive idea to assume a discrete distribution for unobserved heterogeneity with two (or more) points of support also became popular due to Heckman and Singer (1984). Steve did not have an extensive follow-up on his pioneering work. Narendranathan et al. (1985) and

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Narendranathan and Nickell (1985) are two companion papers analysing the duration of unemployment. The first focuses on the effects of unemployment benefits, while the second presents a structural model in which wages and reservation wages are also included.

4.2 Employment and Wages Nickell (1978) is on employment and labour demand over the cycle. It is a theoretical paper indicating how fixed costs of adjustment affect the dynamics of labour demand. Nickell (1984a) is on the determinants of manufacturing employment in the UK. Steve estimates a model that takes into account expectations, adjustment costs and aggregation of labour types. Nickell (1986) is Steve’s contribution to the first volume of the Handbook of Labor Economics dealing with dynamic models of labour demand. An early paper on the role of unions in wage determination is Nickell (1977c) in which Steve presents parameter estimates of industry-level wage equations for Britain for the years 1966 and 1972. The main conclusion is that higher wages are associated with increased collective bargaining coverage. Wages of both men and women are higher in industries with a higher coverage. Although the association is stronger for women, Steve notes that ‘unions are not entirely blameless when it come to the significant underrepresentation of women in high wage industries’ (ibid.: 206). Another early paper on collective bargaining is Layard et al. (1978) analysing the role of unions in wage inflation and confirming the relationship between coverage and wages. Traditional bargaining theory assumes that wages and employment are determined sequentially. Once wages are negotiated, employment is determined through the labour demand curve because, conditional on wages, this gives firms the highest profits. The more recent theory of efficient bargaining suggests that it might be welfare improving if firms and unions bargain on wages and employment simultaneously because it is then possible for both firms and unions to be better off. In this case, the wage-employment combination will not be on the labour demand curve and it is possible that unemployment is reduced. Analysing data from 219 UK manufacturing firms over the period from the early 1970s to 1982, Nickell and Wadhwani have a series of three papers on wages and employment. In the first paper, Nickell and Wadhwani (1988) analyse whether or not unions bargain over employment, i.e. whether bargaining is efficient. They conclude that their ‘evidence is plausibly consistent with the labour demand model’ (ibid.: 733). They also refer to a paper, later published as Layard and Nickell (1990),

34  Stephen J. Nickell (1944–)     843

which presents a theoretical model showing that the macroeconomic implications of bargaining over employment are different from the inferences based on a partial equilibrium model. Depending on the type of production function, it is even possible that unemployment is higher under efficient bargaining. In the second paper, Nickell and Wadhwani (1990) address the issue of insider forces in wage determination. In a competitive market, an increase in labour productivity at the given wage will induce firms to expand output and employment. However, with insider forces productivity gains may translate into higher wages. The main conclusions of this second paper are that insider forces are important but also that outsider factors, such as aggregate unemployment and the share of long-term unemployment, have an impact on wage determination at the firm level. The third paper, Nickell and Wadhwani (1991), also indicates that unions in the private manufacturing sector do not bargain over employment. Denny and Nickell (1991, 1992) find that the presence of unions has a negative effect on investment by firms. This may be caused by unionised workers capturing some of the return of new projects in the form of higher wages thus reducing the incentive to invest. It may also be because the presence of unions makes it more difficult and therefore more costly to install new machinery when this requires a change in work practices. Nickell and Kong (1992) is on the role of insiders in wage determination. Analysing British industry data over a period of 25 years, the main conclusions are that insider forces are important and are related to union power and product market power. Also, the state of the aggregate labour market is important. Bell et al. (2002) and Faggio and Nickell (2005) confirm that wages are influenced by unemployment rates.

5 Unemployment 5.1 Prologue Following a few papers on unemployment durations based on individual data, Steve’s first paper dealing with aggregate unemployment is Nickell (1979c) in which, among other things, he discusses temporary employment subsidies introduced in Britain in the mid-1970s. According to Steve, this policy appears ‘to have been rather successful in fulfilling its objective’ (ibid.: 218). Nickell (1979d) shows that the number of unemployment spells over a worker’s lifetime is influenced a lot by their level of education. Layard and Nickell (1980) discuss marginal employment subsidies as a

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possible anti-unemployment measure. Under such a scheme, any firm which expands its employment will be paid a subsidy for each additional job it provides above its average level of employment during some base period. The performance of the marginal employment subsidy depends on the size of the deadweight subsidy to additional jobs that would have been provided anyway. Andrews and Nickell (1982) present a non-competitive model of the labour market with a price-setting equation, a wage-setting equation and a level of unemployment associated with a constant inflation rate. Aggregate unemployment is partly explained by some labour market institutions, in particular, taxes, employment protection legislation, unemployment benefits and union power. Nickell (1982) is on the determinants of equilibrium unemployment in Britain where equilibrium is defined as a situation in which inflows into unemployment equal outflows from unemployment. The inflow rate into unemployment is A = (I/N ), where I is the number of workers flowing into unemployment and N is the number of employed workers. The outflow rate from unemployment is B = (O/U ), where O is the number of workers who leave unemployment and U is the number of unemployed workers. There is a steady-state equilibrium in unemployment when I = O. Then, the equilibrium unemployment rate is u* = U/(U + N ) = A/(A + B ). Steve’s strategy is to estimate the parameters of A and B and then compute u*. The role of labour market institutions is limited to unemployment benefits, unfair dismissals and pressure put on the unemployed to obtain work. Layard and Nickell (1985a) develop a structural macroeconomic model of the labour market with three equations, labour demand, price determination and wage determination, explaining the non-accelerating inflation rate of unemployment (NAIRU) and deviations from it. Using British data over the period 1954–1983, both the natural rate of unemployment and the actual rate of unemployment are found to have increased significantly. This rise in the natural rate of unemployment is attributed to increases in employers’ labour taxes, unemployment benefits and union power. In Layard and Nickell (1985b), the three equation macro model is estimated for five countries: France, Germany, Japan, the UK and the USA. Union power is found to have had a significant effect in all countries except the USA; no effect of unemployment benefits is found, while taxes had significant effects only in the USA and the UK. Layard and Nickell (1986) are on male unemployment in Britain: it rose from 2% in the 1950s to 17% in 1985. The parallel increase of equilibrium unemployment is attributed partly to unemployment benefits and mismatch but mostly to union militancy and to an increase in employment protection which made employers reluctant to fill vacancies. Bean et al. (1986) is a study of the rise in unemployment in 19

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OECD countries. One of the conclusions is that structural differences in labour markets can be related to national differences in institutional and social characteristics.

5.2 Magnum Opus In 1991, the magnum opus, Unemployment: Macroeconomic Performance and the Labour Market, written jointly with Richard Layard and Richard Jackman, was published. The book builds on many previous studies often single authored by Steve but also many jointly written with Layard. It is a great example of an analysis that combines various issues that are rarely analysed in combination. There is a distinction between stocks and flows in the labour market. Long-term unemployment is more than an indicator of labour market performance but it has an effect on wage formation because it reduces the effectiveness of the matching between the unemployed and vacancies. Employment is more than a fixed number of jobs that cannot be redistributed without costs, i.e. there is no lump of labour. There are alternative theories to explain ‘the facts’. Unemployment is assumed to be the result of imperfections in both the product market and the labour market. There is a price-setting relation in which imperfectly competitive firms determine product prices as a markup over the nominal wage. There is a wage-setting relation in which an imperfectly competitive labour market wages are determined given the price level. There are several explanations for the wage-setting equation ranging from efficiency wages via unions and bargaining to search and matching models. In the model, there is a certain unemployment level that reconciles price setting and wage setting: this is the natural rate of unemployment, i.e. the NAIRU. The (simplified) structure of the model is as follows: Price setting: p−we = β0 −β1 u

(β1 > 0)

(7)

where p is log price, we is log expected wages, and u is the unemployment rate. Wage setting:

w−pe = γ0 −γ1 u

(γ1 > 0)

(8)

where w is log wage and pe is log expected prices. In equilibrium, prices and wages are equal to their expected levels and this determines the equilibrium unemployment rate, u*: Equilibrium unemployment: u∗ = (β0 + γ0 )/(β1 + γ1 )

(9)

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Any factor that exogenously raises wages (γ0 ) or prices (β0 ) raises the equilibrium unemployment rate. Any factor that raises real wage flexibility (γ1 ) or price flexibility (β1 ) reduces the equilibrium unemployment rate. In a non-equilibrium situation, there is a relationship between changes in inflation and the difference between the actual unemployment rate and the equilibrium unemployment rate: �2 p = −θ(u−u∗ )

(θ > 0)

(10)

where 2 p = p−p−1 is the change in inflation. This is a standard Phillips curve relationship. Assuming that the equilibrium unemployment rate depends on labour market institutions z, Eq. (10) can be rewritten as: u = γ z−δ �2 p

(δ > 0)

(11)

  Thus, if inflation is constant 2 p = 0 , labour market institutions are the sole determinants of unemployment, which in this case is at its equilibrium value (u = u∗ ). Referring to u*, Layard et al. (1991) note that the term non-increasing inflation rate of unemployment would be a more accurate term than the NAIRU. If inflation is increasing, unemployment goes down; if inflation is decreasing, unemployment goes up. Taken to the limit, unemployment can only be reduced through a reduction of equilibrium unemployment for which changes in labour market institutions are needed. Eq. (11) has been estimated frequently using cross-country time series data. Often, but not always, five-year or six-year averages over different time periods are used instead of yearly information to remove the effect of cyclical fluctuations. The main conclusion of the analysis presented in the book is that distortions in the labour market are predominantly related to the system of benefits and to the process of wage determination. Unemployment benefits introduce a moral hazard problem because it is less costly for workers to remain unemployed. In wage negotiations, decentralised unions and employers set the wage too high because they do not take into account negative spillovers on employment. Early retirement and work-sharing are policies to be advised against because they are based on the lump of labour fallacy. This is the idea that output and thus the number of working hours is fixed and can be redistributed without costs. The main reason why the idea of a lump of labour is a fallacy is the response of wages and prices. If unemployment were to be reduced initially through early retirement or shorter working hours, wages would increase, for example, because the union

34  Stephen J. Nickell (1944–)     847

bargaining position improves. Such a wage increase would induce firms to charge higher prices, thus causing inflation to go up. This rise in inflation can only be stopped if unemployment goes up, back to its original equilibrium value. The first print of the book on unemployment was in 1991. In 2005, a reprint edition was published. This reprint edition had the same content as 1991, except for an extensive introduction stating that the book had ‘stood the test of time’ (Layard et al. 2005: xiii). The first print of the book was reviewed rather critically by Phelps (1992), while Blanchard (2007) wrote a favourable review of the reprint version. Both review articles were published in the Journal of Economic Literature, and thus, it is the only book about which two review articles have appeared in this journal.

5.3 Follow-up The book on unemployment popularised the analysis of the relationship between labour market performance and labour market institutions. It was by no means the end of Steve’s research on unemployment issues. He wrote several review papers on unemployment. Nickell (1990b) presents an extensive survey of the determinants of unemployment, providing again a motivation for the macroeconomic model consisting of wage setting, price setting and long-term unemployment being determined by supply-side factors. Nevertheless, according to Steve, ‘pinning down the supply side factors which determine levels in the long run has proved to be very tricky’ (ibid.: 431) and ‘a lot has been achieved, but we remain a long way from a generally accepted view of the fundamental causes of unemployment’ (ibid.). Nickell and Bell (1996) compare European and US unemployment to investigate whether the differences in development are due to a shift in demand for the unskilled on both sides of the Atlantic, with relative wages being rigid in Europe and flexible in the USA. The conclusion is that this is not what has been going on. In many European countries, the demand for both skilled and unskilled workers has fallen. Nickell (1997) is one of Steve’s most cited articles. It compares unemployment and labour market rigidities in Europe and North America. Nickell (1998) is a companion paper with an overlapping empirical part (the difference being that one has the owner-occupation rate as explanatory variable, while the other does not, even if this does not make much of a difference). Based on 20 OECD countries and two time periods—1983–1988 and 1989–1994—unemployment rates are regressed on labour market

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institutions and changes in inflation. Unemployment benefits—both level and duration—as well as union density and union coverage and the tax rate have positive effects on unemployment, while active labour market policies and coordination of wage bargaining have negative effects. Employment protection has a negative effect on short-term unemployment only. Nickell (1997) concludes that high unemployment is related to generous unemployment benefits in combination with little or no pressure on the unemployed to obtain work. Furthermore, high unionisation is an important determinant of unemployment when wages are bargained collectively and there is no coordination between either unions or employers in wage bargaining. Unemployment is also influenced by high overall taxes or a combination of high minimum wages for young people associated with high payroll taxes. Finally, unemployment is high in the case of poor educational standards at the bottom end of the labour market. Labour market institutions that are more or less irrelevant are: employment protection legislation, generous levels of unemployment benefits and high union density and coverage as long as they are offset by high levels of wage coordination. Nickell (1998) stresses that understanding differences in unemployment rates between countries is easier than understanding why unemployment at the end of the 1990s was so much higher than in the 1980s: ‘[W]e do not have a really satisfactory answer’ (ibid.: 813). The main reason is that the factors that could explain the rise in unemployment from the 1960s to the 1980s have lost their influence when comparing the 1960s to the 1990s: ‘[I]ndustrial militancy is no worse, oil and commodity prices are no higher, benefit systems are not much more generous, real interest rates are not much higher and labour markets are not much more rigid’ (ibid.: 814). Nickell and Layard (1999) provide a general overview of the relationships between unemployment and labour market institutions. They conclude that the main institutions influencing unemployment are unions and social security systems. In addition, they also claim that to reduce unemployment, governments should encourage product market competition to reduce union power and eliminate the negative effect of unions. Finally, governments should link the reform of unemployment benefit systems to active labour market policies in order to move people from welfare to work. The last sentence of the paper reads that, ‘by comparison, time spent worrying about strict labour market regulations, employment protection and minimum wages is probably time largely wasted’ (ibid.: 3030). The work by Steve and Richard Layard has had quite a few follow-up studies. Belot and van Ours (2001), for example, argue that the role of each labour market institution depends on the rest of the institutional

34  Stephen J. Nickell (1944–)     849

framework. They show that if country fixed effects are included and the analysis is restricted to direct effects of labour market institutions only home ownership has a significant (positive) effect on unemployment rates. However, if in addition interactions between labour market institutions are allowed, there are significant effects of centralised bargaining in combination with employment protection and union density and of unemployment benefits, while tax rates turn out to be not significant. Belot and van Ours (2004) find that there is a direct negative effect on unemployment of the unemployment insurance (UI) replacement rate, while there are positive interaction effects between taxes and UI replacement rates and between union density and centralisation. Other studies on the effect of labour market institutions on labour market performance include Scarpetta (1996), Elmeskov et al. (1998), Daveri and Tabellini (2000), Arpaia and Mourre (2005), Bassanini and Duval (2006, 2009), van Ours (2015), and Dixon et al. (2017). The discussion on whether unemployment is influenced by changes in labour market institutions in combination with economic shocks or by changes in labour market institutions alone goes back to Blanchard and Wolfers (2000) who claim that labour market institutions in Europe did not change a lot in the 1980s, whereas unemployment rates went up substantially. They investigate in particular the interactions between labour market institutions and economic shocks, finding that shocks have a larger positive effect on unemployment when unemployment benefits are high and long-lasting, employment protection is strict, union density is high, and coordination in wage negotiations is low. Nickell et al. (2005) conclude that changing labour market institutions provide a reasonably satisfactory explanation of the broad pattern of longer-term unemployment shifts in the OECD. Changes in benefit systems, increases in labour taxes, changes in union variables and employment protection contribute to changes in unemployment. They conclude that interactions between average values of institutions and shocks make no significant additional contribution to the understanding of OECD unemployment changes. Thus, the paper deals with the criticism by Blanchard and Wolfers (ibid.). The 2005 paper is the last of Steve’s papers in which cross-country time series data are used to study the effects of labour market institutions on unemployment. The idea that to understand differences in labour market performance labour market institutions have to be taken into account is still very much alive (Boeri and van Ours 2013). The highly influential OECD Jobs Study in 1994 mirrors the ideas of Steve and his co-authors, while their research is also reflected in various other OECD and IMF papers.

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6 Conclusion One of the main characteristics of labour market institutions is that they rarely change and, if they do, the change is more often than not marginal. This makes it hard to establish the labour market effects of a change in a particular institution, let alone the simultaneous change of many institutions. In his work on unemployment, Steve is well aware that it is hard to make causal inferences on the basis of aggregate data. Summarising the complexity of any labour market institution in one or two numbers is indeed a serious limitation. In a 1998 paper, Steve stresses that differences in labour market institutions give ‘some understanding of why unemployment varies such a great deal across different countries’ (ibid.: 813), while in a 1997 paper he emphasises the limitations of cross-country time series analysis: ‘[W]e see them as a helpful overview of the correlations in the data and nothing more’ (ibid.: 65). Establishing causality is often restricted to particular labour market institutions focusing on a specific policy change or discontinuity in coverage in a certain country. There are many more studies on the effects of unemployment benefits (Tatsiramos and van Ours 2014) or particular active labour market policies (Card et al. 2010) for which variation over time or discontinuities in coverage can be exploited than there are on employment protection legislation, union coverage or wage bargaining, where a clean research design is harder to find. In many of Steve’s publications, he advocates product market competition to reduce the influence of unions. This does not imply that he is an advocate of a labour market without institutions. After all, the 1991 book on unemployment was dedicated ‘to the millions who suffer through want of work’ (Layard et al. 1991: v). In the 2005 version of the book, it is stressed that it is important to not just focus on jobs but to make a distinction between unemployment and inactivity: ‘[I]f we are concerned with human misery and frustration, unemployment and inactivity are totally different’ (Layard et al. 2005: xxxix). In response to Minford et al. (1983) who among other policies recommend a reduction in the level of unemployment benefits such that some 15% of the unemployed will suffer a 20% fall in real disposable income, Nickell (1984b) states that the expected reduction in unemployment is based on a misspecified model and, once corrected for, the effects of the proposed policies ‘are very much smaller than those which he [Minford] presents. Relative to the hardship and social disruption which these policies would cause, the benefits then seem rather small’ (ibid.: 953). In an assessment of the Thatcher years, Layard and Nickell (1989) conclude that there are two main pluses, the increase in productivity and the fall in inflation. However, the poor unemployment performance and the increase in

34  Stephen J. Nickell (1944–)     851

inequality are considerable minuses. In Nickell (2004), Steve states that relative poverty in Britain has risen massively since the late 1970s because of increasing worklessness, rising earnings dispersion and benefits indexed to prices, not wages: ‘So poverty is now at a very high level’ (ibid.: C24). Steve’s research was not developed according to a master plan. Surprisingly, some of his major contributions to the literature were almost stand-alone. Or, perhaps unsurprisingly. Describing his research, Steve has stated that: ‘I worked it out and moved on’ (personal conversation). Clear examples of working it out and moving on are the dynamic fixed effects panel data model and the model explaining individual unemployment durations. Steve was at the forefront of these two models which were then further developed by other researchers. Steve never pursued a PhD but supervised some 70 PhD students who successfully completed their doctorate mostly under his sole supervision, probably more than any other UK economist. From 2011 to 2016, he worked at the UK Office for Budget Responsibility because, in his own words, he ‘wanted to do something useful’ (personal conversation).

References Main Works by Stephen J. Nickell Andrews, M. and S.J. Nickell (1982). ‘Unemployment in the United Kingdom Since the War’. Review of Economic Studies, 49(5): 731–759. Bean, C., R. Layard and S.J. Nickell (1986). ‘The Rise in Unemployment: A Multicountry Study’. Economica, New Series, 53(210): S1–S22. Bell, B., S.J. Nickell and G. Quintini (2002). ‘Wage Equations, Wage Curves and All That’. Labour Economics, 9(3): 341–360. Denny, K. and S.J. Nickell (1991). ‘Unions and Investment in British Manufacturing Industry’. British Journal of Industrial Relations, 29(1): 113–121. Denny, K and S.J. Nickell (1992). ‘Unions and Investment in British Industry’. Economic Journal, 102(413): 874–887. Faggio, G. and S.J. Nickell (2005). ‘The Responsiveness of Wages to Labour Market Conditions in the UK’. Labour Economics, 12(5): 685–696. Lancaster, T. and S.J. Nickell (1980). ‘The Analysis of Re-employment Probabilities for the Unemployed’. Journal of the Royal Statistical Society, Series A, 143(2): 141–165. Layard, R., D. Metcalf and S.J. Nickell (1978). ‘The Effect of Collective Bargaining on Relative and Absolute Wages’. British Journal of Industrial Relations, 16(3): 287–302.

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Layard, R. and S.J. Nickell (1980). ‘The Case for Subsidising Extra Jobs’. Economic Journal, 90(357): 51–73. Layard, R. and S.J. Nickell (1985a). ‘The Causes of British Unemployment’. National Institute Economic Review, 111(1): 62–85. Layard, R. and S.J. Nickell (1985b). ‘Unemployment, Real Wages and Aggregate Demand in Europe, Japan and the U.S’. Carnegie–Rochester Conference Series on Public Policy, 23(1): 143–202. Layard, R. and S.J. Nickell (1986). ‘Unemployment in Britain’. Economica, New Series, 53(210): S121–S169. Layard, R. and S.J. Nickell (1989). ‘The Thatcher Miracle?’. American Economic Review, 79(2): 215–219. Layard, R. and S.J. Nickell (1990). ‘Is Unemployment Lower if Unions Bargain Over Employment?’. Quarterly Journal of Economics, 105(3): 773–787. Layard, R. and S.J. Nickell (2011). Combating Unemployment. IZA Prize in Labor Economics. Oxford: Oxford University Press. Layard, R., S.J. Nickell and R. Jackman (1991). Unemployment: Macroeconomic Performance and the Labour Market. First edition. Oxford: Oxford University Press. Layard, R., S.J. Nickell and R. Jackman (2005). Unemployment: Macroeconomic Performance and the Labour Market. Second edition. Oxford: Oxford University Press. Narendranathan, W., S.J. Nickell and J. Stern (1985). ‘Unemployment Benefits Revisited’. Economic Journal, 95(378): 307–329. Narendranathan, W. and S.J. Nickell (1985). ‘Modelling the Process of Job Search’. Journal of Econometrics, 28(1): 29–49. Nickell, S.J. (1974a). ‘On the Role of Expectations in the Pure Theory of Investment’. Review of Economic Studies, 41(1): 1–19. Nickell, S.J. (1974b). ‘On Expectations, Government Policy and the Rate of Investment’. Economica, New Series, 41(163): 241–255. Nickell, S.J. (1975). ‘A Closer Look at Replacement Investment’. Journal of Economic Theory, 10(1): 54–88. Nickell, S.J. (1977a). ‘The Influence of Uncertainty on Investment’. Economic Journal, 87(345): 47–70. Nickell, S.J. (1977b). ‘Uncertainty and Lags in the Investment Decisions of Firms’. Review of Economic Studies, 44(2): 249–263. Nickell, S.J. (1977c). ‘Trade Unions and the Position of Women in the Industrial Wage Structure’. British Journal of Industrial Relations, 15(2): 192–210. Nickell, S.J. (1978). ‘Fixed Costs, Employment and Labour Demand Over the Cycle’. Economica, New Series, 45(180): 329–345. Nickell, S.J. (1979a). ‘Estimating the Probability of Leaving Unemployment’. Econometrica, 47(5): 1249–1266. Nickell, S.J. (1979b). ‘The Effect of Unemployment and Related Benefits on the Duration of Unemployment’. Economic Journal, 89(353): 34–49.

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Nickell, S.J. (1979c). ‘Unemployment and the Structure of Labour Costs’. Carnegie–Rochester Public Policy Conference Series, 11(1): 187–222. Nickell, S.J. (1979d). ‘Education and Lifetime Patterns of Unemployment’. Journal of Political Economy, 87(5): S117–S131. Nickell, S.J. (1981). ‘Biases in Dynamic Models with Fixed Effects’. Econometrica, 49(6): 1417–1426. Nickell, S.J. (1982). ‘The Determinants of Equilibrium Unemployment in Britain’. Economic Journal, 92(367): 555–575. Nickell, S.J. (1984a). ‘An Investigation of the Determinants of Manufacturing Employment in the UK’. Review of Economic Studies, 51(4): 529–557. Nickell, S.J. (1984b). ‘A Review of Unemployment: Cause and Cure, by P. Minford with D. Davies, M. Peel and A. Sprague’. Economic Journal, 94(376): 946–953. Nickell, S.J. (1986). ‘Dynamic Models of Labour Demand’. Chapter 9 in O. Ashenfelter and R. Layard (eds) Handbook of Labor Economics. Volume 1. Amsterdam: North-Holland: 473–522. Nickell, S.J. (1987). ‘Why Is Wage Inflation in Britain So High?’. Oxford Bulletin of Economics and Statistics, 49(1): 103–128. Nickell, S.J. (1990a). ‘Inflation and the UK Labour Market’. Oxford Review of Economic Policy, 6(4): 26–35. Nickell, S.J. (1990b). ‘Unemployment: A Survey’. Economic Journal, 100(401): 391–439. Nickell, S.J. (1996). ‘Competition and Corporate Performance’. Journal of Political Economy, 104(4): 724–746. Nickell, S.J. (1997). ‘Unemployment and Labour Market Rigidities: Europe Versus North America’. Journal of Economic Perspectives, 11(3): 55–74. Nickell, S.J. (1998). ‘Unemployment: Questions and Some Answers’. Economic Journal, 108(448): 802–816. Nickell, S.J. (1999). ‘Product Markets and Labour Markets’. Labour Economics, 6(1): 1–20. Nickell, S.J. (2004). ‘Poverty and Worklessness in Britain’. Economic Journal, 114(494): C1–C25. Nickell, S.J. and B. Bell (1996). ‘Changes in the Distribution of Wages and Unemployment in OECD Countries’. American Economic Review, 86(2): 302–308. Nickell, S.J. and P. Kong (1992). ‘An Investigation into the Power of Insiders in Wage Determination’. European Economic Review, 36(8): 1573–1599. Nickell, S.J. and R. Layard (1999). ‘Labour Market Institutions and Economic Performance’. Chapter 46 in O. Ashenfelter and D. Card (eds) Handbook of Labor Economics. Volume 3. Amsterdam: North-Holland: 3029–3084. Nickell, S.J. and D. Metcalf (1978). ‘Monopolistic Industries and Monopoly Profits or, Are Kellogg’s Cornflakes Overpriced?’. Economic Journal, 88(350): 254–268.

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Nickell, S.J. and D. Nicolitsas (1997). ‘Wages, Restrictive Practices and Productivity’. Labour Economics, 4(3): 201–221. Nickell, S.J. and D. Nicolitsas (1999). ‘How Does Financial Pressure Affect Firms?’. European Economic Review, 43(8): 1435–1456. Nickell, S.J., D. Nicolitsas and N. Dryden (1997). ‘What Makes Firms Perform Well?’. European Economic Review, 41(3–5): 783–796. Nickell, S.J., D. Nicolitsas and M. Patterson (2001). ‘Does Doing Badly Encourage Management Innovation?’. Oxford Bulletin of Economics and Statistics, 63(1): 5–28. Nickell, S.J., L. Nunziata and W. Ochel (2005). ‘Unemployment in the OECD Since the 1960s: What Do We Know?’. Economic Journal, 115(500): 1–27. Nickell, S.J. and G. Quintini (2003). ‘Nominal Wage Rigidity and the Rate of Inflation’. Economic Journal, 113(490): 762–781. Nickell, S.J. and J. Tymes (1976). ‘On the Properties of Linear Decision Rules and Their Derivation by an Iterative Procedure’. Econometrica, 44(2): 323–336. Nickell, S.J., J. Vainiomaki and S. Wadhwani (1994). ‘Wages and Product Market Power’. Economica, New Series, 61(244): 457–473. Nickell, S.J. and J.C. van Ours (2000a). ‘The Netherlands and the United Kingdom: A European Unemployment Miracle?’. Economic Policy, 15(30): 135–180. Nickell, S.J. and J.C. van Ours (2000b). ‘Why Has Unemployment in the Netherlands and the United Kingdom Fallen So Much?’. Canadian Public Policy, 26(July): S201–S220. Nickell, S.J. and S. Wadhwani (1988). ‘Unions, Wages and Employment: Tests Based on UK Firm-Level Data’. European Economic Review, 32(2–3): 727–733. Nickell, S.J. and S. Wadhwani (1990). ‘Insider Forces and Wage Determination’. Economic Journal, 100(401): 496–509. Nickell, S.J. and S. Wadhwani (1991). ‘Employment Determination in British Industry: Investigations Using Micro-data’. Review of Economic Studies, 58(5): 955–969. Nickell, S.J., S. Wadhwani and M. Wall (1992). ‘Productivity Growth in UK Companies’. European Economic Review, 36(5): 1055–1085.

