The Cowles Commission in Chicago, 1939–1955

184 Pages·1986·10.853 MB·English

by  Prof. Clifford Hildreth (auth.)

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Lectu re Notes
in Economics and
Mathematical Systems
Managing Editors: M. Beckmann and W. Krelle
271
Clifford Hildreth
The Cowles Commission
in Chicago, 1939-1955
Springer-Verlag
Berlin Heidelberg New York London Paris Tokyo
editorial Board
H.Albach M. Beckmann (Managing Editor)
P. Dhrymes G. Fandel J. Green W. Hildenbrand W. Krelle (Managing Editor)
H. P.K unzi G. L. Nemhauser K. Ritter R. Sato U. Schinko P. SchOnfeld R. Selten
Managing Editors
Prof. Dr. M. Beckmann
Brown University
Providence, RI 02912, USA
Prof. Dr. W. Krelle
Institut fUr Gesellschafts- und Wirtschaftswissenschaften
der Universitlit Bonn
Adenauerallee 24-42, 0'5300 Bonn, FRG
.""""
Prof. Clifford Hildreth
University of Minnesota, Department of Economics
1035 Management and Economics
271 19 Avenue South, Minneapolis. Minnesota 55455. USA
ISBN-13: 978-3-540-16774-7 e-ISBN-13: 978-3-642-61644-0
001: 10.1007/978-3-642-61644-0
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C Springer.vertag Berlin Heidelberg 1996
Sohcover reprint of the hardcover 1st edition 1986
21-42131-4().5-43210
PREFACE
The author is indebted to the Alfred P. Sloan Foundation and to
the Graduate School of the University of Minnesota for financial
aid. This permitted visits with quite a few old Cowlespeople,
reproduction of documents, and some reduction in teaching commitments.
The many who responded with information and suggestions cannot be
blamed for the shortcomings of the book. Faculty and staff at the
Cowles Foundation were particularly helpful. Dori Clifton, Business
Manager, and Karlee Gifford, Librarian, were always resourceful in
locating people and documents.
Michael Intrilgator, Leonid Hurwicz, and Martin Beckmann fur-
nished perceptive comments on an earlier draft. Intriligator also
obtained my access to the Marschak archives at UCLA. Wendy Williamson,
the librarian at the Jacob C. Schmookler Library at the University
of Minnesota cheerfully and efficiently handled lots of (sometimes
vague) requests for reference materials and produced neat and timely
drafts from very trying scratchpaper. Appropriate parts of my
correspondence and some copies of documents will be placed in a
Cowles Commission archive at the Cowles Foundation, Vale University.
The concept of identification is treated in more detail than
others because it was clarified and developed almost exclusively
at the Commission during the period reported. Readers interested
in general notions may want to omit Sections 2.2.3 through 2.2.5
in a first reading.
TABLE OF CONTENTS
Pref ace .••..••••••..••..•.•..•..••.•...•...•...••.•.. iii
1. Introduction 1
2. Simultaneous Equations ••••••••••••••••••••••••••••••••••••• 14
2.1 The Probability Approach •••••••••••••••••••••••••••••• 14
2.2 Identification •••••••••••••••••••••••••••••••••••••••• 24
2.2.1 Abstract Identification •••••••••••••••••••••••••• 24
2.2.2 Identification in Probability Models ••••••••••••• 26
2.2.3 Parametric Models •••••••••••••••••••••••••.•••••• 28
2.2.4 Linear Shock Models with Linear Constraints •••••• 30
2. 2. 5 Other Resul t s •••••••••••••••••••••••••••••••••••• 42
2.3 Estimation and Testing •••••••••••••••••••••••••••••••• 45
2.3.1 Estimates •••••••••••••••••••••••••••••••••••••••• 45
2.3.2 Tests •••••••••••••••.•••••••••••.•••••••••••••••• 53
2.4 Applications •••••••••••••••••••••••••••••••••••••••••• 56
2.4.1 Illustrative Applications •••••••••••••••••••••••• 56
2.4.2 Klein Models ••••••••••••••••••••••••••••••••••••• 58
2.4.3 Small Sectors •••••••••••••••••••••••••••••••••••• 62
................................