Other Works Referred To Arellano, M. and S. Bond (1991). ‘Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations’. Review of Economic Studies, 58(2): 277–297. Arpaia, A. and G. Mourre (2005). ‘Labour Market Institutions and Labour Market Performance: A Survey of the Literature’. Economic Paper 238. Brussels: European Commission.

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Bassanini, A. and R. Duval (2006). ‘Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions’. Economics Department Working Papers 486. Paris: OECD. Bassanini, A. and R. Duval (2009). ‘Unemployment, Institutions and Reform Complementarities: Re-assessing the Aggregate Evidence for OECD Countries’. Oxford Review of Economic Policy, 25(1): 40–59. Belot, M. and J.C. van Ours (2001). ‘Unemployment and Labour Market Institutions: An Empirical Analysis’. Journal of the Japanese and International Economies, 15(4): 403–418. Belot, M. and J.C. van Ours (2004). ‘Does the Recent Success of Some OECD Countries in Lowering Their Unemployment Rates Lie in the Clever Design of Their Labour Market Reforms?’. Oxford Economic Papers, 56(4): 621–642. Blanchard, O. (2007). ‘A Review of Richard Layard, Stephen Nickell and Richard Jackman’s Unemployment: Macroeconomic Performance and the Labour Market ’. Journal of Economic Literature, 45(2): 410–418. Blanchard, O. and J. Wolfers (2000). ‘The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence’. Economic Journal, 110(462): 1–33. Boeri, T. and J.C. van Ours (2013). The Economics of Imperfect Labour Markets. Second edition. Princeton and Oxford: Princeton University Press. Card, D., J. Kluve and A. Weber (2010). ‘Active Labour Market Policy Evaluation: A Meta-Analysis’. Economic Journal, 120(548): F452–F477. Daveri, F. and G. Tabellini (2000). ‘Unemployment, Growth and Taxation in Industrial Countries’. Economic Policy, 15(30): 47–104. Dixon, R., G.C. Lim and J.C. van Ours (2017). ‘Revisiting the Okun Relationship’. Applied Economics, 49(28): 2749–2765. Elbers, C. and G. Ridder (1982). ‘True and Spurious Duration Dependence: The Identifiability of the Proportional Hazard Model’. Review of Economic Studies, 49(3): 403–409. Elmeskov, J., J.P. Martin and S. Scarpetta (1998). ‘Key Lessons for Labour Market Reforms: Evidence from OECD Countries’ Experience’. Swedish Economic Policy Review, 5(2): 205–252. Heckman, J.J. and B. Singer (1984). ‘A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data’. Econometrica, 52(2): 271–320. Lancaster, T. (1979). ‘Econometric Methods for the Duration of Unemployment’. Econometrica, 47(4): 939–956. Minford, A.P.L., P. Ashton, M. Peel, D. Davies and A. Sprague (1983). Unemployment: Cause and Cure. Oxford: Basil Blackwell. OECD (1994). The OECD Jobs Study: Evidence and Explanations. Volumes I and II. Paris: OECD. Phelps, E.S. (1992). ‘A Review of Unemployment ’. Journal of Economic Literature, 30(3): 1476–1490.

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Scarpetta, S. (1996). ‘Assessing the Role of Labour Market Policies and Institutional Settings on Unemployment: A Cross-Country Study’. OECD Economic Studies, 26(1): 43–98. Tatsiramos, K. and J.C. van Ours (2014). ‘Labour Market Effects of Unemployment Insurance Design’. Journal of Economic Surveys, 28(2): 284–311. van Ours, J.C. (2015). ‘The Great Recession Was Not So Great’. Labour Economics, 34(June): 1–12.

35 Christopher A. Pissarides (1948–) Etienne Wasmer

1 Introduction1 It is a great honour to write about Christopher Pissarides’ contributions to economics. My own ‘match’ with his work started in the year before studying at LSE: my co-students on the MRes (Econ) degree at DELTA (a forerunner of the Paris School of Economics) were, in the mid-1990s, in search of a robust framework to analyse the labour markets in Europe. Two decades after the oil shocks, Western European economies had been strongly hit by a deep economic recession. Europe faced a rapid rise in unemployment in all segments of the working age population, including, and this was new, the segment of most skilled workers. We were searching for a relevant model of labour markets where unemployment would not be either voluntary or involuntary and where Keynesian demand effects would not be the only factor behind the level of employment. We found the perfect framework in Chris’s Equilibrium Unemployment Theory (Pissarides 1990). It was not yet a classic read, but we felt it would soon become one. In his approach, 1A

part of this chapter is a translation of a survey previously written by the author (Wasmer 2011) reproduced here with the permission of, and with thanks to, the editor of Revue d’Économie Politique. I also thank Christian Haefke and Etienne Lalé for a discussion on the first draft and Rachel Ngai and Claudio Michelacci for insightful exchanges. Samuel Fitoussi provided valuable assistance with the translation. All remaining errors are mine.

E. Wasmer (*)  Division of Social Science, NYU Abu Dhabi, Abu Dhabi, United Arab Emirates e-mail: [email protected] © The Author(s) 2018 R. A. Cord (ed.), The Palgrave Companion to LSE Economics, https://doi.org/10.1057/978-1-137-58274-4_35

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equilibrium unemployment was the outcome of a balance between job creation and job destruction. The analysis would make it possible to analyse structural policies, demand effects, the impact of changes in the interest rate and active and passive labour market policies. Equilibrium Unemployment Theory offered a beautiful explanation of the medium-run unemployment rate, arising as a balance between the hiring costs and labour market congestion on the one hand, and profits, technology and wage-setting institutions or individual bargaining power of workers on the other. Digging further, one would find well-defined second best concepts and interesting dynamic implications that matched the data qualitatively. The framework could also be extended to growth and price dynamics. That looked easy. What more could we ask? We adopted the framework for all issues concerning labour markets, and this is how it all started for a generation of labour economists. With the book in mind and an illegal photocopy in our luggage (the first edition published in 1990 had not been reprinted and was no longer in bookstores), a few of us crossed the Channel to attend courses in the PhD programme at the London School of Economics (LSE) and I naturally asked Chris to supervise my doctorate. Equilibrium Unemployment Theory was a ‘mid-term’ achievement: it was the culmination of what by then was two and half decades of consistent work on the determinants of unemployment in an equilibrium labour demand and supply framework. This research programme would, however, be further developed by Chris and his main co-authors in the subsequent two and half decades: he would systematically fill in the gaps in the theory. In particular, Chris went on to analyse endogenous job destruction, empirically measuring the so-called matching function, discussing the design and inefficiencies of labour policies (employment protection, unemployment insurance, training) and exploring the issue of creative destruction. In doing so, Chris was also contributing to the recognition that Keynesian solutions to unemployment based on cyclical deficits or monetary policy were neither a good starting point nor a final response to the unemployment problem in Europe. This achievement is probably overlooked, but it may be one of his most important, with a long-lasting impact on economic policy debates, especially in Europe. At the same time, however, it does not mean that the demand side is forgotten about; indeed, factors which affect the demand for labour are clearly present in the framework. Such mechanisms are actually prominent in Chris’s policy discussions on the post-Great Recession, in particular on the management of the Greek crisis by international institutions.

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After the period devoted to the study of frictional unemployment, a medium-run issue, Chris’s work has more recently focused on longerrun issues such as the sectoral reallocation of labour, technical change and growth. The contiguity is obvious: these are cousin topics of those covered in his work on unemployment because there is only a small step from a labour matching function to the process of reallocation of labour across sectors. Finally, and most recently, in public lectures Chris has addressed the important and related topics of robotisation of the economy, and artificial intelligence and its labour market impact, inspired by his early contributions to the capitalisation effect of growth. If there is a common denominator to all these topics, it is the central idea of the reallocation of labour across jobs, occupations, skill categories and places. The matching function described later in this chapter is indeed a very convenient tool with which to highlight the costs associated with reallocation. These costs are either time costs or financial costs and have a significant cyclical behaviour that requires proper and rich analytical tools. Such reallocation costs notably depend on the current value of inputs such as the number of job seekers, the effort they put into search and the number of firms willing to recruit and their advertising effort, and have been shown to be central and empirical determinants of unemployment levels and fluctuations. It is impossible to summarise all the work done by Chris and its influence in the field a fortiori. Excellent literature reviews have been written, such as Mortensen (1986), Mortensen and Pissarides (1999a) in the Handbook of Labor Economics and their survey in the Handbook of Macroeconomics (Mortensen and Pissarides 1999b). I will instead show the coherence of his matrix of analysis by discussing its inspiration, then developing the role of frictions in quantitative macroeconomic work, the role of frictions in economic policy prescriptions, the role of frictions in thinking about longer-term issues such as growth and sectoral change and, finally, the likely development of the approach beyond the labour market, in financial and goods markets in particular. Chris’s life and career, as portrayed in Nobelprize.org (2010), on which this section is drawn, have been rich. He was born in February 1948 in Nicosia, Cyprus. His parents had roots in the village of Agros in the Troodos Mountains. Both were at one time or another involved in the clothing business, with some success. Chris’s schooling was disrupted by events related to independence from British colonial rule, and his years in Nicosia were often punctuated by the sounds of ‘soldiers, flying bullets and bombs’, as he would put it later. He then travelled to London to study for his A Levels,

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followed by an undergraduate degree in economics at Essex University, where he came under the influence of Richard Lipsey, Michael Parkin and Chris Archibald. Despite a subsequent offer to study for a doctorate at Harvard and an early meeting with Dale Mortensen who offered to supervise his PhD at Northwestern, Chris chose to go to LSE. He would report that he experienced there a ‘disorganised approach to doctoral studies’ (ibid.); however, he was encouraged to read the classics, Keynes and Hicks under the guidance of his supervisor, Michio Morishima. Having secured a PhD on search theory, Chris was appointed to a position in the research division of Cyprus’s central bank in early 1974. Personal matters meant that he was, somewhat fortuitously, aboard one of the very last civilian flights out of Nicosia Airport before the overthrow of the Makarios government on 15 July 1974 by the Greek army, replacing it with Greek military rule. This was followed by an invasion by the Turkish army and the division of Cyprus, which has lasted to this day. Chris was stuck in Athens. The partition of Cyprus had two personal consequences: first, he lost all of his belongings and a piece of land he had just acquired; second, he was in desperation at not being able to return to Cyprus. When he heard that the UK had vacant academic positions, he considered them seriously. Chris returned to the UK, taking up a one-year lectureship at the University of Southampton. He would soon get a position back at LSE, in 1976, where he has been ever since. It was on his return to LSE that Chris became involved with the labour research group being established by Richard Layard. Even though he did not consider himself to be a labour economist, Chris’s association with the so-called Layard Group resulted in a fuller appreciation of the importance of the empirical implications of his research and helped shaped his focus on the then very topical problem of unemployment. Two research visits to the USA followed, including a particularly productive six-month stay at the Industrial Relations Section at Princeton University. Meanwhile, the influential Centre for Labour Economics was born at LSE, where Chris would meet and discuss economics with Bob Solow, Jacques Drèze, Edmond Malinvaud, Orley Ashenfelter, Olivier Blanchard and Rudi Dornsbusch. However, Chris felt that his work on search theory was outside the dominant approach of the Centre, making it certainly more original but leaving it in relative isolation. In 1990, Chris and his young family spent a year at the University of California, Berkeley. It was during this time that he began his collaboration with Dale Mortensen. Within a few months, this led to their famous endogenous job destruction paper, on which they worked together in many places, including the famous Bellagio Center in Italy. In the mid-1990s, when I got

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to know him, Chris would devote more time to other activities, including academic administration at LSE: he chaired the Economics Department from 1996 to 1999, and a particular legacy was the decision to build a little bridge (a ‘passerelle’) connecting the Department to another building. Chris also had a major involvement with the University of Cyprus.

2 Origin and Influences Working our way backwards, we can start at the main achievement, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, awarded to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides in 2010 for their work on markets with search frictions, in large part covering the so-called DMP (Diamond–Mortensen–Pissarides) model. The 2010 Prize was one of a long list of prizes which had, over the previous 15 years, rewarded work on market imperfections. In particular, Leonid Hurwicz, Eric Maskin and Roger Myerson received the 2007 Prize for mechanism design in the presence of asymmetric information, George Akerlof, Michael Spence and Joseph Stiglitz’s shared the 2001 Prize for the analysis of markets in the presence of asymmetric information, and the 1996 Prize was awarded to James Mirrlees and William Vickrey for their analysis of incentives in the presence of asymmetric information. More recently, the 2012 Prize was awarded to Alvin Roth and Lloyd Shapley for the theory of stable allocations and the practice of market design. The DMP model is also deeply connected to the foundations of game theory developed by John Nash (1994 Prize) and to the dynamic macroeconomic theory proposed by Tom Sargent (2011 Prize). What made the search and matching approach novel was its careful discussion of the terms of economic exchange, as an input of production and not as an abstract construct or an absentee concept such as the Walrasian auctioneer. Indeed, most economic models assume that contact and thus exchange between two segments of a market is instantaneous, that this is technologically possible and that trade is limited only by the inability to conclude the exchange due, for example, to a lack of income, lack of production or the price not being suitable to satisfy both parties. Instead, in the search approach, agents are only imperfectly informed of their environment and are not aware of all available exchange opportunities. This relative lack of knowledge can for instance be due to the importance of heterogeneity in the labour market, the geographical dispersion of economic opportunities, the variety of skills needed and the sectoral division of labour.

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The search approach develops the foundations of this more realistic world where contacts and subsequent exchanges are costly. Agents need to devote significant resources to acquire knowledge about the information (time searching, opportunity cost). In the theory, after a contact occurs randomly, exchange opportunities may still not be realised, but this is the outcome of a rational decision taking into account the intrinsic difficulty in contacting alternative trading partners from that point in time. The theory of search markets thus differs conceptually and drastically from that of perfect markets. Exchanges are the result of a well-defined economic process. The frictional approach only relies on imperfect information about trading opportunities and willingness to trade. Information can be assumed to be symmetrically distributed within the set of parties involved in exchange (the firm and the employee). The model includes informational capital, i.e. the existence of past search effort is capitalised in the economic value of the match for each agent. But it does not require information asymmetry among them, which complicates the analysis in introducing strategic interactions and additional informational rents. Of course, given its tractability, the frictional model can also easily integrate these asymmetries. One can wonder why search theory did not gain more recognition earlier. The following quote, due to Kiyotaki and Moore (2001: 4) and emphasised, perhaps sarcastically, in Lagos and Wright (2002: 2), illustrates well the polarisation of the debates surrounding the importance of search frictions: ‘The matching models are without a doubt ingenious and beautiful. But it is quite hard to integrate them with the rest of macroeconomic theory—not least because they jettison the basic tool of our trade, competitive markets’. However, why this basic tool, ‘competitive markets’, should be kept by whatever means is a good question. The answer provided by Chris’s analysis is that the theory of competitive markets is a specific case, a point of zero mass in the universe of models of search and matching frictions: it is kept as a limit, but profoundly enriched. The search approach is a theoretical generalisation bringing additional degrees of freedom to the parametrisation of the model. By adjusting the key parameter of the model, namely the speed of adjustment of demand and supply, one can replicate many more labour market ‘facts’ relating to the duration of unemployment and unfilled vacancies. Another characterisation of Chris’s work is the flow approach to labour markets: the model has parameters that allow for a perfect fit of the unemployment hazard rate, that is the transition rate from unemployment to employment, which is, after all, what jobless workers care about most. The model’s primary concern is not so much about the level of unemployment, a stock that does not directly inform us about the well-being of the unemployed

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labour force. In that flow view of labour markets, having a job is the same as holding an asset with stochastic returns, the value of which can be characterised by transition flows. When reading a book chapter on asset trading at the LSE Library, Chris started to consider that a fruitful approach might be that the labour market be modelled as a frictional market and that jobs possessed asset values.2 The Library was certainly inspiring: quiet, populated with students without an office and professors looking for rare books. The parallel between housing markets and labour markets is indeed an interesting one: both have vacancies, and transactions take time and are highly cyclical. The origin of and a subsequent development within search theory was based on the idea of a non-degenerate distribution of wages that search frictions would naturally explain. Stigler (1961, 1962) clearly outlined the concept of search frictions. He initially sought to find out the reasons behind the disparity in wages between Chicago University graduates and argued that incomplete information on wages led graduates to accept offers in a possibly larger interval as long as wages were above a reservation wage.3 McCall (1970) introduced a formal analysis of the reservation strategy positing the wage distribution as given. Diamond’s (1971) celebrated result established that there were in fact strong forces towards price convergence once prices were made endogenous. He assumed that consumers must pay a cost to know the prices of other sellers but considered the offers from sellers as endogenous. These two premises led to the famous Diamond Paradox. Transaction costs are insufficient to generate a price distribution, contrary to Stigler’s intuition: in equilibrium, prices for a homogenous good are unique, but at the seller’s monopoly level, that is far from the competitive level. Furthermore, the equilibrium price is discontinuous. When transaction costs tend towards zero, prices remain different from the competitive price. This illustrates the importance of the buyer’s search costs: they do not need to be very high to have a significant influence. As Diamond made it clear in his December 2010 Nobel Lecture in Stockholm, the interaction between search costs and firm behaviour explains his result in the goods market. Firms exploit the small local monopoly

2Credit

for this anecdote should be given to Rachel Ngai. The chapter, according to Chris, was Karlin (1962). 3Stigler (1961, 1962) assumed the dispersion of prices and salaries. Only the distribution is known to economic agents. To have access to a draw from the distribution (obtain an exchange possibility, purchase a good or respond to a job offer), agents must pay a cost, which can either be a direct cost, a sampling cost or simply the cost of waiting for a new offer. Offers come in randomly and their dispersion is exogenous.

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power conferred to them by the existence of search costs, and their collective actions contribute to the raising of prices. It turns out that this result that small transaction costs have large effects on equilibrium transaction prices is a result that also holds true in the labour market: hiring costs are not large, but their impact on frictional unemployment tends to be very important quantitatively, as compared to other entry costs for firms. However, the existence of a unique price was not entirely satisfactory. In developing the competition between firms to attract consumers (Burdett and Judd 1983), equilibrium price dispersion would in fact arise in more frequent contexts. Labour market analysis soon integrated this insight and nice mechanism with the work of Burdett and Mortensen (1989, 1998). An entirely new research group emerged, driven by Mortensen (2005), Manning (2003), Bontemps et al. (1999, 2000), Postel-Vinay and Robin (2002), Albrecht and Axell (1984), Albrecht et al. (2006), Menzio and Shi (2011), and Galenialos and Kircher (2009), among others. This approach would augment Diamond’s (1971) model. Search frictions not only would be a key in generating unemployment but also would lead to equilibrium wage dispersion. This is where the search literature diverged, between the random search approach and the directed search approach. In the directed search approach, interpreted in a broad sense, workers target offers depending on the wage of the position they are prospecting for. The wage dispersion would be both a key driving force of the equilibrium and sometimes an outcome of the equilibrium, while in some cases the equilibrium converges to a single point. In the random search approach, workers would instead try to establish contacts with vacancies prior to knowing the wage and would apply a reservation rule to accept it or not. Wage dispersion might arise, but only as a side product. In the random search approach, most of the insights in the macroeconomic models developed by Chris are orthogonal to the discussions of the causes of underlying heterogeneity in wages. Frictions were sufficient to provide a rich set of determinants of unemployment, as well as some of its cyclical properties, as in his 1985 seminal paper (Pissarides 1985). Chris did not really consider wage dispersion as a key driving force of equilibrium unemployment. It was therefore more convenient to assume random search as he did in most of his contributions. This simplification was instrumental in that it helped to address various issues that would however still involve heterogeneity: with a matching function, one can characterise the three flows (hiring, separation and mobility) that depend on both a large number of macroeconomic variables such as productivity, mark-ups or wages and individual heterogeneity; one can characterise long-term unemployment

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and in particular discuss the important issue of skill de-cumulation and re-accumulation (as in Pissarides 1992) and its influence on the incidence of long-term unemployment; and one can address individual insurance against idiosyncratic risks and policies such as employment protection (as in Pissarides 2001, 2010). However, the benchmark model can easily generate a non-degenerate distribution of wages (as in the stochastic job matching extension in Chapter 6 of Pissarides (2000) for instance).4 A common denominator to these works and more generally to all of Chris’s contributions is the remarkable ability to summarise a complex problem into a clear question and a neat answer, thanks to the right assumptions. This particular skill impressed his PhD students a lot, not only the simplifying assumptions leading to rich answers, but how they often lead to path-breaking modelling strategies, with an interesting periodicity of roughly five to six years. Thus, there were the building blocks of matching theory created in the late 1970s, the 1985 American Economic Review contribution to business cycles, the full integration realised in the first edition of Equilibrium Unemployment Theory in 1990, the 1994 Review of Economic Studies article on endogenous job destruction with Dale Mortensen, the 2001 Journal of Economic Literature survey on the matching function with Barbara Petrongolo and the 2007 American Economic Review piece with Rachel Ngai on balanced growth. In some perhaps less known works, Chris followed the same logic of a simplifying assumption and inspiring theory: among them, the ‘unrelated’ work for the World Bank on learning by trading5 was presented at LSE in one of the macro seminars in the 1990s with these words from Chris: ‘You will be surprised that there is no matching function in this work’. When Chris presented the learning function F(B, A−B) where A and B are the number of varieties of capital goods in the ‘North’ and the ‘South’, and F is a homogenous function, his colleague Charles Bean could not resist

4This

discussion may not pay full justice to the considerable impact of the meeting at the University of Pennsylvania in January 1969 of nearly all the contributors to the classic Phelps (1970), as highlighted in a 2006 Nobel Prize-related ‘scientific background’ release about Phelps: ‘Phelps’s work here is a precursor of the search and matching theory of unemployment, where Peter Diamond, Dale Mortensen, and Christopher Pissarides have made especially important contributions’ (Kungl. Vetenskapsakademien 2006: 8). As a matter of fact—I thank Chris for this insight—the class of models in the so-called Phelps volume was criticised. To quote Chris from his Nobel Lecture (Pissarides 2011: 1092): ‘The articles in the Phelps volume, however, especially those by Phelps (1970) and Dale Mortensen (1970) which had explicit models of the Phillips curve, required a wage distribution to obtain the microfoundations of the Phillips curve. As Peter Diamond (1971) and Michael Rothschild (1973) pointed out, this was not consistent with the other assumptions of the models’. 5Pissarides (1997).

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saying what everybody in the room thought: ‘But this looks very much like a matching function!’, leading the entire room to burst out laughing. That ability to build simple and elegant models would be a constant concern and would apply to all topics examined by Chris. (See, in particular, the more recent contributions to the economic theory of growth and sectoral reallocation of labour (e.g. Ngai and Pissarides 2007), described later in this chapter.) The virtue of such an approach is that it helps to derive measurable concepts and empirically testable predictions that Chris and his co-authors would generally take seriously (see, for example, his empirical works with Petrongolo on matching functions or on economic growth with Giovanna Vallanti (Pissarides and Vallanti 2007)). Chris’s concern for empirical observation can be found in his early contribution to the modelling of the British economy (Pissarides 1972), but more importantly the description of the Beveridge curve in Pissarides (1986) and the discussion of the inter-regional mobility of labour in Pissarides and Wadsworth (1989).

3 From Microeconomic Foundations to the ‘Standard’ Macroeconomic Model 3.1 Towards Macroeconomics: From the Probabilistic View to the Existence of a Matching Function At the most microeconomic level, there are three interconnected dimensions of frictions: (i) lack of information about trading partners; (ii) economic costs of transactions (both direct and opportunity costs); and (iii) technological constraints limiting the spread of information and the speed at which contacts arise between agents with a desire to trade. These dimensions are obviously linked: the less information, the costlier it is to acquire it and the slower the contacts arise, ceteris paribus. Competitive markets are particular cases in which agents do not bear any direct cost and find trading partners at an infinitely fast speed. Here is a simple way to grasp the idea of frictions. Imagine two actors in each segment of the market: one is attempting to sell a particular good or service (e.g. labour) while the other is attempting to purchase this good or service (hire the worker). These two actors meet randomly. Nature decides in a probabilistic way whether or not the contact will eventually happen. In case it does, the exchange may take place if the agents are able to agree on a price for the exchange (the wage), which is discussed below.

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Assume that at a given point in time t there is a stock U of unemployed workers. In continuous time (the specification chosen by Pissarides (1985), Mortensen (1982a, b), and Diamond (1982a) in their seminal contributions), consider the probability of a meeting during an arbitrarily small time interval between t and t + dt. Denote this by p.dt where p is the instantaneous probability (per unit of time). The number of contacts from the unemployed pool will thus be U.p.dt. Here, p can be any real positive number, including anything greater than 1. The probability p.dt will be less than 1 for an arbitrarily small time interval, while p will be interpreted as a parameter from Poisson’s Law. On the other side of the market, if V is the number of vacancies, the total number of contacts during the interval of length dt will be V.q.dt, where q is another positive number that can be greater than 1. Similarly, q is interpreted as a parameter from Poisson’s Law. The number of contacts from the pool of vacancies needs to be equal to the number of workers from the pool of unemployment, and we thus have the fundamental identity: p.U = q.V

(1)

p = q.θ

(2)

or, where θ = V/U represents the ratio of job offers and workers looking for a job and thus is a measure of labour market tightness. For large values of θ, the market is said to be tight from the firms’ perspective, and if θ is low, the market is said to be loose from the firms’ perspective and hence tight from the point of view of unemployed workers. More recently, Hall and Schulhofer-Wohl (2015) argued that the main contribution of the DMP model is to summarise (rightly) all labour market fluctuations with this single statistic, θ. Here, the important point to take away is that identity (2) implies that p and q cannot be exogenous simultaneously, that is independent from the endogenous quantities U and V. For example, if p is exogenous, then q varies as the inverse of θ. If, on the contrary, q is exogenous, then p is proportional to θ. In all cases, the probability of at least one of both sides of the market (firms or unemployed workers) will depend on the conditions of the market, θ. A general way of expressing the dependence of p and q on the market conditions (summarised by θ ) is to assume that: q = q(θ ) = A.θ −η

(3)

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where η is a parameter of a value between 0 and 1 inclusive, and A is a scale parameter capturing the efficiency of the matching process. When η is equal to 0, q is exogenous. When it is equal to 1, p is exogenous. Finally, when η is itself independent of U and V, the total number of vacancies filled per unit of time is a Cobb–Douglas function: p.U = q.V = A.V 1−η .U η

(4)

The idea of a matching function between two segments of a market thus appears quite naturally. More generally, the matching function between two segments of size U and V (denoted by M(U, V) ) will be assumed to be increasing and concave in each argument, with constant returns to scale, such that M(0, V)  =  M(U, 0) = 0. Furthermore, the returns of this matching function will be infinite in 0: MU′ (U, V ) → +∞ when U → 0 and MV′ (U, V ) → +∞ when V → 0

(5)

The case of competitive markets is obtained when the scale parameter A tends towards infinity. Starting from identity (1) to build the matching function is generally not done in literature, as it is usually taken as given. Lagos (2000) is a rare example of where the analysis begins with identity (1). The ability of the matching function to generalise perfect labour markets to include frictions of varying intensity in a simple way has made it a very flexible tool. As Pissarides (2000: 33–35) noted, the first contributions based on a function linking job offers, unemployment and hires go back to Phelps (1968), then Hall (1979), Pissarides (1979), and Bowden (1980).

3.2 The Asset Value of a Job and a New Open Position (Vacancy) Another key contribution made by Chris has been to find an elegant formalisation of the concept that a job is an asset for the firm, with a value denoted by J. It is governed by a well-defined recursive equation (of the Hamilton– Jacobi–Bellman type) where the flow value of a job rJ, where r is the discount rate, is equal to the sum of the net income generated by the worker (labour marginal productivity y minus wage w ), the capital loss −s(J−JV) arising from a separation shock of Poisson intensity s where JV is the value of the firm without its worker, and, out of the steady state, of the capital gain

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from time dJ/dt. Similarly, the asset value of a vacant position is equal to JV and is the sum of the negative of hiring cost −c, the capital gain from hiring a worker q(θ)(J−JV) and out of the steady state, the capital gain of time for the value of a vacancy dJV/dt. An interesting innovation (Pissarides 1979, 1985) was to introduce a free-entry equation for firms, a closing condition affecting, not the value of a filled position, but, consistent with the idea of search frictions, the value of a vacant position. At any time, there would be enough new vacancy entries (or vacancy exits if in excess quantity) to balance the expected search entry costs and expected profits. In the most general way, the value of a vacancy would be a convex combination (weighted by q/(r + s + q) ) of perpetual profits (y−w)/r and perpetual recruitment costs −c/r with the complementary weight. When labour market tightness θ is near 0, firms find it infinitely easy to recruit and thus the weight above is 1 and the value of a vacant job offer would equal the value of perpetual profits. If instead, θ is very large, q(θ) tends towards zero and thus the weight also tends towards zero. In this case, the value of a vacant job offer is the value of perpetual losses suffered by the firm when it fails to hire workers. This value is thus negative. Therefore, by continuity, there exists a single value (for a given wage below productivity) that makes the entry value of a job JV equal to zero. This entry equation makes it easy to characterise the determinant of equilibrium labour market tightness as a function of the interest rate, labour turnover rate, costs of hiring frictions, labour productivity and, of course, wages.

3.3 Free Entry Equilibrium with Exogenous Wages Going back to identity (1), one can finally connect equilibrium labour market tightness to unemployment. In a stationary state, the number of workers entering the unemployed pool is (1−u )s (the product of the number of jobs, the workforce being normalised to 1 and the rate of job destruction). The number of exits from the unemployed pool is θ q(θ)U. Setting these two quantities equal to each other, we obtain the familiar equation: U = s/(s + θq(θ ))

(6)

which is decreasing in θ. The equation relates the number of vacancies to the number of unemployed workers, i.e. Beveridge curve.

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There is a nice discussion of Pissarides (1986) by Richard Layard (1986). Layard argued that from the observation of co-movement in prices (or inflation) and unemployment, the Phillips curve, one could recover the source of economic fluctuations: a demand shock would drive prices and unemployment in opposite directions while a supply shock would lead to the opposite co-movement. Chris’s work was doing no less than doubling the number of insights.6 Observing unemployment and vacancies to increase simultaneously in the same direction would be revealing a labour reallocation shock, while if they co-moved in opposite directions, this would imply a shock to firms’ entry decisions, e.g. either a demand or supply shock. This idea would be successfully applied to the data a few years later (see, for example, Blanchard and Diamond (1992) reviewed below), and it would be concluded that, indeed, labour reallocation and matching shocks play an important role in unemployment fluctuations.

3.4 Determination of the Terms of Exchange: Wage Bargaining Another key to the success of the matching literature was the derivation of a wage equation again expressed, thanks to the beauty of Nash bargaining, as a weighted average of the worker’s labour productivity and the reservation wage of the worker, the weight characterising the relative bargaining power of the worker and the firm. The underlying assumption, and the one most commonly made in literature, was that the worker’s compensation would maximise the Nash product (see Mortensen 1982a): w = ArgMax(J − JV )1−β (W − U)β

(7)

where β is a parameter between 0 and 1, and (W − U ) is the surplus of the worker measured as the difference between the expected discounted value of employment and the expected discounted value of unemployment. β is interpreted as the ratio of the implicit discount rates of the two agents in a negotiation that would happen instantly in a Rubinstein game of offer and counteroffer (see, for example, Osborne and Rubinstein 1990; Binmore

6‘To resolve these questions, we only have two important further pieces of information—the behaviour of inflation and the behaviour of vacancies. Thus, roughly speaking, we increase our knowledge by almost 50% when we bring in vacancies’ (Layard 1986: 541).

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et al. 1986). The more patient the worker is relative to the firm, the more likely he is able to obtain a surplus. Again, this specification demonstrated its flexibility by reflecting very different polar cases, such as the one in which the worker is paid his reservation wage (when β is equal to 0), and the case in which the worker gets all the surplus, when β is equal to 1.

3.5 Main Additions From the most microeconomic issues to the most macroeconomic ones (or from the short-term dynamics to the long-term aspects of the theory), the matching model is easily extended to: investment and physical capital; labour market participation and endogenous job search; education and human capital; technology adoption; and balanced growth over the long term. Other topics such as endogenous job destruction, welfare, tax and policy, and dynamics and business cycles are treated in the next section. On the first point, the extension to investment and physical capital, seeing the value of a job as an asset makes it straightforward to add a theory of the firm’s capital and investment behaviour. The asset value of a firm is the optimal value when the firm’s owner simultaneously chooses a number of vacancies and the amount of investment as control variables. The resulting level of unemployment and capital stocks are naturally the state variables, and the dynamic constraints are the matching technology features of the evolution of employment as a balance between hires and job separation and the evolution of capital as a balance between investment and depreciation. This perfect symmetry between labour and capital is presented in Chapter 3 of the second edition of Equilibrium Unemployment Theory, published in 2000. It shows the equivalence of the small-firm model (one worker) and the large-firm model. The equivalence holds under constant returns to scale in the production function, an assumption made in this book as well as in all of Chris’s articles. It would subsequently be shown that the equivalence property holds under constant returns to scale even if the firm sets wages strategically, as in Stole and Zwiebel (1996a, b). Another control variable that is easy to introduce is the choice of effort to increase the efficiency of search. This can be done by both workers (job search effort) and firms (investment in advertising), and this has been studied in particular in Pissarides (1984a) and discussed in greater detail in Equilibrium Unemployment Theory (Pissarides 2000: Chapter 5).

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Participation in the labour market thus arises naturally as the interior solution of search effort, while non-participation is the corner solution of it, a discussion that was developed in a series of insightful papers in a partial equilibrium set-up in the 1970s, one by Chris with a focus on the worker’s level of discouragement (see Pissarides 1976) as well as two papers by Mortensen (1977) and Burdett and Mortensen (1978). These seminal works would considerably deepen our understanding of labour market participation in a context of unemployment and would, in particular, define the important empirical concept of attachment to the labour market that would be key in properly measuring unemployment, as some marginally attached workers might not be counted as unemployed workers. Similarly, human capital can be easily incorporated. An individual’s productivity can decrease as a result of job displacement as well as long periods of unemployment (see Pissarides 1992), this being consistent with the view that skills and technology may become obsolete (see Mortensen and Pissarides 1998, discussed later on). The 1992 article was written during a sabbatical at UC Berkeley and was certainly inspired by the discussion on hysteresis in unemployment that had been invoked to explain the persistence of European unemployment. This idea would later attract greater interest and would be extended within an influential quantitative framework by Ljungqvist and Sargent (1998). Technology adoption was an important topic in the 1990s, especially after the revival of Schumpeterian growth theory by Aghion and Howitt (1997). Mortensen and Pissarides, who had first extended the matching model to endogenous job destruction, also developed the model with technology growth and embodied and disembodied technology and endogenous obsolescence (see Mortensen and Pissarides 1998). Incidentally, it is striking to realise that Chris’s collaboration with Dale has been so profoundly original and deep, while at the same time very limited in the number of formal academic articles: there are a few book chapters and two handbook surveys, but in essence there are only two main models, the 1998 one on technological obsolescence and the 1994 Review of Economic Studies paper on endogenous job destruction. Finally, the model was made to accommodate the long-term growth of real variables, both of technology and population with the aim of identifying a long-term growth path where ratios would remain constant (see the discussion on this issue in Section 6 below), and nominal variables (see the discussion on money growth and inflation in Pissarides 1990).

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4 Quantitative Analysis and the Role of Frictions 4.1 The Matching Function Block Numerous works have tried to estimate matching functions directly. This research has been summarised by Petrongolo and Pissarides (2001). Blanchard and Diamond (1989) started from a Cobb–Douglas specification and obtained a hiring elasticity with regard to vacant positions of between 0.53 and 0.62, and a positive and significant elasticity of hires with respect to the number of unemployed workers of lower than 0.5, specifically between 0.3 and 0.45. Total returns to scale were around 1, or between 0.9 and 1, in most specifications. In their literature review, Petrongolo and Pissarides (2001) underline that many studies obtain results of constant returns to scale but indicate that the elasticity of hires with respect to the number of unemployed workers is generally higher at between 0.5 and 0.7. This suggests that unemployment is an important factor in the process of job creation. There is thus an interesting contrast here with traditional models of disequilibrium and the model of Keynesian rationing: both suggested that the number of hires would instead be limited by the number of vacant positions and demand. They would therefore predict a low elasticity of hires with respect to the number of unemployed workers, or even a negative link between hiring and unemployment if the unemployed do not consume and therefore contribute to a reduction in the aggregate demand for goods. One could argue that these empirical works were as much a confirmation of aggregate matching and the random search approach as a partial invalidation of approaches based on strong aggregate demand mechanisms leading to persistent underemployment.

4.2 Cyclical Implications of the Model 4.2.1 Qualitative Implications of the Model on Hiring and Vacancies By extending his analysis from the standard model to the dynamic case, Pissarides (1985) had shown that his model predicted a regularity observed in the data. There are indeed, from the model, movements out of the stationary state in counterclockwise loops around the Beveridge curve in a

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U − V space when productivity goes up and down. This is in fact what is observed in time series in many countries. Blanchard and Diamond (1989, 1990, 1991, 1992) have pushed Layard’s intuition (outlined in his 1986 discussion of Chris’s work Layard 1986): search theory and the Beveridge curve have a strong informational content on the underlying sources of economic fluctuations. Blanchard and Diamond decomposed the movements of vacant job offers and the number of unemployed workers in movements of aggregate productivity and movements linked to the matching process. This can be done using different methodologies. One of these consists in using time series to estimate a matching function with a term that can capture a deterministic drift of scale parameter A of Eqs. (3) and (4) above. Blanchard and Diamond (1989: Table 1) thus find a negative drift during the 1968–1989 period. This shows the Beveridge curve’s progressive movement away from the origin. Another method is based on the strategy of decomposition of structural shocks of Blanchard and Quah (1989), adapted to the analysis of the evolution of unemployment, the number of available vacancies and the active population. The three shocks are distinct (sectoral, aggregate and reallocation). Identification is based on the assumption that an aggregate shock created a negative co-movement of job offers and unemployment during a period of nine months. Their analysis suggests that aggregate shocks dominate, but sectoral shocks also play a significant role. In the short term (less than nine months), aggregate shocks represent more than 50% of the variance of unemployment. In the long term, aggregate shocks represent a lower 25% to 30% of the variance and play only a minor role in explaining fluctuations in the frequency of real cycles. These results lead to the perception that matching difficulties have two notable characteristics. First, their deviations from equilibrium are reabsorbed rapidly during the convergence towards the stationary state, which allows us to concentrate on the stationary model for the analysis of the real cycle. Second, their stationary values are very meaningful in the long term, when we look at secular movements of the labour market or at the difference between the natural rates of unemployment across countries.

4.2.2 Qualitative Implications of the Model on Lay-Offs and Job Destruction When the first empirical analyses on firm databases by Davis and Haltiwanger (1990, 1992) were published, it became apparent that the standard matching model with exogenous job destruction did not take

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into account all phenomena. Davis and Haltiwanger showed two important facts. First, there is a great heterogeneity between firms, even at infrasectoral levels. While some firms can experience a growth in employment, other firms in the same sector can simultaneously experience a decline in employment. But in the standard model, the homogenous behaviour of firms was assumed. The second thing that David and Haltiwanger showed was that job destruction played an important role in macroeconomics, and that this was very volatile in the short run, more so than job creation. The standard model then had to evolve to take into account these two findings. The collaboration between Mortensen and Pissarides led to a great improvement of the standard model. A new endogenous variable was added to the model, the rate of job destruction, previously captured through other variables. The specification presented in Mortensen and Pissarides (1994) allowed this variable to be endogenous and made the model reflect cyclical movements and firm heterogeneity. Firms are subject to idiosyncratic productivity shocks, which leads to fluctuations in the value of jobs for firms and makes firms heterogeneous. In the cross section of firms, there are naturally ones of different productivity levels. When the value of idiosyncratic productivity falls below a certain threshold, it is optimal for the firm (and for the worker, because of the surplus sharing rules) to cancel the match and terminate the relationship. The destruction decision thus becomes endogenous, and the job destruction rate becomes a function of the frequency of productivity shocks and of the probability of falling below the threshold. Furthermore, the important volatility of job destruction in the cycle that David and Haltiwanger’s work showed finds an explanation in this extension: like its number of vacant positions, the job separation threshold for firms is a variable that reacts instantly to anticipations of any type (aggregate profits, technology shocks and wage shocks), which can thus vary discretely from one instant to another.

4.2.3 Model-Generated Macroeconomic Volatility In the 1990s, young scholars (actually, even PhD students at the time; see, for example, Danthine and De Vroey 2017) would attempt to import the main intuitions of Chris’s model into quantitative macroeconomic models. Merz (1995) and Andolfatto (1996) would provide the benchmark dynamic general equilibrium models of search unemployment. The inclusion of job destruction in the model would lead to interesting methodological developments on the propagation of shocks, such as the approach developed by den

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Haan et al. (2000). Eran Yashiv would pursue calibration exercises in several contributions alone or with Monika Merz (see, for example, Yashiv 2000; Merz and Yashiv 2007), pushing the logic of the tight connection between labour markets and finance, where the value of the firm as an asset plays a central role. These extensions of search theory to integrate it into quantitative macroeconomic theory led to various puzzles and empirical challenges. For instance, Cole and Rogerson (1999) analysed data patterns and the cyclical behaviour of job creation and destruction in detail. They would show that the model did not produce enough volatility, and that the only way to fix this would be to redefine the concept of search unemployment: if the model was calibrated for an unemployment rate of 14% instead of 7% or 8%, then, they argued, the model would be able to reproduce cycles accurately. This recalibration had an interesting interpretation provided by the authors: the unemployment rate must take into account workers officially looking for a job but also those who have stopped searching; they are not in the labour force statistics and thus are ‘administratively inactive’, but they actually might take up a job if the opportunity arose. A second and more influential area of criticism of the DMP model comes from Shimer (2005). In a dynamic version in discrete time, he established that starting from ‘observed’ technological shocks, the model could only generate a log standard deviation of about 3.5% for labour market tightness θ, a value which is approximatively 10 times lower than what was measured in US labour market statistics. Can the model replicate a log standard deviation of labour market tightness of 35–38% with only productivity shocks? A partial negative answer is that not all shocks are productivity shocks: the empirical correlation between unemployment and productivity shocks is only around 0.4. Therefore, the DMP model should only match volatility inferior to this by θ, about 0.4*38%, or 15% (see Mortensen and Nagypal 2007). Pursuing this logic, Pissarides (2009: 1351, fn. 15) even suggested an elasticity of labour market tightness to productivity shocks of about 7.56. Others have put forward the argument that a radically new parametrisation of the model would match the volatility in labour market tightness. Assuming for instance that the value of leisure would be close to the wage (the small surplus assumption), one can indeed observe a substantial improvement in the degree of matched volatility by the model. Hagedorn and Manovskii (2008) argue in particular that if the value of non-employment (leisure and unemployment benefits) is close to the wage (between 3% and 5%), then the model generates sufficient volatility to match the data. Costain and Reiter (2008), who had been among the

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pioneers in their calibration efforts, have however criticised this calibration as it makes the model sensitive to the variation of other parameters of public policy, in particular unemployment benefits that are counted in the value of leisure. Nevertheless, it is interesting to note that the idea of increasing the value of non-employment in the calibration raises the equilibrium unemployment rate in the model, which is, incidentally, similar to the strategy of improvement of the calibration chosen by Cole and Rogerson (1999) noted above. Shimer (2005) and Hall (2005) would favour rigid wages as a solution to the puzzle, but what matters for job creation is new wages, which turn out to be quite cyclical in the data, more so than the wages of incumbent workers. Indeed, the rigid wages of incumbents do not affect volatility since new jobs are unaffected by these wages. Instead, the highly volatile wages of new entrants as observed in the data would limit volatility as they reduce profits in good times and increase it in bad times. Hence, the main building block of the matching model (endogenous wages depending on current productivity) would again resist the suggested transformation into rigid wages. Pissarides (2009) took a different road by arguing that the cyclicality of labour market tightness is insufficient because recruitment costs are too procyclical: their value, equal to c/q(θ), increases with labour market tightness, which slows down the incentive to create jobs in a period of economic expansion. Pissarides therefore recommends a reparametrisation of the model in which a fixed part of H, creation costs, adds itself to the procyclical parts, in order to obtain a total cost of job creation C that is less cyclical in elasticity, as follows: C = H + c/q(θ )

(8)

The model then generates the value of 7.56 proposed by Pissarides. Recently, Ljungqvist and Sargent (2017) have developed a thoughtful generalisation of the concept of surplus (what they call the ‘fundamental surplus’) which includes most of the new ingredients in the literature, including the cost of financial frictions affecting new firms. The cost of financial frictions indeed adds more volatility, and its effect can be interpreted as a financial multiplier, amplifying the consequences of cyclical shocks. A fair summary from two decades of quantitative research between 1990 and 2010 is that the DMP model, which was not initially built to be calibrated (unlike the real business-cycle model), could however reproduce second moments in conformity with US data, that is if a few parametrisation changes are made. The exact nature of the necessary changes is still a pending question, and this is discussed in the Conclusion below.

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5 Economic Policy Implications of Frictions Beyond the key contributions to macroeconomics and labour market theory, Chris has also contributed to many policy debates. His intellectual influence in Europe has been notable. He was a member of the Employment Taskforce chaired by Wim Kok, which delivered an important report on the Lisbon Strategy. Chris has worked extensively on the European unemployment and macroeconomic experiences. He has been very active in European academic institutions and journals: Chris was Vice-President (2009) and President (2011) of the European Economic Association and published many times in the European Economic Review for instance, most often on European labour market institutions and European macroeconomic performance.7 These policy analyses were deeply anchored in search theory: the framework is essentially a second-best theory. In this framework, many policy instruments can be analysed and, in general, do not have an unambiguous effect. The model leads to rich and non-trivial implications and balanced analyses that policy makers in Europe have found more attractive than laissez-faire strategies. This does not mean demagogy: Chris has always defended the view that unemployment compensation had to be active and not passive, that training and skills investment was key, that the job search effort was a key factor, and that unemployment could not be seen as purely involuntary.

5.1 Benchmark for Efficiency The standard matching model does indeed allow a large role for economic policy and government intervention, contrary to models based on the abstraction of efficient markets. In these models, disequilibrium (unemployment and job rationing) would be the result of inefficiencies such as entry barriers or rigid prices. Instead, since matching models start from a situation in which frictions play a structural role in markets and cannot be eliminated, only reduced, the policy implications are quite different. The model naturally leads to the concept of a constrained optimum, a second-best efficient situation. The social planner tries to maximise the net output of production costs (production efforts, investments and matching 7As an illustration, the word ‘Europe’ appears 36 times in his resume (covering panels, associations, policy forums, article titles and discussions), whereas America, United States and USA appear only 12 times, mostly for journals and more rarely with respect to policy discussions.

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efforts), under the constraint that the number of matches must be lower than or equal to what the matching technology permits. The constraint will be binding at the social optimum: more efficient matches always lead to a better allocation of resources, which helps move closer to the first-best optimum. The first-best optimum is therefore a useful benchmark, even though it cannot be achieved. One can only partly relax the matching constraint by improving efficiency; for instance, we can create platforms of information for unemployed workers, such as employment agencies (see Pissarides 1979), targeted training sessions for unemployed workers, and more generally, we should allocate public funding to improve matching in the labour market (such as counselling) rather than only passively spending to compensate the loss of revenues linked to unemployment. It is therefore possible for a policy to affect the search effort by unemployed workers to find new jobs; search effort is an input in production. The same goes for the firms’ recruitment efforts and, more generally, the efforts of any economic agent to engage in exchanges with other agents. These efforts all contribute to achieve collective efficiency and must be encouraged. More generally, the spirit of Chris’s research is that unemployment itself is a resource: unemployed workers are not assumed to be ‘lazy’ people, but temporary and necessary factors in the aggregate production process. Further, the second-best optimum is only achieved when the externalities generated during the matching process are internalised by an adequate transfer system. Indeed, the matching function, M(U, V), contains no less than four externalities. The more unemployed workers there are, the easier it is for firms to recruit (positive externality), but the harder it is for unemployed workers to find a job (negative externality). Conversely, the more vacancies there are, the easier it is for workers to be re-employed (positive externality) and the harder it is for firms to recruit (negative externality). For a model with exogenous job separation, job creation is the only dimension that the social planner can affect. If the social planner creates too few positions, unemployed workers will remain unemployed for too long and production will be too low. If the social planner creates too many jobs, competition between vacancies will be too high and firms will pay excessive recruitment costs. Production will be high, but inputs (recruitment efforts) will also be too high. The second-best optimum is only reached when these two contradictory forces cancel each other out. In practice, a decentralised equilibrium reaches an optimum equilibrium when agents are paid what they contribute to the matching process.

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Hosios (1990) and Pissarides (1990) showed that an elegant second-rank optimality condition was when the share of workers in the surplus was equal to the elasticity of unemployed workers in the matching process: β = η(θ)

(9)

For the record and for the history of economic thought, it is interesting to restore some facts. Mortensen and Pissarides (2011) reported that, ‘Diamond (1982b) had already hinted that there might be an internalized Nash wage rule and Pissarides (1984b) derived explicitly the share of labor in the wage bargain that internalizes the externalities, what became later known as the “Hosios rule” (Hosios 1990)’. This is actually an understatement. The Pissarides (1984b) paper cited in Mortensen and Pissarides (2011) derived much of the Hosios rule but stopped one step short of its final formulation. Indeed, Pissarides (1984b) showed in its Eq. 17, page 105, that the efficient bargaining share β needed to be equal to (MU  + MV − M/V)/(M/U − M/V), where MU and MV are the marginal contribution of each input. Although this equation was not simplified, note that under constant returns to scale, MU is equal to η(θ)M/U and MV is equal to (1 − η(θ) ). With one line of algebra, the simplest Hosios condition follows. This result was already obtained in 1984 and just needed to be simplified.8 The interpretation of the condition is as follows: when the unemployed workers contribute significantly to the creation of matches, which is the case when η is large and closer to 1, firms have to be ‘taxed’ by giving a larger wage to workers, and vice versa. The normative implications of matching models are that the optimal rate of unemployment can be positive as opposed to zero in competitive models, because unemployment is an input in production. This leads to richer implications: there is no ‘obvious’ or a priori policy measure. In some cases, the optimal policy can be the opposite of what would be advocated in a pure competitive model; however, in most cases, models would have similar normative implications. Finally, Moen (1997) elegantly showed that the possibility of endogenous segmentation of labour markets would lead to second-best efficiency as a rather generic situation, an interpretation and a conclusion that, I think, Chris never completely accepted: in most writing and discussions, including Pissarides (1984a), the focus is rather on the low likelihood of second-best efficiency, and therefore the need for policy intervention.

8Chris was apparently aware of the simplification and had revised the paper accordingly, but the 1984 publication (Pissarides 1984b) was a conference volume, and the organisers had already sent the submitted papers to the publisher.

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For completeness, one should also remark that in this last paper, Chris emphasises a negative efficiency result: no wage can internalise the different externalities, in apparent contradiction with Pissarides (1984b), but interpreted, in Pissarides (2000), as the fact that Pissarides (1984a), as with other important papers in the search literature, ignored the negative externality of search effort on other workers, leading in that specific case to the result that the decentralised effort would be inefficiently low.

5.2 Policy Instruments There are numerous policy instruments that can be used in the labour market. The matching model has precise predictions for four of them: unemployment benefits, progressive income tax, hiring subsidies and firing costs. Here, we consider their impact on social welfare, defined as the sum of the utility of employed workers, unemployed workers and firms weighted by their numbers, or equivalently, the total net production of transaction costs and leisure. Pissarides (1998) discussed the role of income taxes and in particular income tax progressivity in the search and matching model as well as in alternative models of the labour market. He showed that the progressivity of income tax would reduce equilibrium wages: progressivity reduces the marginal gain from higher wages for workers and reduces the total surplus as wages grow. Hence, bargaining parties converge to lower wages, and this raises employment. Unemployment compensation is also a key determinant of search models. Unemployment benefits usually play a negative role in terms of social welfare. This arises from the fact that only passive compensation reduces the surplus of workers and thus of firms and also reduces incentives for workers to search and for firms to create vacancies. In Pissarides (1983), Chris would however take a more moderate position: the adverse effects of unemployment insurance raise the reservation wage, but this can be alleviated with progressive income taxation, an insight that he would reuse in the 1998 paper mentioned above. In addition, risk aversion and workers’ inability to insure themselves are absent from the benchmark analysis, and so its potential positive impact (insurance) is absent while it is central in the theory of optimal unemployment insurance with imperfect insurance. Hiring and employment subsidies also play an important role in equilibrium unemployment theory. Employment subsidies can accommodate a too large share of wages in bargaining, but Chris would rather advocate structural

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changes in labour market institutions that would reduce bargaining. Hiring subsidies, by alleviating the cost of frictions, may be an interesting alternative and be less costly as it affects a smaller base (new hires). An application to policy in France (Cahuc et al., forthcoming) suggests that this may be an efficient policy. Regarding firing costs, there is once again a tension between competitive models, which see them as an obstacle to the reallocation of labour (e.g. Hopenhayn and Rogerson 1993), and matching models. Mortensen and Pissarides (1999c) followed this view of employment protection as a tax reducing the cross-sectional efficiency of allocation of workers to firms. There is likely to be a Danish influence here: the policy implication, the flexi-security model, would lead to a reduction in employment protection and combine it with generous and active unemployment compensation. However, in positive terms, in the Mortensen and Pissarides (ibid.) model, the net effect of employment protection on unemployment is ambiguous and might therefore be justified. Further, in a world of imperfect financial markets, Pissarides (2001, 2010) developed variants of the model in which we can analyse the role of employment protection in a detailed manner when agents are risk averse and also constrained by the credit market. He notably showed how to combine severance payments and notice periods, the second element being unnecessary if the first element is at its optimal level. A last dimension that is interesting to consider is the minimum wage. A positive impact of the minimum wage on employment can only arise when firms have some monopsony power over workers, a dimension that is naturally present in the DMP model thanks to search frictions. Although the benchmark DMP model has no skill heterogeneity, incorporating ex ante heterogeneity in these skills leads to rich insights into the analysis of the minimum wage under monopsony. An entire book has been written by Christopher Flinn (2010) that discusses, with and without heterogeneity, the way the minimum wage interacts with search frictions.

6 Labour Market Reallocation Across Sectors and IT Another research area in which Chris has contributed is the impact of structural change and the reallocation of labour across sectors. The long-term growth determinants of countries are usually associated with total factor productivity (TFP), innovation, political institutions, capital investment and

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education; however, when productivity growth affects some sectors in particular, the issue of labour reallocation and relative sectoral growth becomes an important one. Chris developed this topic in a series of contributions with Rachel Ngai when she arrived at LSE. In their widely cited 2007 paper (Ngai and Pissarides 2007), they developed a model of sectoral TFP growth in which each sector produces a specific good consumed by a representative consumer, produced with labour and a unique type of capital good. An important result is that differential productivity growth does not necessarily lead to persistent changes in the various ratios (capital to labour, capital to output). Thus, a balanced growth path, where consumption, capital and output grow at the same pace, is possible despite continuous reallocation across sectors. This is an important result, very elegantly demonstrated and consistent with Chris’s continuing effort to keep balanced growth paths in his models (see, for example, the discussion in Chapter 3 of Pissarides 2000). If the 2007 paper with Ngai dealt the demand side of sectoral change, the two of them would soon focus on the supply side and the allocation of hours across sectors in response, in particular, to taxation: contrary to the (quite naive) laissez-faire view that too high taxes explained too low hours, they would show that taxes would only drive households to work at home to produce the goods most substitute to those produced by the market (such as French and Italian cooking and German babysitting traditions—my words). If taxes can help to explain the sectoral levels of unemployment and their cross-country differences, in Chris’s view, long-run labour reallocation and employment changes are closely linked to technological change. The way to model this has been very influential. Beyond differential sectoral trends in technical progress, Mortensen and Pissarides (1998) discuss the distinction between ‘embodied’ and ‘disembodied’ technical progress. Disembodied technical progress affects all jobs in the economy, such as the impact of new information technologies and communications technology. The steady state of an economy without technical progress is therefore simple to generalise: if disembodied technical progress grows at a constant rate g, then in the model it is enough to replace the interest rate r by the interest rate net of growth, r−g, in most of the equations. This is sometimes referred as the ‘capitalization effect’, which Pissarides (2000) attributed to Aghion and Howitt (1994) as the positive employment effect of growth. Instead, when technological progress only affects new jobs, technical progress is said to be embodied in new jobs. This arises because technical progress leads to the appearance of new sectors and jobs, such as iPhone apps leading to developer jobs. This may also be due to the fact that

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capital investments are, to a large extent, irreversible, leading to high costs of updating existing jobs to the new technology. In this instance, a vintage model featuring a trade-off between letting obsolete jobs disappear or investing to update them is necessary. This was analysed by Mortensen and Pissarides in 1998 and subsequently used in the literature to connect labour issues to the work by Aghion and Howitt (1994, 1997) on Schumpeterian growth and innovation. (See, for instance, Pissarides and Vallanti (2007) for an empirical investigation of the relation between TFP and unemployment.)