2.5 Theory and Measurement 66
3. Activity Analysis •••••••••••••••••••••••••••••••••••••••••• 73
3.1 Hi stori c.al Sketch ...........•.••..••.••.•.•.......•... 73
3.2 I~ac:ts •••••••••.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•. 80
3.2.1 Managellll!lnt 81
3.2.2 EQui 1 i br i Uti •••••••••••••••••••••••••••••••••••••• 85
4. ReI ated Topi cs ••••••••••••••••••••••••••••••••••••••••••••• 92
4.1 Soci al Choi ce ••••••••••••••••••••••••••••••••••••••••• 92
4.2 Decisions Under Uncertainty ••••••••••••••••••••••••••• 97
4.3 Organization Theory, Teams, Decentralization ••••••••• 104
......................................
5. Further Observations 111
.........................................
5.1 Econometrics 111
5.2 Mathematical EcononclDi c.s ••••••••••••••••••••••••••••• 117
Appendix I. A Discussion of Non-experimental Data and Matrix
Co~utation •••••••••••••••••••••••••••••••••••••• 121
Appendix II. Residents at the Cowles Commission, 1939-1955
and Cowles Commission MonographS, 1934-1955 •••••• 132
....................................................
References 138
.........................................................
Index 164
CHAPTER 1
INTRODUCTION
The Cowles Comnnssion for Research in Economics was founded in
Colorado Springs, Colorado in 1932 and moved to the University of
Chicago in 1939. In 1955, the Commission was reorganized as the
Cowles Foundation for Research in Economics and moved to its present
home at Yale University.
The founder, Alfred Cowles, president of an investment counsel
ing firm, had become strongly interested in economic research while
studying the generally unimpressive records of stock market fore
casters (Cowles 1933; Christ 1952, p. 12,13). He was referred by
friends to Harold T. Davis, Professor of Mathematics at Indiana
UniverSity and a sumner visitor in Colorado Springs. Besides offer
ing computing advice, Davis put Cowles in touch with Irving Fisher
and Charles F. Roos who had recently (1930) joined with others to
organize the Econometric Society.
Ensuing discussions also involved other economic statisticians.
Arrangements that the Society would sponsor a research commission
financed mainly by Cowles and that Cowles would underwrite the cost
of publishing a Society journal, Econometrica, resulted. An Advisory
Council for the Cowles Commission was appointed from the Econometric
Society. The ...oers were Fisher, Ragnar Frisch, Arthur L. Bowley,
Wesley C. Mitchell, and Carl Snyder. The Commission and the Society
shared administrative offices until separated at Vale in 1955.
Carl Christ (1952) has written an excellent account of these
developments and the subsequent history of the Comndssion to 1952.
The Colorado years (1932-9) saw preparation of the first five Cowles
Commission Monographs (see list on page 136), publication of an
influential statistics textbook by Davis and W.C. Nelson, and a
2
series of stimulating summer conferences. Each summer starting in
1935, leaders of the emerging econometrics profession from various
locations in United States and Europe joined the Cowles staff in
several weeks of discussion of research problems and results.
When the Commission's first Director of Research, Charles F.
Roos, resigned in 1937, the search for an outstanding successor was
complicated by the remoteness of Colorado Springs from other princi
pal centers of econometric activity. Ground transportation was very
expensive of one's time in the 1930's. The possibility of relocat
ing at a major university was considered and mutually promising
arrangements with the University of Chicago were concluded by 1939.
Remaining chronology is interesting and is welt covered by
Christ (to 1952) and by a series of Cowles Commission annual reports
starting in 1940. These are available in a number of economics
libraries and a complete set is kept at the Cowles Foundation.
The purpose of the present book is to review ideas developed
at the Commission in the Chicago period and to briefly relate these
to general economic and econometric thinking. Chronology and person
alities will occasionally enter but, except for this brief introduc
tion, will not be e.phasized. Attention will pri.arily be on work
of the years 1943-55 encompassing the directorships of Jacob Marschak
(until 1948) and Tjalling C. Koopmans.
Important work was done from 1939 to 1943, but there were fre
quent interruptions - leaves to do war work, organizational shifts,
etc. (see Christ 1952, p. 22-5). Theodore Vntema, Director of
Research, was called to important assignments with the Defense
Commission in 1940 and the War Shipping Administration in 1942.
Later in 1942, Yntema resigned to organize studies of post-war
employment problems for the Co.-itt. . on Economic Development.
3
A crucial turn came with Marschak's appointment as Professor in
the Economics Department and Director of Research of the Cowles Com
mission early in 1943. Knowing Jacob (or Jascha) Marschak even
briefly quickly revealed that any kind of group in which he was
included would have to be a lively group. Fortunately, the inquisi
tive, unpretentious, perceptive, and persistent yet cordial tone
that characterized Marschak has been partially preserved in bio
graphical materials, e.g., Hirshleifer and Marschak (1978), Arrow
(1978a, 1 978b , 1979), Klein (1978), Koop. .n s (1978), Radner (1978).