7 Aggregate Demand Effects The first edition of Equilibrium Unemployment Theory starts with a very clear statement: Keynes’s famous statement that the unemployment of workers between jobs can be ignored in the study of more important kinds of unemployment is unverified conjecture. Descriptively, it is false: with the exception of a few “discouraged” workers, unemployed workers are always between jobs, or between some other states and a job (Pissarides 1990: x).

One of Chris’s key but overlooked contributions has been to develop unemployment models where demand effects are not the driving force and, further, unemployment exists even in the presence of price and wage adjustment. This was no coincidence. In many macroeconomic discussions, Chris has emphasised his preference for approaches where Keynesian effects would not be prominent. For instance, in his review of Jeff Frank’s book, The New Keynesian Economics: Unemployment, Search and Contracting (Pissarides 1987), he starts by stating that the first 135 pages of the volume, devoted to IS-LM economics, might not be the most fruitful approach, arguing instead that approaches where search frictions play a central role are best suited to the analysis of unemployment. Chris also points out that the classic distinction between voluntary and involuntary unemployment is not useful, a point he would make quite early on in the Preface to Equilibrium Unemployment Theory (see Pissarides 1990: x). One can find this view expressed earlier on, including again in Pissarides (1987: 511), where Chris wrote: ‘The distinction between voluntary and involuntary unemployment is as common in macroeconomics as it is unhelpful’. This is another battle that Chris has won: nobody would still argue that unemployment is either voluntary or involuntary. It must therefore be either a little bit of both and

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thus indeed be irrelevant, or depend on the regime (classical, Keynesian or inflationary) in which the economy found itself at the time. Indeed, the view that economies were sometimes stuck in a Keynesian underemployment regime was an influential one in the 1980s. The European economics literature on this subject had been deeply influenced by the works and synthesis by Jean-Pascal Bénassy (1982), Jacques Drèze (1991) and Edmond Malinvaud (1977) as well as by Robert Barro and Herschel Grossman (1971) on Keynesian unemployment and Keynesian regimes. The commonly held view was that, given price and wage rigidities, the economy could be in different regimes and that policy prescriptions would depend on the regime. The literature then progressively shifted to models of a unique regime, yet with rich policy implications: the model of price setting-wage setting in Layard et al. (1991 [2005]) and Blanchard (1986) would be examples of this approach. In essence, this predicts that facilitating price and wage adjustment improves output and employment, but that complicated dynamics may arise and aggregate disequilibrium and inflationary pressures may be quite persistent. The search and matching equilibrium approach sought to define a unique equilibrium and then find factors which result in persistence. Yet since unemployment is the consequence of the technological constraint featured by the matching function, price rigidity only plays a secondary role in determining the first moment of the model, the level of unemployment. As discussed above, it would be recognised that price rigidity also plays an important role regarding the value of the second moment, leading to new insights about the role of wage determination (see Hall 2005; Shimer 2005). But this addition would not restore the faith in Keynesian effects and would remain confined to the traditional issue of volatility in macroeconomics. The search and matching literature, based on its apparently innocuous assumption of a frictionless goods market, has been successful, possibly too successful, in eliminating Keynes from the debate. The search and matching model was perceived as sufficiently rich to address the question of unemployment almost independently of the traditional Keynesian effects. Numerous parameters or policies—bargaining strength of workers, the value of unemployment benefits, interest rate policy, employment protection, taxation of labour income, tax progressivity, active labour market policies, reallocation of labour, turnover, education and technology adoption—were enough to provide the main obstacles and solutions to restore equilibrium unemployment: the menu was long enough to keep researchers away from the temptation to search for imperfections in other markets.

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That said, the model has been able to accommodate richer demand effects as well as other types of imperfections in goods and credit markets. One should also point out that, in recent public discussions, Chris has always emphasised that proper policy management would include a mix of aggregate demand and supply policies. For instance, in his public interventions on the Greek crisis, he argued that, if the origin of the crisis was a supply problem, austerity and wage cuts have ‘compounded the structural problems’ (Ioannides and Pissarides 2015: 349), and similar discussions have been present in the collection of policy recommendations by prominent Greek economists (Meghir et al. 2017). In Ioannides and Pissarides (2015) and Pissarides (2013), Chris developed the view that austerity had led to a fall in wages but not a corresponding fall in prices, this resulting in a huge contraction in demand and that, in the absence of structural reforms, austerity had amplified the crisis. Its origins were rooted in the structural problems of the Greek economy at the time of the country’s adoption of the euro.

8 Conclusion Search frictions and the elegant modelling of matching frictions that Chris has contributed to the macroeconomic literature have proved very useful in analysing labour market equilibrium and the determinants of unemployment and its fluctuations. These contributions, however, rely on firms’ hiring costs, which are generally small (see, for example, Silva and Toledo 2009), but are nevertheless amplified, consistent with the insights of the search literature since Diamond (1971). The fact is that firms’ entry costs are more important quantitatively than only hiring costs. They include investment in capital when the investment is partly irreversible, financial frictions (new firms have imperfect access to the capital market as opposed to larger firms that already have capital and collateral) and goods market frictions (new firms must first create their market, which can be interpreted as meeting the demand generated by their customers). From this empirical observation, one can make two additional remarks here: first, the model can very easily accommodate these additional dimensions of entry costs, and this has already been done on many occasions. For instance, Pissarides (2009) argues that the introduction of an exogenous fixed entry cost leads to better cyclical implications of the model. Benchmark models are based on equilibrium between the firm’s hiring costs and profits. Hiring costs are highly procyclical because of the matching externality. The more firms are willing to recruit, the higher the entry costs. So, when

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profits increase due to increased aggregate demand, better technology or higher levels of confidence, vacancies should also rise, but if labour market tightness rises too fast, so do hiring costs, which dissipate the additional profits. As a result, the aggregate response of vacancies is too small. In adding a fixed cost, one lowers the ‘calibrated’ importance of the cyclical entry cost to match the level of unemployment and thus reduces the dissipation effect of profits. This entry cost also features, remarkably, the cost of investing in capital in an irreversible way since this cost cannot be recovered by firms in the future. The second observation is that entry costs only need to be less variable with respect to tightness in the labour market; they do not need to be exogenous. They can thus be linked to other dimensions, such as financial frictions (see Bernanke and Gertler 1989, 1995; Bernanke et al. 1996) and whether they affect more new firms than older firms. Finally, profits themselves can be weighed down by frictions in goods markets and in particular by the length of spells where firms produce but cannot make profits since demand is absent or not met. Hence, from the benchmark model, much more can be done, with relatively moderate modelling complexity, in order to apply the matching analysis to new markets and give it full general equilibrium implications. Indeed, this is the legacy of Equilibrium Unemployment Theory. It explains unemployment as the result of a number of labour market and non-labour market parameters in a flexible enough way that accommodates most country and specific time-period experiences. This is not a small achievement. At the end of this chapter, one is left with the very positive impression that Chris is someone who, over the decades, was consistently right about many theoretical and policy issues and, as such, has won most of his intellectual battles.

References Main Works by Christopher A. Pissarides Ioannides, Y.M. and C.A. Pissarides (2015). ‘Is the Greek Crisis One of Supply or Demand?’. Brookings Papers on Economic Activity, Fall: 349–383. Mortensen, D.T. and C.A. Pissarides (1994). ‘Job Creation and Job Destruction in the Theory of Unemployment’. Review of Economic Studies, 61(3): 397–415. Mortensen, D.T. and C.A. Pissarides (1998). ‘Technological Progress, Job Creation, and Job Destruction’. Review of Economic Dynamics, 1(4): 733–753. Mortensen, D.T. and C.A. Pissarides (1999a). ‘New Developments in Models of Search in the Labor Market’. Chapter 39 in O. Ashenfelter and D. Card (eds) Handbook of Labor Economics. Volume 3. Amsterdam: Elsevier: 2567–2627.

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Mortensen, D.T. and C.A. Pissarides (1999b). ‘Job Reallocation, Employment Fluctuations and Unemployment’. Chapter 18 in J.B. Taylor and M. Woodford (eds) Handbook of Macroeconomics. Volume 1B. Amsterdam: Elsevier: 1171–1228. Mortensen, D.T. and C.A. Pissarides (1999c). ‘Unemployment Responses to “Skill-Biased” Technology Shocks: The Role of Labour Market Policy’. Economic Journal, 109(455): 242–265. Mortensen, D.T. and C.A. Pissarides (2011). Job Matching, Wage Dispersion, and Unemployment. Edited by K. Tatsiramos and K.F. Zimmermann. Oxford: Oxford University Press. Ngai, L.R. and C.A. Pissarides (2007). ‘Structural Change in a Multisector Model of Growth’. American Economic Review, 97(1): 429–443. Petrongolo, B. and C.A. Pissarides (2001). ‘Looking into the Black Box: A Survey of the Matching Function’. Journal of Economic Literature, 39(2): 390–431. Pissarides, C.A. (1972). ‘A Model of British Macroeconomic Policy, 1955–1969’. Manchester School of Economic and Social Studies, 40(3): 245–259. Pissarides, C.A. (1976). ‘Job Search and Participation’. Economica, New Series, 43(169): 33–49. Pissarides, C.A. (1979). ‘Job Matchings with State Employment Agencies and Random Search’. Economic Journal, 89(356): 818–833. Pissarides, C.A. (1983). ‘Efficiency Aspects of the Financing of Unemployment Insurance and Other Government Expenditure’. Review of Economic Studies, 50(1): 57–69. Pissarides, C.A. (1984a). ‘Search Intensity, Job Advertising, and Efficiency’. Journal of Labor Economics, 2(1): 128–143. Pissarides, C.A. (1984b). ‘Efficient Job Rejection’. Economic Journal (Supplement: Conference Papers), 94: 97–108. Pissarides, C.A. (1985). ‘Short-Run Equilibrium Dynamics of Unemployment, Vacancies, and Real Wages’. American Economic Review, 75(4): 676–690. Pissarides, C.A. (1986). ‘Unemployment and Vacancies in Britain’. Economic Policy, 1(3): 499–541 and 548–559. Pissarides C.A. (1987). ‘Review of The New Keynesian Economics: Unemployment, Search and Contracting, by J. Frank’. Economic Journal, 97(386): 510–512. Pissarides, C.A. (1990). Equilibrium Unemployment Theory. First edition. Oxford: Basil Blackwell. Pissarides, C.A. (1992). ‘Loss of Skill During Unemployment and the Persistence of Employment Shocks’. Quarterly Journal of Economics, 107(4): 1371–1391. Pissarides C.A. (1997). ‘Learning by Trading and the Returns to Human Capital in Developing Countries’. World Bank Economic Review, 11(1): 17–32. Pissarides, C.A. (1998). ‘The Impact of Employment Tax Cuts on Unemployment and Wages; The Role of Unemployment Benefits and Tax Structure’. European Economic Review, 42(1): 155–183.

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Pissarides, C.A. (2000). Equilibrium Unemployment Theory. Second edition. Cambridge, MA: MIT Press. Pissarides, C.A. (2001). ‘Employment Protection’. Labour Economics, 8(2): 131–159. Pissarides, C.A. (2009). ‘The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?’. Econometrica, 77(5): 1339–1369. Pissarides, C.A. (2010). ‘Why Do Firms Offer “Employment Protection”?’. Economica, New Series, 77(308): 613–636. Pissarides, C.A. (2011). ‘Equilibrium in the Labor Market with Search Frictions’ (Nobel Lecture). American Economic Review, 101(4): 1092–1105. Pissarides C.A. (2013). ‘Is Europe Working?’. Regius Chair in Economics Inaugural Lecture. 12 December. Available at: http://www.lse.ac.uk/website-archive/ newsAndMedia/videoAndAudio/channels/publicLecturesAndEvents/player. aspx?id=2163. Pissarides C.A. and G. Vallanti (2007). ‘The Impact of TFP Growth on Steady‐ State Unemployment’. International Economic Review, 48(2): 607–640. Pissarides, C.A. and J. Wadsworth (1989). ‘Unemployment and the Inter-Regional Mobility of Labour’. Economic Journal, 99(397): 739–755.

Other Works Referred To Aghion, P. and P. Howitt (1994). ‘Growth and Unemployment’. Review of Economic Studies, 61(3): 477–494. Aghion P. and P. Howitt (1997). Endogenous Growth Theory. Cambridge, MA: MIT Press. Albrecht, J.W. and B. Axell (1984). ‘An Equilibrium Model of Search Unemployment’. Journal of Political Economy, 92(5): 824–840. Albrecht, J., P.A. Gautiér and S. Vroman (2006). ‘Equilibrium Directed Search with Multiple Applications’. Review of Economic Studies, 73(4): 869–891. Andolfatto, D. (1996). ‘Business Cycles and Labor-Market Search’. American Economic Review, 86(1): 112–132. Barro, R.J. and H.I. Grossman (1971). ‘A General Disequilibrium Model of Income and Employment’. American Economic Review, 61(1): 82–93. Bénassy, J.-P. (1982). The Economics of Market Disequilibrium. New York: Academic Press. Bernanke, B.S. and M. Gertler (1989). ‘Agency Costs, Net Worth, and Business Fluctuations’. American Economic Review, 79(1): 14–31. Bernanke, B.S. and M. Gertler (1995). ‘Inside the Black Box: The Credit Channel of Monetary Policy Transmission’. Journal of Economic Perspectives, 9(4): 27–48. Bernanke, B.S., M. Gertler and S. Gilchrist (1996). ‘The Financial Accelerator and the Flight to Quality’. Review of Economics and Statistics, 78(1): 1–15.

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Binmore K., A. Rubinstein and A. Wolinsky (1986). ‘The Nash Bargaining Solution in Economic Modelling’. RAND Journal of Economics, 17(2): 176–188. Blanchard, O.J. (1986). ‘The Wage Price Spiral’. Quarterly Journal of Economics, 101(3): 543–566. Blanchard, O.J. and P. Diamond (1989). ‘The Beveridge Curve’. Brookings Papers on Economic Activity, 1: 1–60 and 74–76. Blanchard, O.J. and P. Diamond (1990). ‘The Cyclical Behavior of the Gross Flows of U.S. Workers’. Brookings Papers on Economic Activity, 2: 85–143 and 154–155. Blanchard, O.J. and P. Diamond (1991). ‘The Aggregate Matching Function’. NBER Working Paper 3175. Cambridge, MA: NBER. Blanchard, O.J. and P. Diamond (1992). ‘The Flow Approach to Labor Markets’. American Economic Review, Papers and Proceedings, 82(2): 354–359. Blanchard, O.J. and D. Quah (1989). ‘The Dynamic Effects of Aggregate Demand and Supply Disturbances’. American Economic Review, 79(4): 655–673. Bontemps, C., J.-M. Robin and G.J. van den Berg (1999). ‘An Empirical Equilibrium Job Search Model with Search on the Job and Heterogeneous Workers and Firms’. International Economic Review, 40(4): 1039–1074. Bontemps, C., J.-M. Robin and G.J. van den Berg (2000). ‘Equilibrium Search with Continuous Productivity Dispersion: Theory and Nonparametric Estimation’. International Economic Review, 41(2): 305–358. Bowden, R.J. (1980). ‘On the Existence and Secular Stability of U-V Loci’. Economica, New Series, 47(185): 35–50. Burdett, K. and K.L. Judd (1983). ‘Equilibrium Price Dispersion’. Econometrica, 51(4): 955–969. Burdett, K. and D.T. Mortensen (1978). ‘Labor Supply under Uncertainty’. In R.G. Ehrenberg (ed.) Research in Labor Economics. Volume 2. Greenwich, CT: JAI Press: 109–158. Burdett, K. and D.T. Mortensen (1989). ‘Equilibrium Wage Differentials and Employer Size’. Discussion Paper 860, Northwestern University, Center for Mathematical Studies in Economics and Management Science. Burdett, K. and D.T. Mortensen (1998). ‘Wage Differentials, Employer Size, and Unemployment’. International Economic Review, 39(2): 257–273. Cahuc, P., S. Carcillo and T. Le Barbanchon (forthcoming). ‘The Effectiveness of Hiring Credits’. Review of Economic Studies. Available at: https://academic.oup.com/restud/advance-article-abstract/doi/10.1093/restud/ rdy011/4829925?redirectedFrom=fulltext. Cole, H.L. and R. Rogerson (1999). ‘Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?’. International Economic Review, 40(4): 933–959. Costain, J.S. and M. Reiter (2008). ‘Business Cycles, Unemployment Insurance, and the Calibration of Matching Models’. Journal of Economic Dynamics and Control, 32(4): 1120–1155.

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Danthine, S. and M. De Vroey (2017). ‘The Integration of Search in Macroeconomics: Two Alternative Paths’. Journal of the History of Economic Thought, 39(4): 523–548. Davis, S.J. and J. Haltiwanger (1990). ‘Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications’. In O.J. Blanchard and S. Fischer (eds) NBER Macroeconomics Annual 1990. NBER. Cambridge, MA: MIT Press: 123–168. Davis, S.J. and J. Haltiwanger (1992). ‘Gross Job Creation, Gross Job Destruction, and Employment Reallocation’. Quarterly Journal of Economics, 107(3): 819–863. den Haan, W.J., G. Ramey and J. Watson (2000). ‘Job Destruction and Propagation of Shocks’. American Economic Review, 90(3): 482–498. Diamond, P. (1971). ‘A Model of Price Adjustment’. Journal of Economic Theory, 3(2): 156–168. Diamond, P. (1982a). ‘Aggregate Demand Management in Search Equilibrium’. Journal of Political Economy, 90(5): 881–894. Diamond, P. (1982b). ‘Wage Determination and Efficiency in Search Equilibrium’. Review of Economic Studies, 49(2): 217–227. Drèze, J. (1991). Underemployment Equilibria: Essays in Theory, Econometrics and Policy. Cambridge: Cambridge University Press. Flinn, C.J. (2010). The Minimum Wage and Labor Market Outcomes. Cambridge and London: MIT Press. Galenianos, M. and P. Kircher (2009). ‘Directed Search with Multiple Job Applications’. Journal of Economic Theory, 144(2): 445–471. Hagedorn, M. and I. Manovskii (2008). ‘The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited’. American Economic Review, 98(4): 1692–1706. Hall, R.E. (1979). ‘A Theory of the Natural Unemployment Rate and the Duration of Employment’. Journal of Monetary Economics, 5(2): 153–169. Hall, R.E. (2005). ‘Employment Fluctuations with Equilibrium Wage Stickiness’. American Economic Review, 95(1): 50–65. Hall, R.E. and S. Schulhofer-Wohl (2015). ‘Measuring Job-Finding Rates and Matching Efficiency with Heterogeneous Jobseekers’. Economics Working Papers 15103, Hoover Institution, Stanford University. Hopenhayn, H. and R. Rogerson (1993). ‘Job Turnover and Policy Evaluation: A General Equilibrium Analysis’. Journal of Political Economy, 101(5): 915–938. Hosios, A.J. (1990). ‘On the Efficiency of Matching and Related Models of Search and Unemployment’. Review of Economic Studies, 57(2): 279–298. Karlin, S. (1962). ‘Stochastic Models and Optimal Policy for Selling an Asset’. Chapter 9 in K.J. Arrow, S. Karlin and W. Scarf (eds) Studies in Applied Probability and Management Science. Stanford, CA: Stanford University Press: 148–158. Kiyotaki, N. and J. Moore (2001). ‘Liquidity, Business Cycles, and Monetary Policy’. Clarendon Lectures: Lecture 2: 27 November.

892     E. Wasmer

Kungl. Vetenskapsakademien (2006). ‘Edmund Phelps’s Contributions to Macroeconomics’. 9 October. Available at: https://www.nobelprize.org/nobel_ prizes/economic-sciences/laureates/2006/advanced-economicsciences2006.pdf. Lagos, R. (2000). ‘An Alternative Approach to Search Frictions’. Journal of Political Economy, 108(5): 851–873. Lagos, R. and R. Wright (2002). ‘A Unified Framework for Monetary Theory and Policy Analysis’. Working Paper 0211, Federal Reserve Bank of Cleveland. Layard, R. (1986). ‘Discussion [of Pissarides 1986]’. Economic Policy, 1(3): 541–543. Layard, R., S. Nickell and R. Jackman (1991, 2005). Unemployment: Macroeconomic Performance and the Labour Market. Oxford: Oxford University Press. First edition, 1991; second edition, 2005. Ljungqvist, L. and T.J. Sargent (1998). ‘The European Unemployment Dilemma’. Journal of Political Economy, 106(3): 514–550. Ljungqvist, L. and T.J. Sargent (2017). ‘The Fundamental Surplus’. American Economic Review, 107(9): 2630–2665. Malinvaud, E. (1977). The Theory of Unemployment Reconsidered. Oxford: Basil Blackwell. Manning, A. (2003). Monopsony in Motion. Princeton and Oxford: Princeton University Press. McCall, J. (1970). ‘Economics of Information and Job Search’. Quarterly Journal of Economics, 84(1): 113–126. Meghir, C., C.A. Pissarides, D. Vayanos and N. Vettas (eds) (2017). Beyond Austerity: Reforming the Greek Economy. Cambridge, MA: MIT Press. Menzio, G. and S. Shi (2011). ‘Efficient Search on the Job and the Business Cycle’. Journal of Political Economy, 119(3): 468–510. Merz, M. (1995). ‘Search in the Labor Market and the Real Business Cycle’. Journal of Monetary Economics, 36(2): 269–300. Merz, M. and E. Yashiv (2007). ‘Labor and the Market Value of the Firm’. American Economic Review, 97(4): 1419–1431. Moen, E.R. (1997). ‘Competitive Search Equilibrium’. Journal of Political Economy, 105(2): 385–411. Mortensen, D.T. (1970). ‘A Theory of Wage and Employment Dynamics’. In E.S. Phelps et.al. Microeconomic Foundations of Employment and Inflation Theory. New York: Norton: 167–211. Mortensen, D.T. (1977). ‘Unemployment Insurance and Job Search Decisions’. Industrial Labor Relations Review, 30(4): 505–517. Mortensen, D.T. (1982a). ‘The Matching Process as a Noncooperative Bargaining Game’. Chapter 7 in J.J. McCall (ed.) The Economics of Information and Uncertainty, NBER. Chicago and London: University of Chicago Press: 233–254. Mortensen, D.T. (1982b). ‘Property Rights and Efficiency in Mating, Racing, and Related Games’. American Economic Review, 72(5): 968–979.

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Mortensen, D.T. (1986). ‘Job Search and Labor Market Analysis’. Chapter 15 in O. Ashenfelter and R. Layard (eds) Handbook of Labor Economics. Volume 2. Amsterdam: Elsevier: 849–919. Mortensen D.T. (2005). Wage Dispersion: Why Are Similar Workers Paid Differently? Cambridge, MA: MIT Press. Mortensen, D.T. and E. Nagypal (2007). ‘More on Unemployment and Vacancy Fluctuations’. Review of Economic Dynamics, 10(3): 327–347. Nobelprize.org (2010). ‘Christopher A. Pissarides—Biographical’. Available at: https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2010/pissarides-bio.html. Osborne, M.J. and Rubinstein, A. (1990). Bargaining and Markets. New York: Academic Press. Phelps, E.S. (1968). ‘Notes on Optimal Monetary Growth and the Optimal Rate of Growth of Money: Comment’. Journal of Political Economy, 76(4): 881–885. Phelps, E.S. et al. (1970). Microeconomic Foundations of Employment and Inflation Theory. New York: Norton. Postel-Vinay, F. and J.-M. Robin (2002). ‘Equilibrium Wage Dispersion with Worker and Employer Heterogeneity’. Econometrica, 70(6): 2295–2350. Rothschild, M. (1973). ‘Models of Market Organisation with Imperfect Competition: A Survey’. Journal of Political Economy, 81(6): 1283–1308. Shimer, R. (2005). ‘The Cyclical Behavior of Equilibrium Unemployment and Vacancies’. American Economic Review, 95(1): 25–49. Silva, J.I. and M. Toledo (2009). ‘Labor Turnover Costs and the Cyclical Behavior of Vacancies and Unemployment’. Macroeconomic Dynamics, 13(S1): 76–96. Stigler, G.J. (1961). ‘The Economics of Information’. Journal of Political Economy, 69(3): 213–225. Stigler, G.J. (1962). ‘Information in the Labor Market’. Journal of Political Economy, 70(5, Part 2): 94–105. Stole, L.A. and J. Zwiebel (1996a). ‘Intra-firm Bargaining under Non-binding Contracts’. Review of Economic Studies, 63(3): 375–410. Stole, L.A. and J. Zwiebel (1996b). ‘Organizational Design and Technology Choice under Intrafirm Bargaining’. American Economic Review, 86(1): 195–222. Wasmer, E. (2011). ‘Le Prix Nobel 2010: Les Marchés Frictionnels’. Revue d’Économie Politique, 121(5): 637–666. Yashiv, E. (2000). ‘The Determinants of Equilibrium Unemployment’. American Economic Review, 90(5): 1297–1322.

Notes on Contributors

Stuart Astill graduated in mathematics from UMIST, was a government statistician, worked in the European Commission then, with considerable thanks to Nick Barr’s influence, became an economic advisor to Alistair Darling (then UK Secretary of State for Social Security). He spent a period in academia at LSE and Sciences Po, Paris (IEP). Later, Astill returned to UK government work advising on disability poverty, labour market reforms for disadvantaged areas and performance measurement of the UK’s social security system. As well as gaining his PhD at LSE and postdoctoral work with the National Audit Office, he has taught widely at the School, Sciences Po and Sheffield University. Astill is currently a consultant working in the UK, Europe and internationally. David Bartholomew  (1931–2017) made significant contributions in latent variable modelling, factor analysis and social measurement. He joined LSE as Professor of Statistics in 1973 and retired in 1996. He published more than 25 books on a wide range of topics, including stochastic models for social processes, statistical inference under order restrictions, statistical methods for manpower planning, latent variable models and factor analysis, the statistical approach to social measurement and measuring intelligence. Bartholomew was a Fellow of the British Academy. He was President of the Royal Statistical Society from 1993 to 1995 and was awarded the Society’s Guy Medal in Bronze in 1971.

© The Editor(s) (if applicable) and The Author(s) 2018 R. A. Cord (ed.), The Palgrave Companion to LSE Economics, https://doi.org/10.1057/978-1-137-58274-4

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896     Notes on Contributors

Peter J. Boettke is University Professor of Economics and Philosophy, George Mason University, and Director, F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics at the Mercatus Center. Boettke is the author of 11 books, including Living Economics. In addition to George Mason University, Boettke has had positions at New York University, Russian Academy of Science, Stanford University, Max Planck Institute and the London School of Economics. Most recently, he was President of the Southern Economic Association and is currently President of the Mont Pelerin Society. Alec Cairncross (1911–1998) was a distinguished economist and public servant. His undergraduate degree was in economics at the University of Glasgow followed by a doctorate from Cambridge. Returning to Glasgow, he was appointed Lecturer in Economics in 1935 and worked in various government departments during and after the Second World War. He became Professor of Applied Economics at Glasgow in 1951, where his focus was on the factors which drive urban and industrial change. Cairncross became an economic adviser to the Treasury in 1961, was knighted in 1967 and was appointed Master of St Peter’s College, Oxford, in 1967. He served as Chancellor of Glasgow from 1972 to 1996. Among his most important publications were Introduction to Economics (1944; six editions) and Years of Recovery: British Economic Policy, 1945–1951 (1985). Robert A. Cord  is currently working as a researcher in economics. His specialist area of interest is the history of economic thought and, within this, the history of macroeconomics. He has published four books: Keynes (2007), Reinterpreting the Keynesian Revolution (2012), Milton Friedman: Contributions to Economics and Public Policy (co-edited with J. Daniel Hammond; 2016) and The Palgrave Companion to Cambridge Economics (editor; 2017). Cord is also the managing editor of the Palgrave series Remaking Economics: Eminent Post-War Economists. He holds a PhD from Cambridge University. Adrian Darnell joined Durham University in 1975, having been a postgraduate at Warwick University. He has enjoyed over four decades at Durham and was appointed Professor of Economics in 1996. In the last 20 years, his roles have encompassed senior managerial positions. His research lies mainly in the history of economic thought and econometrics. He has published extensively and has edited major works on the development of mathematical economics and the history of econometrics.

Notes on Contributors    897

Catherine Ellis  is an Associate Professor in the Department of History at Ryerson University and a Visiting Scholar at Massey College, University of Toronto. She holds a DPhil in modern history from Oxford University. Her research explores political ideas, problem-solving and decision-making in modern Britain, with particular interests in the Labour Party’s political thought and the development of youth cultures. She thanks Stephen Brooke (York University) for introducing her to Evan Durbin’s work and for sharing his own research on Durbin’s life and ideas. James Forder  is Andrew Graham Fellow and Tutor in Political Economy, Balliol College, Oxford, and has taught economics at Oxford University since 1993. He is author of The Case Against Voting Reform (Oneworld, 2011), Macroeconomics and the Phillips Curve Myth (Oxford University Press, 2014), a number of papers sceptical of the merits of central bank independence, and others on the history of economic thought around the middle of the twentieth century. Howard Glennerster worked in the Labour Party Research Department from 1959 to 1964, after which he joined LSE as a Research Officer in 1964 and began teaching in the Social Administration Department in 1968. He remained there until his retirement in 2001. He was Chairman of the Suntory-Toyota International Centres for Economics and Related Disciplines (STICERD) for seven years. He is now Professor Emeritus and Fellow of the British Academy. Glennerster was an advisor to the Treasury and the Department of Health in the UK, spent periods at the Brookings Institution and at a number of US universities working on the comparative finance of health and welfare institutions. Charles Goodhart CBE, FBA, is Emeritus Professor of Banking and Finance with the Financial Markets Group at the London School of Economics (LSE), having previously, 1987–2005, been its Deputy Director. Until his retirement in 2002, he had been the Norman Sosnow Professor of Banking and Finance at LSE since 1985. Before then, he had worked at the Bank of England for seventeen years as a monetary adviser, becoming a Chief Adviser in 1980. In 1997, he was appointed one of the outside independent members of the Bank of England’s new Monetary Policy Committee until May 2000. Earlier, he had taught at Cambridge and LSE. Besides numerous articles, he has written a graduate monetary textbook, several books on monetary analysis and history and on banking regulation.

898     Notes on Contributors

Harald Hagemann is Professor Emeritus of Economic Theory at the University of Hohenheim, Stuttgart, Germany. He is also a Life Member of Clare Hall, University of Cambridge. In 1999/2000, he was Theodor Heuss Professor at the Graduate Faculty of Political and Social Sciences at the New School for Social Research in New York. He has also taught at the Universities of Bremen and Kiel and the Free University of Berlin and as Visiting Professor at the Universities of Bologna, EAFIT Medellin, Graz, Linz, Lyon 2, Meiji University in Tokyo, Nice, Paris I Pantheon-Sorbonne, Strasbourg and Sydney. His main research covers growth and structural change, technological change and employment, business cycle theory and the emigration of German-speaking economists in the Nazi period. He is Honorary Past President of the European Society for the History of Economic Thought (ESHET). Since 2013, he has been Chairman of the Keynes-Gesellschaft. Leslie Hannah is Professor Emeritus at the LSE and divides his time between Tokyo and London. He was the founding Director of the School’s Business History Unit (1978–1988), Professor (and sometime Convenor) in the Economic History Department (1982–1995) and LSE Pro-Director (1995–1997). He later was Dean of the Cass Business School (City University, London), Chief Executive of Ashridge Management College and Professor of Economics at the University of Tokyo. Andrew Harvey is Emeritus Professor of Econometrics in the Faculty of Economics, University of Cambridge, and a Fellow of Corpus Christi College. Prior to that, he was Professor of Econometrics at the London School of Economics. He is a Fellow of the Econometric Society and a Fellow of the British Academy. He is the author of two textbooks, The Econometric Analysis of Time Series (1981) and Time Series Models (1981), and two research monographs, Forecasting, Structural Time Series Models and the Kalman Filter (1989) and, most recently, Dynamic Models for Volatility and Heavy Tails (2013). David F. Hendry, Kt  is Director of the Program in Economic Modelling in the Institute for New Economic Thinking at the Oxford Martin School, and co-director of Climate Econometrics, Professor of Economics, and Fellow of Nuffield College, Oxford University. He was previously Professor of Econometrics, LSE. He was knighted in 2009 and received a Lifetime Achievement Award from the Economic and Social Research Council in 2014. He is an honorary vice president and past president of the Royal Economic Society; Fellow of the British Academy, Royal Society of

Notes on Contributors    899

Edinburgh, Econometric Society, Academy of Social Sciences, and Journal of Econometrics; Foreign Honorary Member of the AEA and American Academy of Arts and Sciences; and Honorary Fellow of the International Institute of Forecasters. He has received eight honorary doctorates, is a Thomson Reuters Citation Laureate, and has published more than 200 papers and 25 books. Susan Howson  is a Professor Emeritus at the University of Toronto and a fellow of Trinity College, Toronto. She is the author of the biography, Lionel Robbins (Cambridge University Press, 2011) as well as three books and many articles on the history of economic policy in twentieth-century Britain. Having edited the diaries of Lionel Robbins and James Meade and Meade’s Collected Papers, she is now working on a biography of James Meade. Richard Jackman has taught at LSE since 1968, becoming Professor of Economics in 1997. His research has contributed to four major areas of economics: macroeconomics, public finance and specifically local government finance, labour economics, including comparative labour market performance, and the economics of post-communist transition. He has published over 100 papers and co-authored two major books. Much of Jackman’s work has a policy focus and has led to consultancies with international organisations, including the World Bank. In addition, he has set up and directed the LSE’s Summer School and the co-sponsored International College of Economics and Finance in Moscow. P.N. (Raja) Junankar  is an Honorary Professor in the Industrial Relations Research Centre, Business School, UNSW Sydney, and Emeritus Professor at Western Sydney University. He is also a Research Fellow of the Institute for the Study of Labour (IZA). He has held teaching and research positions in universities and research institutes in Britain, Canada, France, Germany, India, Japan and USA. He has published in national and international journals. Books he has published include Investment: Theories and Evidence (1972), Marx’s Economics (1982), Economics of the Labour Market: Unemployment and the Costs of Unemployment, Development Economics: The Role of the Agricultural Sector in Development and The Economics of Immigration: The Impact of Immigration on the Australian Economy (all 2016). He has been a consultant for several international organisations, as well as several Australian federal government agencies, and was recently elected as a Fellow of the Royal Society of New South Wales.

900     Notes on Contributors

John E. King is Emeritus Professor at La Trobe University and Adjunct Professor at Federation University Australia. His long-standing and continuing research interests are in the history of economic thought, especially Post-Keynesian macroeconomics and Marxian political economy. King contributed the entry on Nicholas Kaldor to The Palgrave Companion to Cambridge Economics (2017). Recent books include Advanced Introduction to Post Keynesian Economics (Elgar, 2015), The Distribution of Wealth—Growing Inequality?, with M.P. Schneider and M. Pottenger (Elgar, 2016), and A History of American Economic Thought, with S. Barbour and J. Cicarelli (Routledge, 2018). King is currently working on a book-length history of The Alternative Austrian Economics, dealing with socialist ideas in Austria from Bauer and Hilferding to Rothschild and Steindl, and beyond. Donald Kohn  holds the Robert V. Roosa Chair in International Economics and is a Senior Fellow in the Economic Studies programme at the Brookings Institution. He also currently serves as an external member of the Financial Policy Committee at the Bank of England. Kohn is a 40-year veteran of the Federal Reserve System, serving as member and then Vice-Chairman of the Board of Governors from 2002 to 2010. He has written extensively on topics related to monetary policy, financial regulation and macroeconomics. Atsushi Komine was born in Tokyo in 1965 and received his PhD in Economics from Hitotsubashi University. Since 2008, he has been Professor of the History of Economic Thought at Ryukoku University, Kyoto. From 2001 to 2002 and from 2009 to 2010, he was an Honorary University Fellow of Exeter University and a Visiting Fellow of Clare Hall, Cambridge University. He is the author and editor of several books, including W. H. Beveridge in Economic Thought: A Collaboration with J. M. Keynes et al. (2007), Poverty and Welfare in the History of Economic Thought (ed. 2011) and Keynes and His Contemporaries: Tradition and Enterprise in the Cambridge School of Economics (2014). Colin M. Lewis is Professor Emeritus of Economic History at LSE. His main research interests are political economy, business history, Latin American development and comparative growth—with a focus on investment, industrialisation and state formation. He has published in such fields as railways and growth, modernisation in Latin America and Argentinian economic and social history, and has held visiting professorships at universities in Argentina, Brazil, China, Germany, India and the USA, where he lectured on these subjects.

Notes on Contributors    901

Alain Marciano is Associate Professor of Economics at the University of Montpelier 1. His research interests are the post-Second World War history of economics and, more specifically, the history of law and economics and public choice. Among the journals he has published in are History of Political Economy, Journal of the History of Economic Thought, European Journal of the History of Economic Thought, International Review of Law and Economics, Public Choice, and Journal of Economic Behavior and Organization. He is currently working on a biography of James M. Buchanan. Naoki Matsuyama was born in Aichi, Japan, in 1982. He is a graduate of Wakayama University and Hokkaido University. He has worked at Hokkaido University (2010–2012) and has been at the University of Hyogo since 2012, where he is currently an Associate Professor. Matsuyama has also been a Visiting Researcher at the Faculty of Economics at the University of Cambridge (2013–2014). Selected publications include ‘Relativity of Alfred Marshall’s Psychological Research and Economics’ (2010) and ‘Marshall and Carlyle: On the Relativity of “Chivalry” and “Fair Wage” in their Thought’ (2014). He has also transcribed Michio Morishima’s lecture, Memoir of Hicks (2014). Roger Middleton  is Emeritus Professor of the History of Political Economy, University of Bristol. Educated at Manchester and Cambridge, his early career was in economic history, with a particular interest in Keynes, policy making and macroeconomic policy impact in Britain in the 1930s. Subsequently, his research has moved into the history of economics, economic thought and contemporary British political economy. His most recent book is an edited edition, Inside the Department of Economic Affairs: Samuel Brittan, the Diary of an ‘Irregular’, 1964–1966 (Oxford University Press, 2012). Christopher J. Napier is Professor of Accounting at Royal Holloway, University of London. After qualifying as a chartered accountant, he took the MSc in Accounting and Finance at LSE. Napier was a Lecturer and subsequently Senior Lecturer in Accounting at LSE from 1979 to 1996, when he became professor at the University of Southampton (where he received his PhD). He moved to Royal Holloway in 2006. Research interests include accounting history, corporate financial reporting, accounting theory and Islamic accounting. Napier was a member of Council of the Institute of Chartered Accountants in England and Wales between 1997 and 2000.

902     Notes on Contributors

Yew-Kwang Ng is Winsemius Professor of Economics, Nanyang Technological University, and Emeritus Professor, Monash University; he is also a Fellow of the Academy of Social Sciences in Australia. In 2007, Ng received the highest award (Distinguished Fellow) of the Economic Society of Australia. He has a dozen papers (including one published as an undergraduate and joint papers) in the top five journals in economics. Ng has also published more than two dozen books and in excess of 250 refereed journal papers in economics, biology, cosmology, informetrics, mathematics, philosophy, psychology and sociology, including in the American Economic Review and the Economic Journal. A notable recent book is Common Mistakes in Economics (2011), with Markets and Morals forthcoming with Cambridge University Press. Peter C. B. Phillips  was educated at the University of Auckland and the London School of Economics and Political Science. He is Sterling Professor of Economics at Yale University, Distinguished Professor at the University of Auckland, founding editor of Econometric Theory and an elected fellow of many learned societies, including the British Academy, the American Academy of Arts and Sciences and the Royal Society of New Zealand. He is a Thomson Reuters Citation Laureate and recipient of the New Zealand Medal of Science and Technology. His works on finite sample theory, continuous time, trending time series, unit roots, financial bubbles and partially identified models have subsequently developed into major fields of scientific inquiry. He has an extended family fellowship of more than 80 PhD students many of whom are now prominent econometricians. Ennio E. Piano  is a doctoral candidate in the Department of Economics at George Mason University and a Graduate Fellow at the F.A. Hayek Program in Philosophy, Politics, and Economics at the Mercatus Center. He has a BA in History from the University of Siena and an MA in Political Economy from King’s College London. His research has appeared in such academic outlets as Public Choice, Rationality & Society and Cambridge University Press. Euston Quah  is Head of Economics and Deputy Chair of the Sustainable Earth Office at the Nanyang Technological University, Singapore. A prolific writer, Quah has published over 100 articles and various books, including on cost–benefit analysis jointly written with Ezra Mishan and as co-writer of the Asian edition of Mankiw’s bestselling textbook, Principles of Economics. Quah is editor of the Singapore Economic Review and is the President of the

Notes on Contributors    903

Economic Society of Singapore. He has consulted for various bodies, including the Singapore government, the World Bank and the Asian Development Bank. Quah is one of the most highly cited and influential academic economists in Singapore. Peter A. Riach is a graduate of the University of Melbourne and the London School of Economics. He has taught at the University of Melbourne, Monash University and De Montfort University. From 2005 to 2010, he served as the labour economist member on the UK’s Prison Service Pay Review Body. He has published in the following areas: theory of aggregate income distribution, wage bargaining practices, Post-Keynesian employment theory, origins and consequences of the real wage gap, feminist economics and field experiments of employment discrimination. He is currently a Research Fellow of the Institute of Labor Economics (IZA). Daniel Schiffman  is Senior Lecturer in the Department of Economics and Business Administration at Ariel University, Israel. He specialises in economic history and history of economic thought and has published papers in these areas. His most recent publication is The Role of Economic Advisors in Israel’s Economic Policy: Crises, Reform and Stabilization (with Warren Young and Yaron Zelekha), which deals with the roles of Lerner and other world-renowned economists as economic advisors in Israel. He holds a PhD from Columbia University, USA. Max Steuer  joined the Economics Department at LSE in 1959. Currently, he is Reader Emeritus attached to the Centre for Philosophy of Natural and Social Science at LSE. He took over James Meade’s course in international economics (trade, migration and capital movements). Under the direction of the then Convener, Ely Devons, he had an active role in developing the taught MSc and initiated the course Methods of Economic Investigation. Later, he developed and taught the structured PhD in Economics, working with Kevin Roberts and others. His books include The Impact of Foreign Direct Investment on the United Kingdom, Mathematical Sociology (with Janet Holland) and, most recently, The Scientific Study of Society. His current research emphasis is on the many aspects and implications of extreme economic inequality. He wrote and produced the feature film The Committee directed by Peter Sykes; held UK and world records in aviation (hot air and mixed balloons); and plays bass guitar in rock bands, including The Critique of Pure Rhythm.

904     Notes on Contributors

Jim Thomas  is Emeritus Reader in Economics and a Research Associate at STICERD at the London School of Economics (LSE). He has published articles on the history of economic thought and is currently researching the historical development of economics at LSE. Noel Thompson  is an Emeritus Professor of History in the College of Arts and Humanities at Swansea University, where he had been Head of the Department of History (2000–2005), Head of the School of Humanities (2005–2008) and Pro-Vice-Chancellor (Research) (2008–2014). He is the author of a recent major study of British socialist political economy, Social Opulence and Private Restraint: The Consumer in British Socialist Thought Since 1800 (Oxford University Press, 2015). Keith Tribe is an independent scholar and professional translator who has in recent years taught the History of Economic Thought course at the University of Birmingham with Roger Backhouse. In 2015, he published The Economy of the Word: Language, History, and Economics and is preparing a monograph on the development of the discipline of economics in Britain from the mid-nineteenth to the mid-twentieth centuries. Tribe published (with Roger Backhouse) The History of Economics: A Course for Teachers and Students in 2017, and co-edited with Marten Seppel Cameralism in Practice. Jan C. van Ours  is Professor of Applied Economics at Erasmus School of Economics, Erasmus University Rotterdam, the Netherlands, and Professorial Fellow at the University of Melbourne, Australia. His recent research is on unemployment, labour market institutions, labour market policies, health, crime, cannabis use, football and happiness. A recent publication is The Economics of Imperfect Labour Markets (joint with Tito Boeri). Van Ours was President of the Society for Population Economics in 2009 and President of the European Association of Labour Economists from 2011 to 2014. Etienne Wasmer is Professor of Economics at New York University in Abu Dhabi and at Sciences Po, Paris. He is a Research Fellow at CEPR and IZA. Wasmer was the founding Co-Director of LIEPP (Laboratory for Interdisciplinary Evaluation of Public Policies) at Sciences Po from 2011 to 2017. He received a PhD in economics at the LSE under the supervision of Chris Pissarides. Wasmer was a member of the Council of Economic Advisers to the French Prime Minister from 2012 to 2016 and a co-editor of Labour Economics: An International Journal. He has developed search and matching models of the labour market, and of financial markets and goods markets, in

Notes on Contributors    905

general equilibrium, and has co-written a textbook entitled Labor, Credit, and Goods Markets: The Macroeconomics of Search and Unemployment (2017). Warren Young  is Emeritus Professor of Economics at Bar-Ilan University, Israel. He has published and edited books and articles on the history of modern macroeconomics and growth theory, the history of the Federal Reserve, international macroeconomics, energy economics and the Israel economy. Young was an adviser to the Archives Project, Federal Reserve Bank of Minneapolis. He was a Visiting Professor at the Tepper School of Business, Carnegie Mellon University and the Center for Economic Efficiency, Arizona State University. Young holds a PhD from the University of Cambridge, England. Yaron Zelekha is President of the Higher Academic Council of Ono Academic College, Israel, Director of its Accounting School and Professor of Accounting. During 2003–2007, he was the Accountant General of the State of Israel, and during 1996–1998 served as the Director of the Prime Minister’s Economic Staff and chaired numerous public committees. He has received many prestigious awards for his public service and contributions to public-sector accounting in Israel. Zelekha has published six books and dozens of academic papers. He holds a PhD in Economics from Bar-Ilan University, Israel, and is a CPA.

Index

A

Academic independence 120 Accominotti, Olivier 54 Accountant, The 83, 89–91 Accountant prudence principle 90 Accounting 79, 92 academics 103 beginnings 81 calculations 101 constant purchasing power (CPP) 94 cost theory and 87 Department 118 discipline 81 economization of organisational life 104 historical research 103 history 103 influenced by economics 84 magazines 96 management and 84 mathematics and history 87 methods 86 practice 88, 102, 104 price-change 93 regulation 101

research 104 Research Association (ARA) 86 Review 99, 102 scholarly journals 96 teaching 81, 84, 87, 92, 98, 103 theorists 81 theory 80 Ackrill, Margaret 131 Adaptive learning 17 Adjustment processes 14 Agassi, Joseph 9, 10, 729, 731 Akerlof, George 155, 810 All Our Working Lives 126 Allen, Roy 4–7, 22, 515, 517, 669 academia 516 academic career 518 analysis of family budgets 519 balance of payments 522 CBE 518 collection of economic data 522 competitive equilibrium 520 consumer demand 443 contributions to theoretical economics 523 Director of Records and Statistics 516

© The Editor(s) (if applicable) and The Author(s) 2018 R. A. Cord (ed.), The Palgrave Companion to LSE Economics, https://doi.org/10.1057/978-1-137-58274-4

907

908     Index

econometrics 525 economic policy 522 economic statistics 518 elasticities of demand 519 employment exchange data 522 Fundamental Formula 521 game theory 524 index numbers 522 Index Numbers in Theory and Practice 523 Introduction to Mathematical Economics 519 knighthood 518 labour market 522 linear programming 524 macroeconomic modelling 525 Macro-Economic Theory: A Mathematical Treatment 524 Mathematical Analysis for Economists 518, 522, 524 Mathematical Economics 523–525 national income and expenditure 522 national income statistics 518 Other Publications 522 political decision-making 525 prices 522 Professor of Statistics 516 public honours 518 public service 516, 522 publications 523, 525 Research 520, 525 Some Problems in Econometrics 519 Statistics for Economics 523 teaching 518, 525 The Economic Approach to Business Cycle Problems 519 The Mathematical Foundations of Economic Theory 523 Theory of Value 521 turnpike theorem 525 value theory 520

Visiting Professorship at Harvard University 516 war service 516 Allocative insufficiency 160, 403. See also Lerner, Abba American Economic Association 165 American Economic Review 165, 316, 407, 615 Anson, Michael 130 Anstey, Vera 63 Aoyama, Hideo 643 Appropriateness 254 Approximation 96 Archibald, Chris 728, 731, 860 Arrow, Kenneth 727 Arrow-Debrew-McKenzie concept of equilibrium 442 Ashley, William 198, 201 Ashton, Thomas Southcliffe 63–67, 115 Prize 66 Assets 80, 83 fixed 82 markets 151 pricing 21 valuation 82, 91 value of 80, 89 Association of Incorporated Statisticians Limited 244. See also Beveridge, William Henry Association of Teachers of Economics 251 Association of University Teachers of Economics (AUTE) 239, 313, 586 Asymmetric information 726 Asymptotic theories 672 Atkinson, Tony 150, 151. See also Welfare state programme Minimum acceptable standard of living 150 Minimum rights to access range of resources 151

Index    909

Poverty and the Reform of Social Security 149 social security provisions 149 Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) 149 Austin, Gareth 51 Austrian market process approach 383 Austrian School 87 Autocorrelation 14 Autoregressive damping 17 B

BA Historians 44 Baines, Dudley 49, 68 Bakker, Gerben 50, 130, 131 Balanced budget multiplier debate 704 Bank of England 116, 130, 305, 601, 761, 765, 769, 782. See also Goodhart, Charles and Sayers, Richard Funding for Lending Scheme 786 Bankruptcy 776 Banks 786 international standards 773 liquidity regulation 785 prohibitions 778 subsidised lending 786 Bargaining theory 104, 842 Barker, Theo 42, 118 Barna, Tibor 147, 148 Barone, Enrico 383 Barr, Nicholas 155–157, 159, 805 free higher education 817 ability-to-pay principle 816 academic work 808, 826 asymmetric information in insurance markets 810 behavioural economics 808 benefit principle 816 blog 827

citizenship 824, 825 consumer choice 823 context and theory as vehicles 806 early life 806 economics of information 809, 810 empathetic teacher 809 finance of higher education 808 higher education finance 808, 815, 819 IMF 808 imperfect information in product and insurance markets 811 income-contingent repayments 816, 818 incomplete contracts 808 Labour Markets and Social Policy in Central and Eastern Europe 814, 821 main works 827 MSc Political Economy of Transition in Europe 814 Myths My Grandpa Taught Me 820 OECD 808 old-age pensions 820 optimal taxation 808 pension reform in China 824 pensions 805, 822 China 821 systems 822 policy impact 813 policy work 824 public choice 810 public involvement in institutions 810 public policy 808 risk sharing 823 serendipitous opportunities 820 social insurance 816 principle 816 social policy 813 student loans 816, 818 sustainable social justice 806 teaching 813

910     Index

The Economics of the Welfare State 805, 809, 811–813, 815, 816, 820, 821, 826 The Welfare State as Piggy Bank 810, 811, 812 theoretical work 824 variable fees 819 welfare state 805, 809–811, 815, 827 economics 812 World Bank 808, 813–815, 820 Bates, Robert 49, 50 Bauer, Peter 54, 726, 728 Baxter, William 81, 92–98 BCom degree 115, 117 Becker, Gary 556 Behavioural economics 156, 808, 810, 823 Behaviours non-rational economic 51 Bell, Brian 95, 834 Benchmark models 886 Bentham, Jeremy 363 Benthamite principle 760 Bergson, Henry 641 Bergstrom, Rex 11, 12, 23 Betriebswirtschaftslehre 114 Beveridge curve 246, 751, 866, 869, 873, 874 Beveridge, William Henry 84, 114, 152, 239, 350, 375 amateur economist 239 Association of Incorporated Statisticians Limited 244 Association of University Teachers of Economics (AUTE) 250, 251 authoritarian 242 biographical sketch 240 bridge between natural and social sciences 249 British idealism 256 Cambridge practicality 252 Causes and Cures of Unemployment 245

Chair of Social Biology 249 collecting funds 251 Commissioner for Man-Power Survey 242 consistent and logical models in theory 249 contributions to economic analysis 239 contributions to economic ideas 251 contributions to modern economics 243 creating modern economics 251 decasualisation of labour 245 developments in econometrics and statistics 244 Director at LSE 248 Directorship 242, 246 discretionary policies 247 economic analysis 254 Economics ‘Tripos’ 247 economy and society 257 empirical analysis 244 empirical works 244 evolution of politics 256 freedom from idleness 256 freedom from want 256, 259 full employment 256 Full Employment in a Free Society 242, 246 individual political rights 256 influence 240 Insurance and Allied Services 242 Keynesian economics 253 laws of macroeconomic phenomena 243 links between economics and social sciences 251 LSE changed 241 LSE scientism 252, 256 M.P. 243 main works 259 management in bureaucracy 252 methodological approach 256

Index    911

Ministry of Food 241 Ministry of Munitions 241 modern theory of unemployment 239, 243, 244 naïve positivism 253 new type of economic idea 251 Oxford idealism 252 personality 242 political economy 249 post-war problems 242 Power and Influence 243 President of the Royal Statistical Society (RSS) 244 professionalization in economics 239, 247 professionalization of modern economics 239 quasi-uniformity of social phenomena 254 rebirth of community 243 remedies for unemployment 247 scientific approach 256 social insurance 242 social security 256, 257 support new professions 249 theory of unemployment 246 time-series analysis 244 trade cycles 247 Treasury View 245 unemployment 245 Unemployment : A Problem of Industry 245 unemployment benefits 242 utilitarianism 252 vision of welfare 257 welfare ideas 240, 256 welfare state 239 Whitehall 241 workmen’s compensation 242 world peace 243 Bhimani, Alnoor 102 Blair government 819 Blair, Tony 754, 755

Blaug, Mark 158, 734 Boettke, Peter 388 Bonbright, James C. 90 Bootstrapping 17, 18, 20 Bowlby, John 495, 596 Bowley, Arthur Lyon 4, 22, 215 A General Course of Pure Mathematics from Indices to Solid Analytical Geometry 231 accumulation of high-quality data 226 accuracy of weighed averages 221 Acting Director of the Oxford Institute of Statistics 219 Adam Smith Prize 220 An Elementary Manual of Statistics 228 applied statistician 229 best estimates of rate of wage change 221 CBE 219 Central Statistical Office (CSO) 229 changes in comparable data on wages 221 Cobden Essay Prize 217 collecting and generating statistics 219 confidence interval 230 constancy of wage share 223 contract curve 232 contributions to economics 220 contributions to statistical theory 235 cost of living 220 criteria for acceptability of statistics 227 criticised by Neyman 230 criticism of pursuit of accuracy 228 demand curve 232 diagnostic specification tests 235 earnings 222 econometrician 229 economic statistician 220

912     Index

Edgeworth’s contributions to statistical theory 230 Elements of Statistics 217, 225, 226 empirical economics 216 Fabian Socialist 225 Family Expenditure 233, 234 Fellow of the British Academy 220 Fellow of the Royal Economic Society 220 Fisher’s ideal index number 221 founder member of Econometric Society 220 Guy Medal in Silver 217 honours 219 indifference curve 232 International Statistical Institute 229 investigations into poverty 222 justification for method 221 Knight Bachelor 219 lecturer in Statistics 218 Livelihood and Poverty 223, 224 main works 235, 236 Marshall’s positive influence 217 mathematical economics 216, 220, 231 measurement of social change 225 measurement of subsistence levels 220 Montefiore Prize for Mathematics 216 national income 223, 225 statistics 222 pioneer of applied economics 219 econometrics 229 sampling 219, 220 statistical techniques 219, 220 poverty 225 Prices and Wages in the United Kingdom 222 quality of statistics 227 role of statistician 226 sampling technique 223

simple random sampling 230 Slutsky equation 232 social change 222 social investigator 225 social reform interest in Fabian Socialism 218 socialism 218 statistical applied work 216 statistical method 233 statistician as disinterested technocrat 228 stratified random sampling 230 studies of wages 225 test theory 235 The Mathematical Groundwork of Economics 232, 233 theoretical statistician 229 theory and practice of sampling 216 theory of index numbers 222 Thompson Gold Medal for Mathematics 216 top Grecian 216 total national wage bill 222 Trinity College, Cambridge 216 Tyson Gold Medal for Mathematics 216 unemployment 222, 225 use of index numbers 222 use of mathematics in economics 216, 235 wage rates 222 wage-drift 222 Wages and Income in the United Kingdom Since 1860 223 weighted index number 221 work on wages 222 Box-Jenkins methodology 639 Briggs, Asa 45 British Academy 52, 53, 62, 154, 220, 254, 436, 464, 516, 534, 547, 551, 635, 895 British Library of Political and Economic Science (BPLES) 69, 364

Index    913

Bromwich, Michael 81, 99–102 Business Administration 84 degree 118 teaching of 340. See also Plant, Arnold Business cycle(s) 6, 7, 22, 54, 168, 341, 796. See also Allen, R.G.D, Desai, Meghnad, Hayek, Friedrich von, Lipsey, Richard, Phelps Brown, Henry, and Phillips, A.W.H. Austrian theory 374, 376, 433 course 7 Business history 41–43, 113, 118, 121, 123, 124, 128, 131, 132 Chandlerian 42 Journal 128 new 42 Unit (BHU) 42, 47, 118, 120, 121, 123, 125–127, 130, 132, 133 Bocconi University 124 collaborative conferences 129 links with Japan 124, 129 methodology 133 Steering Committee 127 Business prosopography 128 C