Marschak was born in Kiev, capital of the Ukraine, in 1898. As
a Russian Jew he was refused admission to the Gywnasium and studied
with governesses and at the Kiev School of Technology. He bee a .. a
Marxist of the Menshevik faction and was briefly i~risoned before
being liberated by the overthrow of the monarchy in February, 1917.
He then served in a democratic government in the northern
Cauasus. It resisted the Bolsheviks until June, 1918. Following a
brief return to Kiev, Marschak decided to study economics in Germany.
After six months at the University of Berlin he went to the Univer
sity of Heidelberg, receiving his Ph.D. in 1922. He was an economics
reporter for the Frankfurter Zeitung from 1924 to 1926 and visited
England on a Rockefeller Fellowship in 1927.
Having developed a primary interest in academic study, Marschak
joined the staff of Kiel's Institute for World Economics in 1928 and
moved to Heidelberg as Privatdozent in 1930. By 1933, forebodings
about Nazi rule led him to seek a new location. By then his writings
in econometrics and in macroeconowQcs (some economists attribute the
term to Marschak) were sufficiently well known to help him secure a
lectureship at All Soul's College, Oxford. In 1935 he was made
Director of the Oxford Institute of Statistics.
4
Marschak was visiting United states on another Rockefeller
Fellowship in 1938-39. With the onset of World War II, his family
joined him and he accepted a professorship at the New School for
Social Research in New York. Through the National Bureau of Economic
Research he also organized a seminar on theoretical and applied
econometrics which attracted most of the practiCing econometricians
of the New York-New England area (see p. 46). Thus Marschak brought
to the Commission a rich background of study and experience in add
ition to his vital personal qualities.
Circumstances at the University of Chicago in 1943 presented a
very favorable opportunity for the developmant of economic research.
The high intellectual goals and achievements of the Econo~cs Depart
ment (Reder 1982) and the University (Murphy and Bruckner 1976) were
world renowned and the Department was still ascending. The University
was a citadel of freedom with intolerance of nonsense one of the few
proscriptions. Of course, nonsense and innovation are sometimes
hard to distinguish but the Chicago effort was, and is, sincere.
Recruiting opportunities were unprecendented because outstanding
European scholars came to the United States as refugees or were
attracted by the belief that America would be the most effective
place to work, e.g. see Weintraub (1983), pp. S-21. Another distinct
advantage was that Alfred Cowles had relocated to Chicago. His con
tinuing deep interest in the work, continued financial support, and
policy of noninterference except when called upon were vital to the
stability of the Commission. His advice was need~ on several occa
sions and he sometimes played a key role in explaining the nature of
the Commission to others.
By 1942, Cowles' financial support was supplemented by modest
grants from the Social Science Research Comndttee of the University
5
of Chicago, the Rockefeller Foundation, and the National Bureau of
Economdc Research. Free use of University facilities was an impor
tant additional contribution. Significant part-time appointments of
Chicago faculty had also been made - in addition to Ynte. . there
were Joel Dean, H. Gregg Lewis, Jacob Mosak, and Oscar Lange.
While a splendid opportunity existed, there were limitations.
Total financial resources from the several sources were not largeJ
the Commission was unable to offer faculty status to Research Asso
ciates until 1949; living in the University area was difficult;
thefts and assaults were common. There is some disagreement among
participants and observers regarding the extent to which predisposi
tions in the Department of Economics at Chicago .ay have been a
handicap to the Cowles Conmnssion. I cannot be very helpful on this.
The achievements of both the Commission and the Department
belie the possibility that either was an overwhelming handicap to
the other. On the other hand, extensive collaboration did not
develop. Fortunately, there was extensive cross attendance at
seminars, and sharp differences of judgement sometimes emerged
between members of the Economics Department, between members of the
Cowles Commission, or between someone pri.arily associated with the
Department and someone primarily associated with the Conmdssion. I
recall (ay period at Chicago was 1949-53) two distinctive features
of the last-mentioned. They tended to occur repeatedly with respect
to certain topics (e.g. realism as a possible desirable property of
models, involuntary nature of some econowdc circumstances) and efforts
at resolution did not generally proceed as automatically or smoothly
as in the other cases. However, I found senior people in both groups
quite anxious to furnish constructive leads when approached with
problems in their domains. My conclusion is that each group benefited