Cairncross, Alec 533, 534 Calculation debate 386. See also Hayek, Friedrich von, Lange, Oskar and Lerner, Abba Calculation problem competitive solutions 385 Calvinism 270, 271 Calvinists 271 Cannan, Edwin 146, 147, 197, 198, 331, 335, 431, 432, 559, 562 A Review of Economic Theory 203, 211 Adam Smith’s Glasgow lectures 207 capital 204 critical account 205

Das Adam Smith Problem 207 deployment of theory as critique 212 divergence with Marshall 202 Economic Review 210 economic theory of earlier times 203 economics 203 Elementary Political Economy 204, 205 First World War critic 212 History of Economic Theory 210 knowledge of past economic theory 212 local government taxation 210 Lothian essay 200 Lothian Prize 199 LSE 210 main works 212, 213 modern economics 202, 206 Oxford University Press 208 publishing career 203 students 560 teaching 210 terminology of economics 211 The Wealth of Nations 207–211 Theories of Production and Distribution 203–205, 207, 212 utility of economic science 211 Wealth: A Brief Explanation of the Causes of Economic Welfare 203–205 work of Adam Smith 209 writings of Physiocrats 207 Canning, John 90 Capacity utilisation 318 Capital 785 account 79 fixed and floating 82 levy 299, 300, 305. See also Dalton, Hugh owner’s 79 per head immigration and 622 shortage theory 438

914     Index

spending 319 theory 465 Capitalism 654 concept of 79 emergence of 270 general structure 304 German corporate 125 instrumentalist attitude to labour 273 modern 79 nature and structure of 46 Protestantism and 270 spirit of 271 Capital-stock adjustment model 319 Carsberg, Bryan 81, 98, 99 Carus-Wilson, Eleanora Mary 62, 63 Cassis, Youssef 125, 126, 130, 133 Census investigations 224 Central banks 765, 781, 786. See also Goodhart, Charles operational independence 782 deposits 785 Central planning 88, 378, 380, 381, 383, 384, 752. See also Layard, Richard and Lerner, Abba board 404 Central Statistical Office (CSO) 148, 229 Centre for Analysis of Risk and Regulation (CARR) 102 Centre for Economic Performance (CEP) 19, 20, 23, 132, 158, 160, 744. See also Layard, Richard Centre for Labour Economics (CLE) 19, 20, 744 Centre for the Economics of Education (CEE) 19, 159 Centre for Vocational Education 158 Chandler, Alfred 124 criticism of 125 Scale and Scope 125 Strategy and Structure 124 Visible Hand 124

Chang, Ha-Joon 114 Chicagoans 556 Christian Socialists 56 Churchill coalition government 360 Clapham, John Sir 38, 60, 64, 113, 114, 539, 546 Cliometric history 42, 43 Cliometrics 40, 795. See also Desai, Meghnad Coase theorem 556 Coase, Ronald H. 81, 85–87, 89–91, 104, 116, 133, 172, 342, 432, 555 absence of proper competition 152 accounting 562 analyses of public utilities 564 analysis of lighthouses 564 biographical summary 557 blackboard economics 562 business organisation 562 case studies 564 comparative institutional analysis 569 competitive system coordinated by prices 566 conception of economics 559 criticism against institutionalists 565 decentralised mechanism 570 definition of economics 559 economic system 561, 564, 570 economic theory 571 economics as a science of choice and as a method 561 economics as limited to a subject matter 562 economics subfield 555 Evaluation of Public Policy Relating to Radio and Television Broadcasting 565 existence of firms 571 firms 565, 570 individuals 570, 571 institutions 565, 569 Journal of Law and Economics 558

Index    915

law and economics 555 Man and Economy 558 marginal cost pricing 569 market in economics 563 market pricing system 571 marketing costs 569 markets 565, 568 methodological position 556 methodology 559, 561, 562 multi-part pricing 569 naïve empiricism 564 opportunism 571 Plant’s teaching 566 practical economics 560 pricing mechanism 567 pricing system 567–569 production of useful theories 564 properly functioning market 565 rational utility maximiser 563 role of consumers 567 state 565 sterile theories 563 subject matter 561 system as it actually works 562 The British Post Office and the Messenger Companies 565 The Federal Communications Commission 558, 565 The Marginal Cost 566 The Nature of the Firm 564–566, 571 The Problem of Social Cost 555, 565, 568 theoretical analysis 571 theoretical framework 565 theories of utility 562 total social product 569 toy model 565 transaction costs 567, 568 transition cost economics 555 utility maximisers 562 Cobb-Douglas production function 470, 471, 868

Cobden Prize 199 Cochrane-Orcutt transformation 14 Cole, W.A. 39–42 Coleman, Donald C. 36, 42, 44, 55, 66 Collectivist societies centralised or decentralised 413 Commercial banking 539, 786. See also Goodhart, Charles Commercial law 81 Commercial union 360 Committee of Inquiry on Decimal Currency 517 Committee on the Working of the Monetary System 533 Communism 357, 745 collapse of 754, 756 fall of 752, 757 Communist Manifesto 797 Communist terminus ad quem 269 Comparative social conditions 54 Comparative teaching 48 Competition 129, 152, 154, 158, 339, 726. See also Coase, Ronald and Durbin, Edward market 836, 848, 868, 850 models 114 perfect 233, 377, 386, 413, 416, 622, 625 State and 152 use of 159, 160 Competitive models 882 Computation 13, 88, 672 Computational algorithms 672 Confidence interval 230, 231 Conservative government 154, 712, 755 Constructive research strategy 15 Consumer surplus 353, 452 Consumption 45, 90, 707, 738, 785, 820. See also Goodhart, Charles capital 322 function 7

916     Index

goods 438, 440, 651, 760 limiting 359 maintainable 97 residual from income 588 Continental Rationalists 364 Continuous time modelling 678, 795 Control theory 600, 602, 603, 605. See also Phillips, A.W.H. Copyright 335–337. See also Plant, Arnold Corporate financial reporting 97 Corporatism 363 Corporatists 127 Correct signs 14 Correspondence principle 449 Corry, Bernard 728 Cost–benefit analysis 705 Cost-push inflation 596 Cost-push theory 591 Costs 79–81 accounts 88 analysis 405 approach 89 associating 80 avoidable 89 curve declining average 622 determination 91 direct 81 fixed 81 incremental 88, 89 indirect 81 marginal 81, 88, 89 variations 89 measurements 81 migration monetary and non-monetary 621 opportunity 89, 95 variable 81 Cost-sharing benefits 626 Council of the Royal Economic Society 586 Counterfactualism 41

Courses 7, 10, 12 aggregation 7 applied economics 10 business cycles 7 conversion 12 game theory 7 identification 7 Leontief ’s input-output analysis 7 linear programming 7 Problems of Econometrics 7 Cowles Commission 5, 16, 22, 672, 673 Cowles Commission methodology 9 Cowles, Alfred 150, 151 Crafts, Nicholas 50 Cramer-von Mises statistics 637 Crawford, Iain 817 Critical causal variable 224 Critical values 636 Cross sections 18 Cultural cringe 125 Cultural theory 101 Cummins, Neil 54 Cumulative periodogram 637 Cunningham, William 53, 57–59, 61 Currency 56, 331, 348–351, 363, 539, 548, 769, 770, 785. See also Goodhart, Charles British School 445, 781 cigarette 175 foreign 417, 464 inflation 300 single 755, 756 systems 51, 517 term 145 D

Dahrendorf, Ralf 46 Dalton, Hugh 146, 147, 265, 289, 348, 350 academic career 289 anti-monopoly legislation 305

Index    917

capital levy 299, 300 Chancellor of the Duchy of Lancaster 292 Chancellor of the Exchequer 292 character 292 citations 293 contribution to interwar economics 289 countercyclical fiscal policy 302 countercyclical government spending 298 crude equalitarianism 294 distribution of income and wealth 293 doctrine 291 economic welfare 293 economics of socialism 290, 302 education 296 epidemic of unbalanced budgets 301 equal sacrifice 298 equality 304 equality of incomes 294 expansionist doctrine 301 Foreign Secretary 292 functional distribution of income 294 functional finance 299 Gini coefficient 293 income distribution 294 inequality in income 295–297 influence of Soviet system 303 inheritance taxation 296 inherited wealth 295, 304 institutional economist 291 Labour Party 291 macroeconomics 298 main works 307 Marx critical attitude 294 measures of inequality 293 Minister of Local government and Planning 292 Minister of Town and Country Planning 292 other writings 306

personal distribution of income 290 Pigovian socialism 305 planned economy 302 policy proposals 295 policy to reduce unemployment 303 Practical Socialism for Britain 303 Principles of Public Finance 297 principles of tax system 298 progressive taxation 305 proportional sacrifice 298 public debts 297 public expenditure 297 public finance 290, 300 public income 297 redistribution of income 305 reduction of inequality 305 social injustice 301 social institutions 291 socialised banking system 304 socialism 301 socialist politician 289 socialist principles 303 Some Aspects of the Inequality of Incomes in Modern Communities 293 sound finance 299 sources of income 295 Soviet planning 302 Swabian housewife logic 299 teaching 348 The Measurement of the Inequality of Incomes 289 theory of distribution 290 transfers from rich to poor 293 Treasury dogma 303 uncompromising utilitarian 294 vertical mobility 296 Data cross-sectional 17 generated 15 macroeconomic 19 mining 14 public expenditure 147

918     Index

reconstruction 41 sets large 23 sets parametric models and 18 Decentralisation externality 750 Decision-making investor and creditor 104 Decomposition of structural shocks 874 Demand adequate monetary 417 curve horizontal 622 elasticities of 3, 6 Demand-pull/cost-push paradigm 702 Demographic History Group 46 Demographic studies 224 Demography 46 Deng, Kent 48 Department of Accounting 20, 50, 99, 104 Department of Business Administration 84, 332, 341, 342 Department of Business Administration, Research and Training (DBA) 84–86 Department of Economic History 42, 43, 54, 55, 70, 73 Department of Economics 99, 158, 160, 181, 182 Department of Economics and Social Policy 160 Department of Social Policy and Administration 55 Depression 356, 757, 759. See also Layard, Richard Derivative control 8 Desai, Meghnad 54, 791 Academy of Economics (MDAE) 792 agricultural economics 791 applied econometrician 795 Applied Econometrics 796 austerity policies 792 business cycles 796

Chair of Islington South and Finsbury Constituency Party 800 Cliometrics 795 Delhi School of Economics 799 development economics 791 development studies 798 Development Studies Institute (DESTIN) 798 early years 792, 793 economic history 791 economic theory 791 free markets 797 global governance 798 globalisation 799 India 799 Islington and Finsbury Constituency 792 Journal of Applied Econometrics 796 Keynesian economist 792 Kondratiev wave 792 Labour Party 792, 800 left-wing academic 796 macroeconometrics research 795 macroeconomics 791 main works 802, 803 Marx, Karl 796 Marxian Economic Theory 796 Marxian economics 791, 794 Marx’s Revenge 797 Marx’s theories 797 MDAE 800 monetarist models of inflation 795 movies 801 Padma Bhushan 792, 800 political scientist 791 Pravasi Bharatiya Puraskar 800 Professorship 794 provocateur 801 Quantitative Economics Seminar 794 single lags 795 Soviet economies 797 Sraffa debate 796

Index    919

stop-go policies 795 Testing Monetarism 795 The Cambridge Economic History of India 799 The Rediscovery of India 799 theatre 801 Vietnam War 796 world tin economy 793 econometric model 794 Dev, Susan 81, 98, 99 Development economics 726 Development of underdevelopment 46 Development Studies Institute (DESTIN) 51 Devons, Ely 11, 736 Diamond, Peter 809 firm behaviour 863 search costs 863 Diamond–Mortensen–Pissarides (DMP) model 861 867, 876, 877, 882 Dickinson, H.D. 383, 384 Dicksee, Lawrence 82, 83 Advanced Accounting 82 Dictionary of Business Biography 121, 122, 131 Dictionary of Political Economy 221 Diffusion 17, 47, 52, 707 Directed search approach 864 Disequilibrium 442, 525, 648, 657, 873, 878, 885. See also Hicks, John budgetary 301 decision-making and 382 evolution of 450 independent cause of 440 Distorted economy 725 Distributional assumptions 18 Distributional consequences 146 Diversification 124 Division of labour 254 Doolittle method 13 Dore, Ron 132

Double-entry bookkeeping 79, 88, 103 Double-entry ledgers 103 Durbin, Edward 159 Durbin, Evan 159, 265, 487 advanced capitalism inequalities of 493 aggression 496 causes and prevention of war 496 centralised controls 490 centralised planning 492 childhood 487 civil service selection process 503 committed to socialism 488 competition 492 concern of the British worker 499 contributions 489 contributions to Labour Party 489 democratic socialist planning 491 democratic socialist society 498 economic and social inequality 500 economics 491 electoral canvassing 507 emotional education 496, 506 English consciousness 493 equalitarian state 492, 493 equitable distribution of resources 490 equitable society 489 ethics 491 evolution of capitalism 499 financial rewards 505 formulation of socialism 489 Four National Faults 500 Freudians influence 494 government administration 502 hereditary intelligence 506 human aggression 495, 498 human cooperation 495 implementation of controls 501 individual freedom 505 inequality 492 interconnected groups of economists 490

920     Index

irrational causes of warfare 496 Labour candidate 494 Labour party 504 Labour party weaknesses in popular appeal 507 Labour’s Immediate Programme 494 lack of imagination 500 Managerialism 499 Marxism 490 internal inconsistencies of 498 mass psychoanalysis 506 mechanics of planned economies 490 nationalist movements 501 nationwide psychoanalysis 506 New Trends in Socialism 490 origins of conflict 496 patriotism 501 planned economy 505 post-war foreign policy 502 private banks 492 property ownership 492 psychoanalysis 495 psychology 485, 494, 508 Purchasing Power and Trade Depression 489 reconstruction 503 research psychological and anthropological 494 responses to Keynes’s work 491 Ricardo Scholarship 489 role of psychology 498 socialism 494 socialist 489 Socialist Credit Policy 489 State control growing 506 The Politics of Democratic Socialism 497 The Problem of Credit Policy 489 The Psychological and Sociological Problems of Modern Socialism 506 trade cycles 492

vandalism 500 wage policy 505 wartime writing 500 What Have We To Defend? 500 Durbin, James 580, 631 academic base 633 Annals of Statistics 634 application of statistics 632 Biometrika 634 bounds test 636 contributions to statistics 635 Convener 633 development of statistical methods 636 Emeritus Professor 633 errors in variables 637 Fellow in Centre for Microdata Methods and Practice 633 fellowships 635 first-order autoregressive process 636 first-order serial correlation 636 goodness-of-fit tests 635 Guy Medal in Gold 634 Honorary Professor of University College London 633 honours 634 instrumental variable estimator 638 International Statistical Institute 634 International Statistical Review 634 Journal of the Royal Statistical Society 634 journals 634 main works 639 method of limited information maximum likelihood 636 nonlinear and non-Gaussian state space models 638 philosophy of statistics 635 probability theory 635 sample survey methodology 635 sample survey theory 636 seasonal adjustment 635 seat belt project 638 simultaneous equations models 635

Index    921

societies 634 state space methods 638 statistical research unit 632 system of simultaneous equations 636 testing for serial correlation 635 theoretical contributions 635 time series analysis 635 time series testing 636 unobserved components models 638 weak convergence 637 Durbin, Maurice 8 Durbin-Watson test 632, 636, 637 Dynamic analysis 449 Dynamic economy 795 Dynamic general equilibrium models 875 Dynamic input-output analysis 651 Dynamic macroeconomic theory 861 Dynamic models theory of optimal control 8 Dynamic stability conditions 648 Dynamic stochastic general equilibrium (DSGE) model 782, 784 Dynamic systems 8 E

Earle, Peter 68, 69 Easterlin Paradox 757, 758 Econometric analysis 551 Econometric Approach to Business Cycle Problems 6 Econometric history 40, 41 Econometric representation 603 Econometric Society 4, 22, 406 Econometric Theory 17, 22, 632 Econometrica 405, 637, 795, 833 Econometrics 3–6, 10, 12, 21, 636, 645, 725, 737 applied 9, 19, 21, 632, 645 contributions to 22

development of 22, 23 history of 21–23 LSE tradition 13–16 macroeconomic 17 research in 23 spatial 17, 18 teaching of 22, 23 Economia aziendale 80 Economic and Social Research Council (ESRC) 19, 121, 149 Economic fluctuations 874 Economic General Staff (EGS) 255 Economic historians 44, 728 preoccupations 40 Economic history 35, 40, 42, 43 systematic study 37 academic presence 38 approaches 38 concepts 39 defined 38 Department 115, 122, 127 early modern 44 expansion of higher education and 38 hallmark of 39 history and 40 history of economics 40 method 38 methodology 40 new 40, 42 political economy 38 Review 38, 62, 65, 71 science of society 39 social sciences and 39 Society 38, 43, 45, 46, 55, 66, 71 specifics of 39 study of 39 study of the welfare impacts 38 Economic imperialism 561 Economic Journal 165, 167, 289, 413, 418, 446, 615, 706. See also Royal Economic Society Economic Liberalism 417

922     Index

Economic literacy and numeracy 41 Economic model 15, 621, 622, 650, 655, 657 Economic Policy 831 Economic progress 255 Economic reasoning 81 Economic systems alternative 386 Economic thought 53 Economic welfare index 451 Economica 126, 165, 167, 336, 418, 615. See also Beveridge, William Analytical Subject Index 176 articles published 168 book reviews 168 changes 168, 170 circulation 175 comparison between economics journals 179 Country Studies 176 distribution of articles and reviews 167, 182 economic disagreements 168 economic history 176 editorial reorganisation 182 editorial team 175 Economica Editorial Board (EEB) 175 Gregory, Theodore 168 Hayek, Friedrich von 173, 174 journal subscriptions 173 Keynesian economics 176 launch 166 LSE economists 177, 181 monetarism 176 monetary system 175 no longer house journal 177, 181 overseas contribution 168 Paish, Frank 174 Peacock, Alan 174 Phillips curve 175 Phillips’s 1958 article 175 political developments in Europe 171 Power, Eileen 171

price fluctuations 175 purpose of 166 ranking of 178–181 rational expectations 176 Robbins, Lionel 168, 171 Sargan, Denis 175 Second World War 172 T-Card system 177 Economica (New Series) 171, 176 Economics 53, 79 behavioural 156 business 80 central concepts 79 criticisms of 201 Department 118, 132, 152, 153, 155, 434 visitors 732 development of 54, 160 empire 46 empirical business 114 empirical modelling 16 hegemony of 101 historical 39 History Department 130, 132 influence of 81 information 101 institutional 40 marginalist 387 Marshallian 38 mathematical 9, 12, 23, 383 neoclassical 387 of Information 100, 810. See also Barr, Nicholas Adrian principles of 201 railway 81, 114 theoretical works 37 theory of institutions 49 urban 704 Economies of specialisation 623 Economist, The 114, 131, 539 Economy African 47 Asian 47

Index    923

centrally planned 753 early modern English 42 imperial 58 interdependent system 737 international political 50 Latin American 47 political 50 self-regulating 727 socialist 386 system of equations 384 Edey, Harold 81, 93, 98, 322 Edgerton, David 128, 133 Edgeworth, Francis Ysidro 201 Edgeworth approximations 17 Edgeworth expansions 16 Education. See also Barr, Nicholas Adrian and Tawney, R.H. economics of 158, 805, 815, 816, 819 higher 11, 19, 38, 71, 152, 737, 745 finance 156–158, 808, 815–817, 819, 826 homogenisation 737 human capital approach to 158 reforms 744 Edwards Seminar 123 Edwards, Ronald 81, 85–87, 90–92, 95, 97, 104, 117, 118, 342, 343, 706 Efficiency cost 626 Elasticities 729 substitution 295, 437. See also Hicks, John supply 405, 406. See also Lerner, Abba supply and demand 295 Electricity economics 709. See also Turvey, Ralph Employment 302, 339, 342 aggregate demand and 362 fluctuations 305

full 253, 256, 257, 280, 285, 403, 414, 417, 418, 421, 478, 479, 482, 502 increase 299, 339 maintain 478 practices 285 reduce 322 restrictions 296 theory of 322 young generation 303 Engel curves 234 Engels, Friedrich 173, 797 Enterprise history 41 Entrepreneurial history 41 Epstein, Stephen 49, 50 Equal sacrifice 298 Equalisation of income 415 Equality 115, 153, 280, 282, 294, 481, 482, 491, 492, 494, 501, 626 citizenship status 153 democratic 257 driven by immigration 626 economic 274, 283 security and 498, 499 views on 479 Equation-solving argument 384 Equilibrium 585, 864 constructs 382 definite 622 matching 885 price dispersion 864 prices 385 profit-maximisation 622 static stability conditions of 648 stock and flow 587 unemployment theory 881. See also Pissarides, Christopher A. Equimarginal principle 385. See also Lange, Oskar Erickson, Charlotte 48, 67, 68, 121 Error correction mechanisms (ECMs) 600

924     Index

Estimated coefficients 14 Estimation 672 European Accounting Association 100 European Central Bank (ECB) 770 European Research Council (ERC) 52 European University Institute, Florence 126 Evolution 202, 255, 273, 374, 450, 453, 499, 871 Exact distribution theory 675 Exogenous shocks 388, 444 Expansionary monetary policy 355 Expenditure 151, 229, 274, 297–299, 301, 411, 738. See also Allen, Roy and Hicks, John family 4, 5, 233, 234 government 8 incremental 89 public 146–148, 154, 297, 298, 303, 304 Explanatory variables 636 Externalities 616, 705, 713, 775–779, 784, 811, 879–881 F

Fabian socialism 432 Fabian Society 64 Fabianism 58 Fabians 56, 218 Fairness 254, 476, 626, 645 Federalism 51, 254 Feminism 61 Finance 48, 57, 91, 271, 299, 301, 311, 320–322, 331. See also Paish, Frank functional 400, 401, 403, 409–414, 416, 418. See also Lerner, Abba principles 410 first law 409 second law 409 government 147, 155 higher education 156–158

local government 147 public 37, 146–148, 155, 158, 290, 293, 297, 300 Financial History Review 130 Financial Markets Group (FMG) 20, 21, 23 Financial markets 17, 20, 54, 444, 658, 677, 738, 766, 767, 769–773, 776, 783, 785. See also Goodhart, Charles Financial reporting 91 Financial statements 83, 84, 86, 91, 97 adjusting 94 corporate 94, 97 Financial Times 126 Fire sale 776, 785 First World War 37, 61, 153, 212, 241, 299, 306, 330, 340, 467, 468, 539, 615 First-order serial correlation 637 Fiscal policy 50, 299, 302, 304, 409, 411, 412, 464, 478, 598, 657, 756, 768, 770, 795 Fisher, Frederick Jack 66, 69 Fisher, Irving 331 Fisher, Jack 43, 44 Fixed regressors 672 Fixprice equilibrium model 450 Flexible accelerator 318 Flower, John 98 Foucault, Michel 102 Fowler, Ronald 81, 85, 86, 104 Foxwell, Herbert 206 Fractional cointegration 17 Frictionless goods market 885 Frictions 662, 783, 859, 861–864, 866, 868, 877. See also Pissarides, Christopher A. Friedman, Milton 154, 413, 534, 556, 731, 768, 816 Frisch, Ragnar 4 Functional income distribution 465 Functional limit theory 678

Index    925

Fundamental Formula 451, 521. See also Allen, Roy G

Game theory 7, 50, 104, 524, 726, 861. See also Nash, John Gardner, Leigh 50, 51 GDP 154, 155, 161, 316, 616 effects of instability 784 stable shares of 154, 155 General Agreement on Tariffs and Trade 360 General equilibrium 449, 727 theory 644, 646, 655, 725 Geography 57, 81 German Historical School 113, 378 Giddens, Tony 132 Gini coefficient 148 Girton College 61 Glass, David 54, 67 Global Financial Crisis (GFC) 766, 769, 772, 780, 782. See also Goodhart, Charles causes 774 Global History Network 52 Global History Seminar 52 Global Recession 797 Globalisation 51, 621, 744 Globalisation process of 51 Gokhale Institute of Politics and Economics 50 Gold standard 351, 357, 767 international 539 pre-war 539 Gonner, Edward 197, 198, 332, 401 Goodhart, Charles 765 A Model to Analyse Financial Fragility Applications 784 bailing-in private creditors 780 Bank of England 765, 768 biography 766, 767 burden-sharing devices 780

capital 777 buffers 777 causes of financial instability 787 central banking practice 786 central banks 765, 771, 773, 787 independence 770 public welfare 787 policy making 765 countercyclical capital movements 774, 777 credit crunches 784 crises 779 crisis management 779 defaults 784 design deficiency 773 economic modelling 783 finance and economics 771, 783 financial markets 766, 772, 786 Financial Markets Group (FMG) 766, 771, 783 financial regulation 786 financial stability 773 fire sales 784 foreign exchange markets 772 Global Financial Crisis (GFC) 772, 774 Harvard 767 Hong Kong currency anchor 769 housing and mortgage markets 783 institutional design 770 intrusive regulatory regime 782 liquid asset requirements 774 liquidity requirements 777 liquidity rules 777 macroeconomics and finance 765 macroeconomy 786 macroprudential policy 784 main works 788, 789 microprudential supervisor 781 Modelling a Housing and Mortgage Crisis 783 modelling of financial systems 773

926     Index

modelling with default 782 modern monetary theory 768 monetary policy 769, 770, 785, 787 Monetary Policy Committee 765 Money, Information and Uncertainty 766 more authority for central banks 781 new regulatory architecture 781 Norman Sosnow Professor 771 policy analysis 765, 768 political economist 765 price stability 787 rate of growth 786 regulation 775 regimes 779 regulators boundary problems 776 regulatory response to crisis 775 resolution authority 781 stability of money demand 768 stable demand for sterling M3 768 study of forex markets 772 The Emerging New Architecture of Financial Regulation 777 The Evolution of Central Banks 766 The Fundamental Principles of Financial Regulation 766 The Optimal Monetary Instrument for Prudential Purposes 784 two-factor model 784 two-period game 783 Goodhart’s Law 768, 769. See also Goodhart, Charles Goodness of fit 14 Goodwin predator-prey model 796 Gordon, Brown 755 Gorman, Terence 11, 12 Gospel, Howard 123, 128 Gourvish, Terry 47, 128, 130, 131 Governance 254 Government interference 157 Government primary function 417 Gowing, Margaret 145 Gram-Charlier approximations 16

Grandes ecoles 114 Granger, Clive 244 Great Depression 341, 433 Great Recession 756, 792, 801 Greek crisis 858. See also Pissarides, Christopher A. Growth 634, 650–655, 662, 706, 735, 750. See also Lipsey, Richard and Morishima, Michio balanced 651 economic 50, 66, 102, 280, 303, 401, 492, 616, 619, 655, 735 rate 319 recurring 36, 37 Growth sustained 36 H

Hahn, Frank 11, 12 Hancock, Keith 145 Hannah, Leslie 47, 70, 118, 128, 131 Happiness 759 hedonic treadmill 759 individual freedoms and 760 mean reversion 758 misery and 759 neuroscience and 757, 758. See also Layard, Richard principle 759 research 760 social justice and 760 Hard market environment 474, 475 Harte, N.B. 37, 43, 45 Harvard Business School 41, 47, 92, 124, 340 Harvard University 92 Havel, Václav 814, 815 Hawking, Stephen 731 Hayek, Friedrich August von 87, 88, 92, 104, 115, 116, 153, 161, 174, 301, 329, 355, 361, 373, 433 analysis 389 Austrian School of Economics 374

Index    927

Austrian theory of business cycles 374 business cycle 376 theory 439, 440 calculation debate 386 capital structure 377 capital structure readjustment 376 concentration of knowledge 389 critique of Comte’s ideas 173 economic fluctuations 390 economic theory 388 Economics as social science 390 epistemic foundations of economic problem 377 evolution of social institutions 374 foundation of economic performance 392 Inaugural Lecture 377 interdependence of economic, social and institutional phenomena 374 interest rate 376 intertemporal equilibrium 439 macroeconomic fluctuations 374, 376 main works 392, 393 market process 390 market socialism 374 markets 387 methodological foundations of economic science 386 Mises argument 388 monetary theory 376 moral philosophy 374 nature and function of capital 377 nature of economics 374 political economy of socialism 388 political theory 374 Prices and Production 439 relative scarcity 376 rise of market socialism 379 scientism 391 seminar on economic theory 375 signal extraction problem 376

socialism 173 socialist calculation debate 374 spontaneous order 374 State control 379 structure of production 376 students 375 Sveriges Riksbank Prize in Economic Sciences 374 The Constitution of Liberty 364 The Road to Serfdom 174, 364 theoretical and applied economics 377 understanding price system 389 University of California 374 University of Chicago 374 University of Freiburg 374 University of Salzburg 374 University of Vienna 373 Hayek-Robbins nexus 492 Help to Buy programme 786 Hendry, David 13, 16, 21, 23 Hewins, William 38, 53, 57, 218, 559 Hicks, John 96, 104, 329, 353, 367, 431, 521, 649 A Market Theory of Money 442, 444 A Revision of Demand Theory 452 A Theory of Economic History 452 balance sheet equilibrium 444 British Currency School 445 business cycle theory 439 business psychology 444 Cambridge 435 Capital and Growth 450, 453, 454 Capital and Time 452–454 capital theory 453 capital-saving 437 choice-theoretical money demand function 443 Collected Essays 453 comparative statistics 449 compensation test 451 Contribution to the Theory of the Trade Cycle 440

928     Index

contributions to monetary theory 440 cost–benefit analysis 452 credit economy 444 cyclical fluctuations 441 deposit rate 445 disequilibrium method 450 dynamic theory 450 elasticity of expectations 449 elasticity of substitution 437 Equilibrium and the Trade Cycle 439 equilibrium theory 442 evolution of disequilibrium 450 fixwage model 454 flexprice method 450 flow input-flow output 454 free market school 443 functional distribution of income 439 Fundamental Formula 451, 521 general equilibrium theory 448, 453 history 442 imperfect foresight 442 Impulse 453 income effects 451 intertemporal equilibrium 439 IS-LM 445 labour economist 437 labour saving 437 liquidity preference 441, 445 loanable funds theory 445 machinery problem 437 main works 455, 456 marginalist calculation 441 measurement of income 451 measurement of capital 452 Methods of Dynamic Economics 453, 454 modern financial system 444 modern mathematical economics 375 monetary disorders 440

monetary disturbances 439 monetary economics 439 monetary factors 441 monetary institutions 444 monetary policy 445 monetary socialism 445 monetary theory 442, 443 national income accounting 436 neo-Austrian theory 441, 454 Nobel Prize 448 overdraft economy 442, 444 overdraft system 444 perfect foresight 442 President of the Royal Economic Society 436 price elasticity 521 priority of real factors 441 psychological factors 444 Research Fellow 436 sequential causality 453 Slutsky Equation 451 Social Framework 435 substitution effects 451 Suggestion for Simplifying the Theory of Money 443 The Crisis in Keynesian Economics 444, 446 The Foundations of Dynamic Economics 449 The Theory of Wages 437–439 The Working of the Dynamic system 449 theory of portfolio selection 443 theory of the traverse 454 time dimension 454 time in economics 453 uncertainty 440, 441, 443, 450 University of Manchester 435 Value and Capital 415, 416, 436, 447–451, 643, 647, 649 value theory 451 vertical maladjustments 441 welfare economics 435, 450, 452

Index    929

welfare theory 451, 453 Hicks-Hayek debate 440 Hicks-neutral 437. See also Hicks, John Higgs, Henry 206 Higher Commercial Education 83 Higher Education Research Unit 19, 158, 746 Higher-order serial correlation 637 Hills, John 151 Historians British company 123 business 129 cliometric 41 demographic 46 demographic 46 economic 36, 37, 46, 47, 49, 53–57, 63, 69, 73, 113 labour 123 Historical analysis 38 Historical materialism 269, 654 Historicists 378 History economic evolving nature of 37 Aldwich Economic 36 American 68 banking and monetary 55 business 53 cliometric 48, 49, 53 commercial 57 comparative 52 constitutional 45 demographic 46, 53, 55 departments 45, 47 economic 35, 46, 47, 53, 54, 56–59, 61, 64, 71, 72, 145 analysis and 375 application of social science concepts 36 ideas 53 India 55 initial position 36 thought 53, 55 financial 130

global economic 53 Japanese economic and social 48 Latin American economic 47 medieval economic 62 new global economic 51 political 45 social 45 social and demographic 54 twentieth-century financial 54 urban 53 Hobsbawm, Eric 126 Hoffman’s index 468 Hopwood, Anthony 81, 100–104 House of Commons Select Committee 150 Household affected by tax and benefit changes 150 Housing costs 712 economics of 158 markets 159 Howlett, Peter 71 Hume, David 333, 335, 363 Hunter, Janet 47, 67, 131 Hyperinflation 594 I

Identification 17, 672, 874 Idle money balances 585, 588 Immigrants 340, 622, 624–626. See also Mishan, Ezra Immigration 621 benefits of 626 desirability of 627 economic effects of 627 unskilled labour of 625 unskilled workers 626 Imperial College 118, 128 Imperial isolationism 502 Incentives 105, 785, 786 Income 79, 80 concept of 90

930     Index

distribution 147, 150, 470, 474 ex post 96 groups 146 Hicksian concept of 97 inequality 296 measurement 90, 91 notion of 97 policies 750 Income-contingent loans 816 Income-contingent student loans 156 Incomplete contracts 101, 811 Independent Commission on Banking 780 Indifference-curve technique 406 Indigenous population 626 Individual funded accounts 157 Inductive inference 231 Industrial Revolution 65, 66 Inequality 148, 305, 411, 492, 500, 626, 744, 748. See also Dalton, Hugh capitalism and 257 causes of 36, 295 generation of 479, 481 incomes 291–298, 304 measure 150, 289, 305, 747 pay 463, 476, 477, 481 unemployment and 19 Inflation 10, 94, 311, 324, 410, 419, 420, 709, 711. See also Lerner, Abba, Paish, Frank and Phelps Brown, Henry accounting 98 control 470, 501, 590, 592 cost-push 596, 702 currency 300 financial statements 94 growth and 314–319, 323, 324 incomes policy and 320, 478 inequality of incomes and 298 measure 711, 749, 784 model of 10 modelling 703 money supply and 319

money wage 315, 419, 751, 756, 838 New Jewish state 401 objectives 768, 770, 773, 782, 787 Phillips curve 594 policies 419 prevent 421 rates of 98 tax 704, 750 types of 702 unemployment and 175, 410, 502, 594, 605, 749, 752. See also Layard-Nickell model Information Systems Department 128 Inheritance tax 296 Instability 412, 444, 772–775, 782– 784, 787 Institute of Chartered Accountants in England and Wales (ICAEW) 86 Institute of Historical Research 60 Institutional economics 378 Institutionalism new 50, 51, 53, 726 Institutionalists 378, 383 Institutions 16, 36, 43, 130, 145, 492, 501. See also Coase, Ronald economic 115, 343, 391 financial 20, 330, 420, 774, 775, 785 growth and 49 labour market 844, 846–850, 878, 882. See also Nickell, Stephen market 565–568, 744, 832 monetary 444 non-market 50 research 19, 20, 72 role of 51 social 257, 374, 391, 507, 561 theory of 49 Integral control 8 Integration 17 Interest rate 376, 391, 444, 501, 585, 587, 597, 656, 704, 858, 869, 883, 885 Internalisation of industrialisation 49

Index    931

International Centre for Economics and Related Disciplines 48. See also Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) International Labour Review 404 International Monetary Fund (IMF) 360, 542, 753, 756 measure of distance to default 784 International statistical standards 710 International trade 417 International Trade Theory 405 Internationalism 254 Investment 318, 319, 585 idle money balances and 588 interest rates of 729 productivity theory 391. See also Knight, Frank Investors’ information needs 91 Irigoin, Maria Alejandra 50 IS curve 447 Isaacs, Susan 495, 496 IS-LM economics 884 IS-LM 445–447. See also Hicks, John J

Japanese Management Culture 661 Jeremy, David 121, 128 Jevons, Stanley 200, 201 Job destruction 875. See also Pissarides, Christopher A. John, Arthur H. 44 Johnson, Harry 11, 12, 735, 736 Johnson, Paul 70, 71 Jones, Geoffrey 119, 120, 128, 133 Jones, Ron 732 Journal of Economic Dynamics and Control 165 Journal of Economic Literature 156 Journal of Global History 53 Journal of International Economic Law 165 Journal of Monetary Economics 165

Journal of Political Economy 165, 167, 413, 615, 835 Journal of the Royal Statistical Society 167 Kahn, Richard 404, 446, 448 Kaldor, Nicholas 147, 329, 423, 642 money wages 733 unemployment 733 Kalecki, Michał 406, 409, 472, 474, 523 Kalman filter 637, 638 Kendall, Maurice 599, 604, 632 Kennedy, William 48 Kernel smoothing 20 Keynes, John Maynard 169, 241, 355, 473 capital levy 300 Clearing Union plan 360 Commodity plan 360 demand-side macroeconomics 246 General Theory 248, 253, 404, 445, 732, 738, 492 General Theory of Employment, Interest and Money 171, 248, 253, 404, 433, 445, 492, 732, 738 liquidity preference theory 445 tariff bounty proposal 356 The Economic Consequences of the Peace 171 theory of liquidity preference 443 Keynesian regimes 885 Keynesian Revolution 390, 411, 433 Keynesian theories 588 Keynesian underemployment 885 Keynesian unemployment 885 Keynesianism 115, 464 King, Mervyn 149 Kitchen, Jack 81 Klappholz, Kurt 10 Knight, Frank 377, 378, 390, 519 capital heterogeneity rejection 391 notion of capital 377 productivity theory of investment 391 Knowles, Lilian 58–63, 115, 348

932     Index

Kondratiev wave 792. See also Desai, Meghnad Labour economics 744, 747. See also Layard, Richard Labour government 157, 279, 355 Labour markets 157, 869. See also Pissarides, Christopher A. analysis 864 finance and 876 flexible 479, 464, 752 institutions 744, 850. See also Nickell, Stephen Labour mobility 159 Labour Party 64, 291, 464, 507, 754 Labour supply 151 Labour theory of value 654 Lagrange multiplier procedure 637 Laing, Ronald 734, 735 Laissez-faire 413–416 Lakatos, Imre 732 Lancaster, Antony 833 Lange, Oskar calculation problem 385 central planning 387 decentralisation of production 385 distribution of resources 385 equimarginal principle 385 model 385 parametric function of prices 385 price determination 387 Lange-Lerner theorem 402, 404 Larger Population Benefits 624 Large-span asymptotics 678 Laski, Harold 265 Law of Comparative Costs 405 Layard, Richard 743, 834, 860 active labour market policies 744 adoption of happiness 758 Benthamite utilitarianism 760 capital accumulation 746 capital-skill complementary hypothesis 746

Centre for Economic Performance (CEP) 744, 755 Centre for Labour Economics (CLE) 744, 748, 751, 755 centrist position in politics 754 collapse of communism 754 co-movement in prices 870 depression 745, 757 economic fluctuations 870 Economics Department 745 economics of higher education 745 education 746 decision 747 scale of educational provision 746 technology of teaching 746 Employment Institute 754 European Single Market 756 fall of communism 752 happiness 745, 757 Happiness: Lessons from a New Science 757 isolation fallacy 757 labour economics 744, 747 labour market 751 behaviour 744 issues 748 leading research centres 744 lifetime income 748 macroeconomics 744 main works 761, 762 manpower planning 746 market-friendly policy 750 mass unemployment 744 mental illness 745 Microeconomic Theory 745 MSc Microeconomics 745 Phillips curve 870 philosophy 760 Reform in Eastern Europe 752 Robbins Committee 743 Russian Economic Trends 754 screening hypothesis 746

Index    933

Senior Research Officer 743 Summer School in Economics 745 tax-based incomes policy 750 teaching 744 technology of teaching 746 transition in Eastern Europe 745 unemployment 748, 870 Unemployment: Macroeconomic Performance and the Labour Market 749 University Efficiency and University Finance 747 wage-inflation tax 750 well-being 745, 757 What Labour Can Do 755 Why Britain Should Join the Euro 756 work at LSE 745 World Happiness Report 758 Layard-Nickell model 749, 751 Le Grand, Julian 151, 156, 159, 160 Lehman Brothers 775, 776 Lenin, Vladimir Illych 173 Leontief ’s input-output model 647 Lerner Index 402 Lerner, Abba 375, 586 academic activities 416 academic carrier 400 adequate aggregate demand 403 allocative insufficiency 403 autocratic collectivist societies 408 balance 411 calculation debate 386 capitalist society 407 Central Planning Board 404 completely collectivized economy 408 contribution to economics 421 contributions to trade theory 403 control 414 controlled economy 413 cost of living allowance 419

debt and taxation 418 dynamic paths 406 economic liberalism 417 Economic Liberalism in the Postwar World 400, 416 economic problems of new Jewish State 401 economic theory 399 socialism 404 economic writings 420 Economics and the Control of Man 414 Economics of Employment 401, 418 economics of laissez faire 408 elasticity 420 elasticity of substitution 420 Equilibrium and Dynamic Concepts in the Theory of Employment 406 factor price equalisation 402, 403 Factor Prices and International Trade 401, 418, 419 First Fundamental Welfare Theorem 402 formulation of fiscal principles 411 full employment 418 functional finance 400, 401, 403, 407, 409, 411, 413, 416 Functional Finance and the Federal Debt 409 Gladstone Prizes 402 Hick’s ‘synthetic approach’ 403 international macroeconomic policy 416 international trade 402 Keynesian economics 402 Lange-Lerner theorem 402, 404 ‘Lerner Index’ 402 ‘Lerner Paradox’ diagram 402 Liberal-Socialist-Welfare-Marginalist 413 London-Cambridge-Oxford seminars 400

934     Index

LSE eclectism 399, 401 main works 422, 423 marginal efficiency 406, 418 marginal product of capital 418 market economy 402 market socialism 380, 402 debate 400, 403 microeconomics 402 money and interest 418 neoclassical synthesis 400, 411 Pareto optimality 403 Pareto-efficiency 404 planning 418 policy analysis 399 price policies 407 principle of judging fiscal measures 409 principle of judging only by effects 409 principles of functional finance 410 relationship between goods and factor prices 402 relationship with Israeli economics 419 ‘Robbins Group’ 400 Second Fundamental Welfare Theorem 403 short period equilibrium 406 social optimum 403 socialism 407 socialist 401, 421 socialist calculation 400, 402, 403 socialist economics 402 socialist leanings 419 spending 418 Statics and Dynamics in Socialist Economics 404 taxes 402 The Concept of Monopoly and the Measurement of Monopoly 403 The Economics of Control 403, 407–409, 411

The Relation of Wage Policies and Price Policies 407 theory of employment 406 Tooke Scholarship 401 trade theory 402 trial and error approach 404 wage policies 407 weltanschauung 400 Leunig, Tim 131 Liabilities 80, 86, 91, 97, 444, 636, 769, 778, 781 Liberal government 466 Liberalism 115, 254, 255, 301, 400, 416, 417, 559 Liebenau, Jonathan 120 Limited liability 778 Lindahl, Erik 435 Linear Engel curve 234 Linear regression equations 672 Lipsey, Richard 669, 723, 860 achievements 724 Adaptation to Climate Change Team (ACT) 739 An Introduction to Positive Economics 730 approach to economic inquiry 733 approach to knowledge 732 business studies 727 Canadian Ecofiscal Commission 739 Canadian Social Sciences and Humanities Research Council’s Gold Medal 740 Canadian trade policy impact 739 collaborating on research 733 creative economist 724 defensive location 730 economic theorist 740 Economic Transformations: General Purpose Technologies and LongTerm Economic Growth 725 engineering 727 evolutionary economics 725

Index    935

evolutionary theory 727 externally driven research 727 geography 727 internally driven research programme 727 Introduction to Positive Economics 724 laws of general application 733 legacy 739 lobbyist 739 main works 740 mathematical technique 726 methodology 732 methods of economics 724 National Business Writing Award 738 National Economic Development Council (NEDC) 724, 735 public policy 735, 738, 739 Review of Economic Studies 724 Schumpeter Prize 725 sources of change 737 testing of theories 731 textbook writing 737 The General Theory of Second Best 725 The Novel as a Force in Social Change 737 theory of economic clustering 730 University of Essex 724, 736 Liquidity 443, 444, 534, 535, 541, 544 preference 406, 411, 441, 443, 445, 585, 587. See also Hicks, John speculative demand for 587 LM curve 447 Loan schemes 157 Loanable funds 587, 588 Loan-to-income (LTI) 779 Loan-to-value (LTV) 779 London and Cambridge Economic Service (LCES) 312

London Business School 118 London-Cambridge-Oxford seminars 400. See also Lerner, Abba Long, Clarence 316 Long-term lending 784 LSE Global Governance 798. See also Desai, Meghnad LSE Triumvirate 95–97, 103 Lucas, Robert 737, 769 critique 601, 602, 605, 769 Lutherans 271 M

Ma, Debin 50, 132 Machlup, Fritz 361 Macmillan Committee 540 Macroeconomic fluctuations 374. See also Hayek, Friedrich von Macroeconomic modelling 9 Macroeconomic policy 465 Macroeconomic stabilisation 596 Macroeconomics 298, 445, 726 dominant paradigm 390 job destruction and 875 Keynesian approach 246, 737 Macroeconomy 8, 772, 783, 786 Macve, Richard 81, 132 Malinowski, Bronisław 250, 265 Management in bureaucracy 255 Manchester School of Economic History 36 Marginal productivity theory 470 Marginal product 625 Marginal utility 201 Marginalists 378, 379, 383 Market economy 153, 377, 378, 384, 387, 389, 402, 622, 727 Markets 100, 152 chaotic 378 dynamic interaction of 42 environment 475

936     Index

financial 20 process knowledge-generating and coordinating properties 383 socialism 374, 380. See also Hayek, Friedrich von and Lerner, Abba Marriner, Sheila 121 Marshall, Alfred 113, 114, 197, 198, 200, 349, 432, 473 focus on statistics 217 Industry and Trade 122 measurable regularities 216 Money, Credit and Commerce 122, 216 Principles of Economics 122 progress of economic science 216 pure theory 216 use of mathematics in economics 216 Marshall, T.H. 153, 161, 257 Marshallian economic theory 113 Marshallian economics 447 Marx, Karl 173, 796, 797 A Contribution to the Critique of Political Economy 659 central planning 381 Das Kapital 653 Marxians 382 Matching function 868. See also Pissarides, Christopher A. Matching model 871, 872, 874, 877, 881, 885 implications 880 standard 878 Mathematical economics 644, 645 McArthur, Ellen 61, 62 McCarthyism 116 McNally, Sandra 158 Meade Commission 150 Meade, James 360, 362, 413, 580, 603 Mental health 759 Metcalf, David 744 Method of temporary equilibrium 449

Methodology 13, 14, 16 alternative 14 econometric 13 impact of 16 LSE econometric 14 Methodology, Measurement and Testing (M2T) in Economics Seminar 9, 10, 22, 669, 729–732 Methods 38, 42, 80, 86, 228, 229, 250, 266, 268, 480 accounting 86 dynamic analysis 435, 449, 452 dynamic economics 453, 454 econometric 53, 103, 686, 795 economic 81, 220, 724 equilibrium 447 high-dimensional modelling 679 historical 57, 126 inductivist 354 inferential 675 Keynesian 501 mathematical 232–234 Monte Carlo 668 nonparametric and semiparametric 17 numerical optimisation 672 quantitative 40 sampling 219, 223, 224 simulation 17, 681 state space 638, 639 statistical 6, 523, 635, 636, 638 Microsimulation modelling 150 EUROMOD 150 PTAX 150 TAXBEN 150 TAXMOD 150 TRAP 150 Mill, John Stuart 37, 200, 202, 205, 349, 363 Miller, Peter 102, 103 Milward, Alan 48 Minns, Chris 50 Mises, Ludwig von 87, 301, 378, 433

Index    937

central planning 381 collectivist economic planning 381 economic calculation under socialism 380 feasibility of socialism 381 impossibility thesis 382 profit-and-loss mechanism 380 radical transformation 383 socialism 381, 384 socialist calculation 382 socialist economy 382 Mishan, Ezra J. 615 accounting stance 617, 618 acquisition of accumulative material goods 619 anti-growth views 627 Benefits of Immigration/Population Increases 620 contribution to economics 616 cost–benefit analysis 616–620 effects of globalisation 621 effects of immigration 621 Elements of Cost–Benefit Analysis 616 evaluation of 627 Evaluation of Life and Limb: A Theoretical Approach 619 happiness and social welfare 616 health care 619 Immigration/Population Increases 621 impartial project evaluation 618 issues relating to equity 618 LSE professor 615 main works 627 maximising society’s welfare 617 negative externalities 616 non-conventional spillover effects 618 questionnaire surveys 619 social cost 619 statistical life 619 The Costs of Economic Growth 616, 618 value of human life 620

value of statistical life 620 welfare economics 616 welfare losses 619 Mishan-Meadowcroft exchange 626 Misspecification 14 Mitchell, Wesley Clair 373 Mixed economy model 657 Model-building 551 Modelling strategies 16 Models log-linear 19 nested in general model 15 nonparametric and semiparametric 23 Modigliani, Franco 411, 412 Monetarism 176, 535, 795 Monetarists 534, 535, 544, 768, 795. See also Sayers, Richard Sidney Monetary aggregates 535, 769 Monetary History Group 55 Monetary policy 534, 769. See also Goodhart, Charles Monetary targeting 769 Monopolies and Restrictive Practices Commission 338. See also Plant Arnold Monopoly 335–337. See also Plant, Arnold Morgan, Mary 53, 67 Morishima, Michio 641, 860 analysis of economic reality 645 assumptions in economics 645 causality of economic phenomenon 646 Collected Works of Michio Morishima 657 comparative statistics 650 convergence of growth 652 dilemma of durables 657 Dynamic Economic Theory 647, 648, 659 dynamic general equilibrium theory 647, 650, 652

938     Index

dynamic stability of paths 648, 649 economic analysis 646 economic methodology 644, 645 economic theory 644 economics of Walras 654 equilibrium theory 644 Equilibrium, Stability and Growth 647 full-cost principle 658 general equilibrium theory 642, 649, 653 history of economic thought 644, 646, 652, 654 homoeconomicus 661 input-output model 650 institutional-analytical economics 658 internal structures 646 International Economic Review 642 Japanese type of Confucianism 661 Keynes’s Economics 652, 657, 658 Kyoto University 641 macroeconomic analysis 658 Marx’s Economics 652, 653 Marx’s historical materialism 659 mathematical economics 646 mathematical economist 641 Modern Economics as Philosophy 652 nominal price 649 nonlinear economic phenomena 649 Order of Culture 642 Osaka University 641 population 660 President of the Econometric Society 642, 645 price determination 658 price determination mechanism 650 principle of exchange rate determination 658 research in the UK 642 research on economics 642

sales price 649 Say’s Law 658 shortcoming of Walras’s general equilibrium theory 656 Sir John Hicks Professor of Economics 642 stability conditions 649 stability theory 647 structural stability of economic system 648 Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) 642, 644, 661, 662 symphonic economics 644, 646, 658–661 system of general equilibrium 655 Takata’s analytical approach 659 the dilemma of durables 656 The Economics of Industrial Society 657 theorems in economics 646 theorems in mathematics 646 theory of economic growth 655 theory of unemployment 658 turnpike theorem 648, 650 University of Essex 653 von Neumann model 650 Walras’s Economics 652 Walras’s Elements 655 Walras’s theory 655 Why Has Japan ‘Succeeded’? 660 wide-ranging research interests 644 Morishima’s exception 652 Moser, Claus 19, 158, 746 Mozart effect 623 Myint, Hla 54 N

Nash bargaining 870 Nash product 870 Nash, John 861. See also Game theory

Index    939

National Assistance 149 National Economic Development Council (NEDC) 724, 735, 736 National Health Service 160, 504 National insurance 153, 504 Negative feedbacks 596. See also Phillips, A. W. H. Neoclassical marginalism 113 Neoclassical synthesis 411, 446, 447 Neoliberal triumphalism 756 Neoliberalism 153 New Accounting History 103 New Deal 115 New Economic Institutionalism (NIE) 36, 49 New Fabian Research Bureau (NFRB) 490, 492, 494 New Labour 745, 754, 755 Euro and 755 government 745 New Statesman 126 Nicholas, Tom 131 Nickell, Stephen J. 744, 831 biases in dynamic models 832 collective bargaining 833 competition 832, 834–836 depreciation of capital 835 determinants of equilibrium unemployment 844 duration dependence 841 dynamic fixed effects 851 dynamic models biases 838 dynamic panel data 832 dynamic panel data models 834 Economic Policy 831 economic shocks 849 employment 839, 842 individual unemployment durations 832, 851 inflation 832, 834, 838 investment 832–835 investment theory 832 job search 839

labour demand 844 labour market 832, 844 distortions 846 institutions 847–850 performance 847 rigidities 847 magnum opus 846 main works 851 market institutions 832 market power 837 methodology 838 non-accelerating inflation rate of unemployment (NAIRU) 844 poor educational standards 848 President European Association of Labour Economists 831 price determination 844 price-setting equation 844 product market competition 850 product markets 832, 835 productivity 832, 834–837 replacement investment 835 replacement rates 841 reservation wage 840 restrictive work practices 837 structural macroeconomic model 844 supply oriented policies 831 system of benefits 846 unemployment 832–834, 839, 840, 843, 846–848 benefits 848 duration 842 local 841 Unemployment: Macroeconomic Performance and the Labour Market 846 unionisation 848 unions 833, 843 unobserved heterogeneity 841 wage bargaining 834 wage determination 842, 844, 846 wages 839, 842

940     Index

wage-setting equation 844 Nickell’s bias 839 Non-accelerating inflation rate of unemployment (NAIRU) 19, 844–846 Nonlinear dynamic system 649 Nonlinear markets 648 Nonlinear modelling 672 Nonparametric and semiparametric estimation 20 Non-rational economic behaviour 51 Normal approximation 18 North, Douglass 49 Null hypothesis 636 Numerical sources reliability 41 O

O’Brien, Patrick 52 Okishio, Nobuo 653 Okishio’s theorem 653 Oligopoly 726 Opportunity cost approach 95 Organisation theory 101 Overheads 81, 88 Over-the-counter (OTC) derivative trading 778 Owen, Geoffrey 132 Oxford-Cambridge-London Joint Economics Seminar 732 P

Paish, Frank 311, 728 academic articles 313 approach to economic policy 317 Association of University Teachers of Economics (AUTE) 313 balance of payments 320 banking policy 322 business finance 311, 320 Business Finance 321, 322 business finance 311

‘carrot’ theory 316 criticism 314, 317 doctrine 318 Economica 312, 313 Economics Department 311 economy growth rate 315 empirical analyses 318, 319 excess demand 315, 316 excess demand for labour 318 Financial Times 313 general doctrine 317 growth 311, 314 incomes policies 319, 320 inflation 311, 314, 317, 319, 320 inflationary wage 316 ‘insecurity effect’ 316 Insurance Funds and Their Investment 311, 313 labour market policy 317 Liberal Party 313 life 312 London and Cambridge Economic Service (LCES) 312 ‘lubrication effect’ 316 macroeconomics 311, 314 main works 324 marginal propensity 322 money wage inflation 315 necessary unemployment 317 output 314 real world motivation 316 schema 318 spare capacity 315 ‘stick’ theory 315 Studies in an Inflationary Economy 317 theory of balance of payments 322 theory of employment 322 unemployment 311, 317, 318 Pareto improvements 451 Pareto optimal 626 Pareto optimality 403. See also Lerner, Abba

Index    941

Pareto, Vilfredo 383 Pareto-efficiency 404. See also Lerner, Abba Parkin, Michael 860 Patents 335–337. See also Plant, Arnold Peacock, Alan 96, 147, 148, 153–155 Penrice, Geoffrey 7 Penrose, Edith 116, 133 Pension reform 157 Pensions 156 Per capita cost reducing 626 Per capita income 623, 625 decrease 624 increases 627 larger population 624 lower 624 Perfect competition 622, 625 Perfect foresight 442. See also Hicks, John Peston, Maurice 158 Phelps Brown, Henry 463, 471, 728 anti-inflationary policy debate 470 applied economics 481 biography 463 capital on 473 capital-output ratio 473 cost push 477 distribution of income 479, 480 economic history 470, 481 economics of labour 465 Egalitarianism and the Generation of Inequality 479, 481 elasticity of supply of capital 476 elasticity of supply of labour 476 firm-level bargaining 466 function of trade unions 478 historian 465 Historical Analysis of Labour Productivity Movements 467 Historical Analysis of Wage Movements 467

historical movement of money wages 463 history 481 income categories classification 472 industrial relations 463 industrial relations reform 478 inflation 477 inverting the Marxian theory of distribution 476 knighthood 464 labour economist 464 labour market 481 main works 482 market environment 474 money wage index of 469 natural response to uncertainty 473 pay structures 476 productivity 463, 468, 469 productivity bargaining 466 pursuit of pure theory 482 ratchet effect 472 rates of return on education 477 real wages 463 research on productivity 468 restrictive labour practices 466 subdivision of work processes 466 The Growth of British Industrial Relations 466, 477 The Historical Perspective 464 The Inequality of Pay 476, 477, 481 The Long-Term Movement of Real Wages 472 The Origins of Trade Union Power 477, 478 theory of distribution 476 trade union strength 475 trade unions 479 trade unions research 463 validity of human capital 477 voluntarism in industrial relations 466 wage share 463

942     Index

analysis 472 wage shift analysis 474 wage-income ratio 472 Wages through the Ages 467 wealth distribution 480 women’s greater freedom 479 Phillips curve 20, 315, 465, 470, 579, 749, 795 Phillips Machine 584, 825. See also Phillips, A.W.H. Phillips, A.W.H. 8, 16, 23, 579 Adaptive Inflationary Expectations Formula 594 agenda for further research 598 analysis 598 analysis of stabilisation policy 593 anti-clockwise loops 592 aspects of stabilisation 597 Australian National University 581 automatic stabilising forces 597 basis of control 602 business cycle 592 career 589 complexity of dynamic responses 598 continuous process with discrete data 598 contributions 597 contributions to econometrics 604 control theory 600, 603 corrective policy 598 critique 602 curve 589, 590, 592–596, 605 deficiencies 591 relationship 591 deep structural parameters 602 derivative control 598 econometric theory 598 econometric work 599 econometrically based policy 603 economic modelling 600 effective stabilisation 599

equilibrium 597 feedback problems 596 Festschrift 580 Hutchinson Medal 580 impact 599 imperfectly estimated system 601 inflation 592, 605 inflationary policy 590, 594, 605 inflation-unemployment relationship 594 influence 599 ingenuity 585 lag structures 598 lags 603 life 580 linear stochastic differential equations 600 loanable funds debate 588 loops 595 Lucas Critique 601, 602 605 machine 584–588, 602 hydraulic Keynesian 589 loanable funds debate 589 references 589 stocks and flows 589 technologically sophisticated analogue computer 589 wider impact 589 macroeconomic stabilisation 603 macroeconomics control theory 605 main works 606, 607 missing equation 590 model incorporating growth 598 modelling of expectations 594 negative relationship 593 non-exponential lag forms 598 optimal control 596 optimisation of stabilisation policy 596 oscillations 597 papers 581 physical sciences and economics 604 policy adjustments 598

Index    943

policy changes 602 policy making 589 price flexibility 597 price of labour 591 prison camp 581 prisoner of war camps 584 problem of identification 603 promotion of inflationist policy 579 proportional, integral and derivative control 603 rapid price increase 592 rate of change of unemployment 592 research 596, 604 simultaneously estimating and controlling system 601 six ranges of unemployment 592 stabilisation issues 596 stabilisation policy 594, 597, 605 stability properties 598 stable or falling prices 594 statistical inference 600 sterile debate 588 stocks and flows 588 systems of lagged dependencies 599 teaching of econometrics 581 Tooke Professor 580 unemployment 590, 591, 595, 600 unpublished 600 wage change 595, 600, 605 wage index 592 wage-push 592 wages 591 rise 590 wartime experiences 582 Phillips-Friedman-Phelps critique 594 philosophy Kingley Hall 734 Piercy, William 340 Pigou, A.C. 171, 290, 378, 812 capital levy 300 general structure of capitalism 304 unemployment 252 welfare economics 361

Pigovian taxes 777, 778 Piketty, Thomas 297, 737 Pissarides, Christopher A. 744, 857 aggregate demand effects 884 austerity 886 balanced growth 865 business cycles 871 capitalisation effect 883 competitive markets 862 continuous time 867 cyclical implications of model 873 determinants of unemployment 858 DMP model 861, 882 economic exchange 861 economic theory of growth 866 education and human capital 871 efficiency of search 871 endogenous job destruction 858, 865 endogenous job search 871 endogenous variable 875 entry cost 887 equilibrium labour demand 858 Equilibrium Unemployment Theory 857, 858, 865, 871, 881, 884, 887 exogenous fixed entry cost 886 exogenous wages 869 first-best optimum 879 fixed cost 887 free entry equilibrium 869 free-entry equation for firms 869 frictional approach 862 frictional market 863 frictional unemployment 859 frictions 864 frictions role 873 Greek crisis 858, 886 Handbook of Labour Economics 859 Handbook of Macroeconomics 859 human capital 872 income taxes 881

944     Index

influences 861 informational capital 862 inter-regional mobility of labour 866 investment and physical capital 871 job asset value 868 job creation 879 job destruction 860, 871, 874 job destruction rate 875 labour market 858, 863, 869 congestion 858 equilibrium 886 flow approach 862 participation 871, 872 reallocation 882, 883 theory 878 labour relocation shock 870 learning by trading 865 long-term growth of real variables 872 macroeconomic model 864 macroeconomics 866 main works 887, 888 matching function 859, 865 matching function block 873 matching function 866 matching model 871 matching shocks 870 matrix of analysis 859 medium-run unemployment rate 858 minimum wage 882 model on hiring and vacancies qualitative implications 873 model-generated macroeconomic volatility 875 modelling of British economy 866 modelling of matching functions 886 models of sectoral TFP growth 883 negative efficiency result 881 new open position 868 non-degenerate distribution of wages 863, 865

origin 861 partial equilibrium 872 perfect markets 862 policy 878 analyses 878 debates 878 instruments 881 intervention 880 management 886 qualitative implications 874 quantitative analysis 873 random search 864 reallocation of labour 859 search frictions 869, 886 search markets 862 search theory 860–863, 878 second-best optimum 879 second-rank optimality 880 sectoral relocation of labour 866 skill de-cumulation 865 skill re-accumulation 865 supply framework 858 Sveriges Riksbank Prize 861 tax and policy 871 technological change 883 technology adoption 872 theory of stable allocations 861 unemployment compensation 881 unemployment models 884 unemployment protection 882 wage bargaining 870 wage dispersion 864 wage-setting institutions 858 welfare 871 worker’s level of discouragement 872 Plant, Arnold 84–88, 91, 92, 104, 115, 116, 198, 329, 375, 432, 728 advantages of copyright 334 African studies 329 analysis of copyright 336 analysis of patents 336 apartheid 339 articles 338

Index    945

BCom degree 330 broadcasting 338 business administration 330, 341 business finance 331 Cape Town 331 career 330 Chairman of Advertising Standards Authority 332 civil servant 332 collecting data 341 common sense approach 560 competition 339 competitive system coordinated by prices 566 consumer sovereignty 341 contributions to theoretical economics 332 copyright 334, 335, 342 monopoly 334 books 329, 333 criticism 335 economic analysis of property rights 333 economics of Africa 338 exceptional cases 336 factory organisation 331 Gernsternberg Scholarship in Economics and Political Science 330 history of copyright law 334 Hume’s influence 333 immigration 339, 340 importance of competition 342 important papers 341 industry group 557 institutions interest in 560 intellectual property 338 interests 329 life 330 LSE Department of Business Administration 332, 341 LSE Economics Department 332

main works 343, 344 member of Cinematograph Films Council 332 Monopolies and Restrictive Practices 338 monopoly 152, 332, 334, 337 argument 336 opposition to interference 339 patent system 336 patents 343 patents for inventions 329, 332, 335 ‘pay as you view’ television 338 Piercy influence 340 practical approach to economics 335 prevent emigration 340 private property 342 property rights 332, 337 public administration 331 relationship between consumers and producers 341 research 341 royalties 334 State intervention 342 teaching of business administration 340 trade secrets 337 transport economics 331 Poincare, Henri 641 Poissons’s Law 867 Policy concern 161 educational 159 equality-oriented 626 nature of 9 static 9 system dynamics and 9 terms of rules 9 traditionalists 160 Politica 170 Political economy 53, 56, 160, 201, 366, 559 Political Economy Club 250 Political science 57

946     Index

Political Science Quarterly 412 Politics domestic 50 economics of 160 Pollard, Sidney 39, 40, 546, 547 Pope, Peter 104 Popper, Karl 9, 361, 731 Posner, Richard 556 Postan, Michael 46, 63–65, 69 Postel-Vinay, Natacha 54 Potter, Jim 48 Poverty 55, 149, 255, 256, 798, 851 alleviation of 415, 754, 797, 810, 811, 820 avoidance of 156 Bowley’s studies 225 causes of 36, 224, 240, 265 consequences of 63 developing countries 160 evidence of 224 measure 150, 151, 798 Power, Eileen 58, 59, 61–65, 69, 71, 115 Medieval English Nunneries 60 Medieval People 60 The Wool Trade in English Medieval History 60 Power, Michael 102 Power-Postan medieval history seminar 60, 62 Presence of first order (AR1) 14 Present value (PV) 94, 95 Prest, Alan 147, 155 Price 88, 94, 95, 97, 99, 152, 298, 301. See also Inflation equilibrium 863, 864 flexibility 597, 756, 846 fluctuations 175 future 90 market 222 relative 388 rigidity 885 sale 649, 650

system 389, 390, 566 epistemological foundations 390 Problems of Social Policy 145 Product market environment 474 Production function 625 Productivity 151, 468 Profit 79, 80, 90, 645 Property rights 337. See also Plant, Arnold Proportional sacrifice 298 Prosopographical research 121 Public administration 57 Public finance 305 Public ownership 492 Public policy 160, 877 adoption of happiness 758 Public spending 147, 154, 155 Pure economics 644 Pure theory 727 Q

Quantitative analyses 41 Quantitative easing (QE) 785 Quantitative macroeconomic theory 876 Quantity theory of money 535 Quarterly Journal of Economics 165, 167 Quasi-markets 159 R

Radcliffe Committee 540. See also Sayers, Richard Sidney Radcliffe Report 533, 534, 768 Radicalism 51 Random search approach 864 Ratan Tata Foundation 223 Rationality 726 Reader, William 123 Real wage overhang 474, 475 Real-cost analysis 405

Index    947

Reformation 269, 271 Reformers 56 Regressions 637 Replacement cost (RC) 94, 95 Repurchase agreement (RP) market 784 Research Center in Entrepreneurial History 116 Restrictive labour practices 468 Revealed preference theory 452 Ricardo effect 441, 454 Ricardo, David 37, 202 diminution of gross income 438 dynamic law of distribution 655 propositions on machinery 438 Rignano, Eugenio 296 Ritschl, Albreht 54, 131 Robbins Committee 158, 746 Robbins seminar 586 Robbins, Lionel 3, 4, 11, 56, 70, 87, 88, 92, 104, 117, 152, 153, 198, 203, 233, 248, 253, 266, 291, 292, 329, 347, 488, 580, 604, 669, 724, 727 aggregate demand 362 An Essay on the Nature and Significance of Economic Science 203, 599, 730 Austrian macroeconomics 355 Austrian trade cycle theory 356 Autobiography 364, 433 career 348 Central Economic Intelligence Service 359 Chairman of the Court of Governors of LSE 364 collection of papers 364 Commodity plan 360 Comparative Economic Theory 351 Comparative lectures 351 complete international planning 357 consumption limiting 359

criticisms of a priorism 358 Currency and Banking Debate 363 deductivist methodological position 366 definition of economics 354, 365 deflation in the Depression 433 Director 359 Economic Planning and International Order 357 economics and ethics 354 economics of public utilities 362 education 348, 349 empirical testing of economic hypotheses 365 Essay on the Nature and Significance of Economic Science 254, 432 Financial Times 364 free trade position 363 government intervention 363 Head of Economics Department 361 history of economic thought 361, 364, 365 history of economics 362 House of Lords 365 influence 366 international political federation 358 international trade theory 729 interpersonal comparisons of utility 365 Introduction to the History of Economic Theory 351 issues of economic theory 360 knowledge-generating properties 383 lectures 352, 353 limitations of laissez faire 363 LSE economist 347, 366 macroeconomic policy 362 macroeconomics 355, 358, 360, 361 main works 367, 368 methodology lectures 354

948     Index

monetary overinvestment theory 357 national income and expenditure estimates 359 neutral science of economics 364 New College, Oxford 350 New Statesman & Nation 356 Oxford lectures 354 partial international planning 357 Pigovian welfare analysis 361 points rationing 359 policy debates 361 policy work 347 post-war LSE 361 Principles Lectures 358, 361 problems of policy making 362 Professor of Economics 352 propositions of economic theory 729 relation of economics to politics 364 Robbins Committee 363 Second World War 359 seminar 729 significance of national planning 357 social and economic reform 363 students 367 teaching 347, 350–352, 366 testing hypotheses 365 The Economic Problem in Peace and War 362 The Great Depression 211, 356, 357 the Seminar 352, 358–362 Theories of Economic Policy 362 Tooke Professor 356 Unsettled Problems in Theoretical Economics 352 utility of countercyclical public works 359 Robertson, Dennis 588

Robinson, Peter 17, 23, 156 Rogers, Thorold 59 Rose, Mary 121 Roses, Joan 54 Rowlands, Stanley 91, 92 Roy, Tirthankar 50 Royal Economic Society 165, 250. See also Economic Journal Royal Statistical Society (RSS) 217, 221, 229 S

Sample selection 17, 18 Sample surveys 230 Samuelson, Paul 649, 727 Samuelson’s stability conditions 649 Sargan, John Denis 11–13, 16, 23, 667, 794, 795 alternative approaches to approximation 676 asymptotic and small-sample distributions of estimators and tests 668 asymptotic distributions 672 asymptotic expansions 676 asymptotic theory 675 asymptotically chi-squared criteria 676 asymptotically normally distributed criteria 676 asymptotics 675 autocorrelated errors 672, 681, 682 common factor dynamics (Comfac) 684 computing 681 continuous systems 677 continuous time 677 contributions to econometrics 671 data mining 684

Index    949

distribution of the IV estimator of single equation 676 dynamic models 681 econometric methodology 683 econometric modelling of wages and prices 685 Econometrica 671 econometrics 667 Edgeworth expansions 668, 675, 676 Emeritus Professor of Economic Science and Statistics 670 empirical modelling 671 empirical studies 671, 684 EqCMs 684 estimation 680 existence of moments 680 Fulbright Scholarship 669 full asymptotic development 677 full information maximum likelihood (FIML) 673 generalised method of moments (GMM) 672 high-dimensional structural systems 679 identification 673, 674 identification of parameters in models 668 infill asymptotics 677 infinite dimensional systems 679 instrumental variables (IV) 668, 672, 680 IV estimation asymptotics 674 large econometric model estimation 679 life 668 limit distribution theory 672 limited information maximum likelihood (LIML) 676 linear models 674 main works 686, 687

methods of estimation, inference and evaluation 671 misspecification tests 684 model selection 684 modelling methodology 671 Monte Carlo methods 681 near-unidentification 675 nonlinear IV models 675 non-normal asymptotic theory 674 non-normal distribution theory 674 numerical methods 681 observable-variable dynamics 682 papers 671 publications 671 semiparametric estimation 668, 672 semiparametric methods 678 simultaneous equations model 676, 678 small-sample properties 675, 685 system and error dynamics 674 test for instrument validity 684 three-stage least squares (3SLS) 673 time series analysis 683 Tooke Professor of Economic Science and Statistics 670 types of data 671 wage-price model 685 Sargent, Tom 599, 861, 872, 877 Sayers, Richard Sidney 533, 728 academic 538 academic honours 552 adjustment to balance of payments 539 aims and operations of the Bank 547 Bank of England 539 Bank of England Operations 1890– 1914 535, 539 Banking in Western Europe 545 Bank’s relationship with government 546 British Academy 551 British banking 552

950     Index

Cambridge 537, 538 capital expenditure 541 Central Banking after Bagehot 535, 543, 545 consultant 548 domestic monetary policy 544 domestic policy 543 early life 536 economic historian 552 Economic History Society 552 Economic Section of the Cabinet Office 542 Economica 547 family 537 Financial Policy 1939–1945 535, 542, 543 functioning of institutions 551 Gilletts in the London Money Market 535 great determination and persistence 550 historian 542 money and banking 535 historian of banking institutions 546 History of Economic Change in England 1880–1939 545 industrial policy 542 knighthood 552 lecturer 548 liquidity 541, 545 liquidity-distribution 541 Lloyds Bank in the History of English Banking 535 main works 554 Modern Banking 535, 538, 540, 542, 543, 545, 546, 553 monetarists 544 monetary historian 539 monetary history 551 monetary policy 545 analysis 553 Monopolies Commission 551 Oxford 539 540

Oxford Economists’ Research Group 541 Oxford Studies in the Price Mechanism 541 personal relationships 548 price and investment policy 542 process of change 551 Radcliffe Committee 534, 543, 544 Radcliffe doctrine 550 Radcliffe Report 541 Sayers’s Money Group 536 seminars 550 short- and long-term rates of interest 541 textbook on banking 540 The Bank of England 1891–1944 535, 552 Treasury 543 wage policy 542 Say’s Law 655 Say’s Law criticism 657 Schneider, Eric 54 Schumpeter Prize 725 Schumpeter, Joseph 116, 389, 738 Business Cycles 482, 738 Schuze, Max-Stephan 48 Scientism 174, 258, 391 Scitovsky paradox 451 Search and match model 885 Search frictions 864 Search models 881 Search theory 874, 876. See also Pissarides, Christopher A. Second World War 66, 91, 92, 145, 147, 247 Self-interest 160 Self-regulating economy 725 Seminar in Problems of Administration 92 Semiparametric Bayesian inference 21 Semiparametric estimation 678 Sen, Amartya 799

Index    951

Shackle, George 375 Shadow banking 535 Shaw, George Bernard 218 Shibata, Kei 653 Short-term borrowing 784 Signalling 726 Simultaneous equations system 384, 448 Single equation estimates 675 Single European currency 755 Sloman, Albert 736 Slutsky equation 232, 451 Small static simultaneous equations models 675 Small-sample properties 675 Smith, Adam 37, 53, 198, 204, 349, 363, 378, 623. See also Cannan, Edwin The Wealth of Nations 37, 198, 205 Social biology 250 Social economics 645 Social engineering 387 Social History Society 45 Social policy 145 academics’ awareness of limits 155 academics’ scepticism 152 accustomed living standards protection 156 avoidance of poverty 156 economics of 146 expenditure 151 income smoothing 156 intervention 156 practice 157 revolution in 159 significance of 156 social solidarity 156 staple diet of 148 strategies 157 teaching 156 types of 257 Social Science Research Council (SSRC) 150

Social sciences 39, 56 Social welfare 54. See also Welfare Socialism 174, 269, 380. See also Hayek, Friedrich von economics of 302. See also Dalton, Hugh market 384 models of 382 political economy 388 possible in theory 382 Prussian 174 tools 383. See also Dickinson, H.D. Socialist calculation debate 374, 375. See also Hayek, Friedrich von Socialist calculation 402, 434. See also Lerner, Abba Socialist economy 404 Socialist market 387, 388 Sociologically informed positions 101 Sociology 39, 42, 43, 46, 57, 101, 102, 170, 249, 250, 257, 267, 643, 646 Soft market environment 474 Solomons, David 81, 92, 97 Sombart, Werner 79 Soros, George 132 Spare capacity 311, 315, 319. See also Unemployment Spectral regression 678 Spontaneous order 374. See also Hayek, Friedrich von Stabilisation policy 753 Stability and Growth Pact 756 State 152 fiscal unitary 147 functions of 363 intervention 156 must intervene 378 power 153 role of 161, 810 welfare role 152 Stationarity 19 Statist, The 539

952     Index

Statistic Durbin-Watson (DW) 14 Statistical estimation 3 Statistical inference 725 Statistical testing 9 Statistics 4, 7, 41, 57, 216–220, 471, 516. See also Bowley, Arthur Lyon and Durbin, James business 83 comparative 8, 449 Cramér-von Mises 637 criteria for acceptability of 227 economic 220, 519, 523 labour 710, 711, 876 national income 222 official 227, 228 reliable 225 theory and practice of 226 Steiner, Peter 729, 732 Stern, Nicholas 149, 160, 821 Stigler, George 556 insularity or autonomy 562 Stiglitz, Joseph 810 Strange, Susan 131 Structural stability 648 Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) 17, 19, 48, 52, 119, 642, 825 Supply and demand interacting relations 725 Supranational institution 254 Sutton, John 132 Syndicalism 363 Systems dynamic 8 T

Tanabe, Hajime 643 Tariff reform 58 Tavistock Children’s Clinic 495 Tawney, Richard Henry 44, 63, 65, 66, 71, 115, 158, 263, 499 academic career 264

acquisitive ethos of capitalism 270 activist 263 adult education 264 British ruling class 274 Calvinism 271 capitalism 269, 273 causal links 267 causation 269 Chair in Economic History 265 Christian moral values 283 Christian socialist tradition 280 class advantages 274 class struggle 274 collective action 278 commentator 263 Commonplace Book 272, 282, 283 communist terminus ad quem 269 compartmentalise wisdom 266 critique of capitalism 272 desire for material things 281 difficulty in discussing politics 266 Director of Ratan Tata Trust 265 distribution of income 272 dogmatic rationalism 267 early life 264 economic democracy 278 economic historian 269 economic history 266 economic philosophy 275 economic privilege 278 economic progress 280 education 281 educational reform 264 engagement with Max Webber 270 equal society 280 Equality 267, 274, 278, 280, 283, 284 ethical renewal of society 282 formulate theories 268 full employment 280 Head of Department of History 265 hierarchy of authority 274 historical context 267

Index    953

historical explanations 267 historical methodology 269 historical patterns 267 human motivation 267, 268 individualism 271 intellectual historian 263 interdeterminate outcome of historical forces 270 Labour and the Nation 278 legacy 283 l’histoire integrale 270 main works 285, 286 Marxist study 266 materialism 283 methodological multi-disciplinarity 267 morality 276 mythology of coherence 282 nationalization 278 nature of scholastic institutions 266 new social ethics 276–278 philosophy 276 plutocracy 284 political democracy 280 political economist 263 political economy 271, 283, 284 political thought 282 principle of economic freedom 279 proprietary rights 275 public ownership 278 religion 272 Religion and the Rise of Capitalism 267, 269, 276, 277 revolt against capitalism 273 Sankey Commission 278 scientific methodological individualism 268 Secretary of the Children’s County Holiday Fund 264 social antagonism 272 social ownership 279 social philosophy 275, 277 social reformer 268

social service 279 social system 280 socialism 283 socialist economy 280, 283 Socialist Government 279 Studies in the Development of Capitalism 269 The Acquisitive Society 267, 278 The Agrarian Problem in the Sixteenth Century 267 The Radical Tradition 284 The Study of Economic History 266 theories premised upon egotistical individualism 268 threat to democracy 272, 274 trust 279 utilitarian methodological individualism 267 Workers’ Educational Association (WEA) 264 Tawney’s Century 45 Tax local 146 policy 151 rates 150, 154 reform 293 system 147 Tax/transfer system 626 Taxable capacity 147 Taxation 146 distribution of burden 147 Incentives and Distribution of Income (TIDI) 149–151 incidence of 147 indirect 148 Teichova, Alice 130 Thatcherism 126 hard electricity privatisation 126 Thatcherite 126 Theories of cyclical fluctuations 6 Theories of utility 563 Theory neoclassical 49 Theory of income distribution 465

954     Index

Theory of monopoly 406 Theory of optimal control 8 Theory of stable allocation 861. See also Pissarides, Christopher A. Theory of the path 651 Theory of Transfer 405 Theory testing 13, 14 Third World Economic History and Development Group 52 Thirlby, George 93 Time series 18, 636 analysis of 8 data 13, 14 econometrics 678 economic 14 historical 672 long 20 memory 17 model 638 paradigm 638 short 13, 19 simple 672 Time, The 126 Titmuss, Richard 257, 258, 265 Tory Party 464 Toryism 58 Total spending 410 Townsend, Harry 117 Trade cycle theory 86 Trade unionism 591 Trade unions 466, 478 action 474 activity 474 role of 594 strains on 319 Transfer of buying power 405 Turnpike theorem 645, 648, 651, 652 Turvey, Ralph 697 academic salary-determination 709 American Economic Association and Royal Economic Society (AEARES) 705 applied welfare economics 713

asset price theory 704 balanced budget multiplier debate 704 business sustainability 709 Channel Tunnel project 706 Chief of the Department of Labour Information 700 classic British intellectual 698 classification of equilibria 701 Consumer Price Index (CPI) 710 consumer price indices 711 cost–benefit analysis 705 cost-price sequencing 702 cost-push inflation 702 current policy 701 Demand and Supply 700 demand-pull/cost-push paradigm 702 Developments in International Labour Statistics 711 discounted cash flow 707 Economic Analysis and Public Enterprises 699, 709 efficacy of regulation 713 Electricity Council 707 Electricity Economics 709, 710 employment 702 exogenous wage push 708 externalities 705 fishery regulation 714 Greek taxation 706 hallmark 703 high-profile macroeconomics 707 hybrid form of regulation 712 ILO 710 manual 711 index number problems 707 inflation 702 inflation tax 704 Interest Rates and Asset Prices 699 investment decision-making 706 involvement with CRI 712 key Swedish texts 698

Index    955

labour statistics 710 later career 710 M2T seminar founder 703 macroeconomic policy 701 macroeconomics 700, 701 main works 715, 716 marginal cost 706, 708 pricing 707 markets 702 monopoly 714 NBPI report 709 optimal pricing 709 Optimal Pricing and Investment in Electricity Supply 699, 708 partial equilibrium 709 period analysis 701 physical modelling in economics 701 planning legislation 704 price cap 712 price mechanism 704 price-setting 708 productivity 708 Public Enterprise: Selected Readings 707 publication record 700 public-sector investment criteria 705 rate of return 712 rational cost-estimation 708 reforming labour statistics 711 rent controls 704 retirement 712 second-best optimisation 709 stabilisation policy 701 Stockholm School 701 The Economics of Real Property 699, 704 theory requirements 703 three lags 702 Treasury 699, 706 types of inflation 702 urban economics 704, 705

Utilities Policy 713 Wages Policy Under Full Employment 703 wage-setting 708 welfare economics 700 welfare housing costs 711 Two-period game 783. See also Goodhart, Charles U

UK Association of Business Historians 42 UK student loan 818 Uncertainty 21, 89, 155, 441. See also Hicks, John Unemployment 410, 744, 749, 833, 843, 860, 870. See also Nickell, Stephen J. benefits 877 causes 253 evolution of 874 high 318 inflation and 594, 749, 752. See also Phillips curve investment and 318 labour market institutions and 848. See also Nickell, Stephen J. long-term 751, 755 rates 753 reduce 304 relief of 302 remedies 355 search 875, 876 technological 438 voluntary and involuntary 884 wage change and 590, 591 wage rigidities and 152 Unit roots 17 Universal pensions 152 University of Cambridge 119 University of Chicago 100

956     Index

Unwin, George 36, 49 Upward-sloping marginal cost curve 622 Urban History Group 45 Useful and Reliable Knowledge in the East and the West (URKEW) 52 Utilitarianism 363, 760. See also Layard, Richard Utility 645 UV curve 751 Uzawa, Hirofumi 653 V

Valuation 80 Values 79 current 94 deprival 95 present 99 Variables 14–17 Vector autoregression (VARs) 785 Vienna School of Economics 36 Viner, Jacob 361 Volckart, Oliver 54 Von Neumann general equilibrium theory 647 Von Neumann ratio 636 Von Neumann’s theory of capital accumulation 651 W

Wada, Kazuo 133 Wage controls 319 cut 252 determination 591 dispersion 864 equation 870. See also Pissarides, Christopher A. plasticity of 252 rigid 877

rigidity 152 share 465 Wage-income ratio 473 Wagner, Adolph 154 Walker, Martin 99 Wallas, Graham 265, 431 Wallas, Henry 218 Wallis, Patrick 44, 45 Walras, Leon 644 general equilibrium theory 645 pure economics 645 theory of economic progress 655 Walrasian scheme 405 Watson, Geoffrey 632 Weak convergence theory 637 Wealth by progressive taxation 415 Wealth maldistribution 255 Webb, Beatrice 218, 249, 253, 292 Webb, Sidney 83, 200, 218 Welfare economics 362, 366, 760 first theorem 622 fiscal 258 ideas LSE 258 improvements 451 occupational 258 payments 319 social 258 state 152, 257, 812 economics of 155 programme microsimulation model 152 programme 151, 152. See also Atkinson, Tony Welfare Benefits Handbook 812 Well-being 757, 759, 760. See also Layard, Richard Well-offness 96 White Paper on Employment Policy 360 Whitehead, Christine 159 Whittle likelihood 678

Index    957

Wicksell, Knut 375, 378, 421, 434– 439, 441, 444, 445, 449, 519, 643 Wicksellian analysis 355 Wicksellian model 444 Wicksteed, Philip 353, 375, 378 Wilson, Richard 130 Winter of Discontent 126, 477 Wiseman, Jack 153, 154 Wolf, Abraham 348 Worker mobility 594 Workers’ Educational Association (WEA) 37, 64, 282. See also Tawney, Richard World Bank 157, 360, 822 Wrigley, Tony 55

X

XYZ Club 492, 494 Y

Yamey, Basil 103, 132 Young, Allyn 198, 432 Z

Zuckerman, Solly 495, 496