EUREKA! Magic Moments in Thought and Action Harris Lecture 2014 Clemson University Clemson, SC

EUREKA! Magic Moments in Thought and Action

Harris Lecture 2014

Clemson UniversityClemson, SC

April 2014

John B. Harris III 1952 - 2006

John Harris & I(1972)

Meet

Alchian & Allen(1969)

Archimedes and the Golden CrownEureka!!

What can we learn from Eureka moments of others that may help us have more Eureka moments of our own?Is there a Eureka moment production function?

If so, what are the arguments in it?

EM = f(x, y, z)

Mr. Ford and His Industrial Miracle

What about the Econ Tribe?

Paul Douglas

The Cobb-Douglas Production Function

Douglas, then teaching at the University of Chicago, had gathered data on U.S. production and labor and capital inputs—1889-1922. In 1928 he was giving a lecture at Amherst. The Eureka moment came while he was building a table of inputs and outputs on the blackboard. Fired up by this insight, he got with Charles Cobb, an Amherst mathematician. The two chased more data and discovered the relationship that bears their names .

Paul Douglas. In the Fullness of Time. New York: Harcourt, Brace & Jovanovich, 1972: 46.

1892 - 1976

1919 - 2013

Arrived at the University of Chicago in 1945 as a confirmed “socialist,” eager to begin his graduate education in economics. Two Eureka moments later he was a confirmed free market economist.

The first indelible imprint came from his professor , Frank H. Knight. The second was three years later, in 1948. While browsing the shelves in Harper Library, Buchanan discovered Knut Wicksell’s Finanztheoretische Untersuchungen, 1896.

Knight and Wicksell became the intellectual forces in his life.

James M. Buchanan

1932 - 1998

Jonathan Rauch. Government’s End, New York: Public Affairs, 1999, 23.

Mancur Olson

In the mid-1950s, Olson, traveling in Europe, was struck by an economic oddity. The United Kingdom had won two great wars and enjoyed all the splendors of empire, yet it suffered from economic anemia—so much so that people came to speak of the “British disease.” Germany had been defeated in two wars and then was broken in half, yet West Germany was booming—so much so that people came to speak of the German “economic miracle.”

Why?? Olson’s Eureka moment lasted a lifetime.

1910 - 2013

Ronald H. Coase

Coase tells how in 1932, when he was 22!, he was thinking about the Russian revolution and an assertion that Russia would build a centralized state economy. Coase explains this way:

“The first five-year plan was not adopted until 1928. Lenin had said that under communism the economic system would be run as one big factory. ..Why couldn’t the Russian economy be run as one big factory”?

A lifetime fascination with transaction cost followed.

William Breit and Roger W. Spencer, eds. Lives of the Laureates, 3rd ed. MIT Press, 1995: 233.

1927 -

Vernon Smith

‘‘Experimental economics started at Purdue in the late fall of 1955. . . . Ihad insomnia one night, and . . . I found myself thinking about the classroom experiment that Ed Chamberlin used to perform with the Harvard graduate students to prove the impossibility of perfect competition.

“So there I was, wide-awake at 3 am, thinking about Chamberlin’s sillyexperiment… This led to two ideas: (1) why not use the double oral auction procedure, used on the stock and commodity exchanges? (2) why not conduct the experiment in a sequence of trading ‘days’ in which supply and demand were renewed to yield functions that were ‘daily flows.‘

“The following January, I carri ed through my insomniacal plan. . . . I amstill recovering from the shock of the experimental results. The outcomewas unbelievably consistent with competitive price theory. “

d the Ted Bergstrom. 2003. “Vernon Smith’s Insomnia and the Dawn of Economics as Experimental Science" Scandinavian Journal of Economics 105.2 : 181-205, at 182-183.

Claudia Goldin

1946 -

“Many of those moments occurred during, otherwise, boring periods in archives.  Others happened at odd times – during a walk or chatting with Larry [Lawrence Katz] late in the evening. … [O]ne occurred late at night when we chatted about our work on the role of the birth control pill in women’s educational and career advances.  There was a eureka moment in realizing how the pill could increase the age at first marriage for all women, not just those taking the pill. 

“Many of the ‘eureka’ moments occurred when I was developing a model and it began to ‘talk back’ to me, telling me something I had not previously known and did not think I put into it.  Sort of like a robot that has a life of its own.”

Email exchange, February 9, 2014.

Douglass North

“It was not until I got my first job, at the University of Washington in Seattle, and began playing chess with Don Gordon, a brilliant young theorist, that I learned economic theory. In the three years of playing chess every day from noon to two, I may have beaten Don at chess, but he taught me economics; more important, he taught me how to reason like an economist, and that skill is still perhaps the most important tool that I have acquired.”

William Breit and Roger W. Spencer, eds. Lives of the Laureates, 3rd edition, 1995, 253.

1920 -

Amy Finkelstein

“[M]ost of my research projects, evolved slowly, through reading, thinking, and conversations with colleagues. But I distinctly remember the start of the Oregon Health Insurance Experiment: I was in my office and a colleague came in and said: I was just giving a radio interview about my research, and the snippet before me was about how the state of Oregon was running a lottery to allocate limited slots for Medicaid. I quickly googled it and realized it was real: they really had run a lottery. Random assignment of health insurance to some and not others! For a health economist, this was like a dream come true. The research opportunity of a lifetime. I said to myself: stop what you're doing, drop everything and focus on making this study happen. So that's what I did. And I'm very glad that I did”!

Email exchange, February 16, 2014.

1973 -

1938 -

Sam Peltzman

When asked about his discovery of risk compensation—the Peltzman Effect—for drivers in association with seat belts and other auto safety devices. 1975 Was there a Eureka moment?

“Hardly that dramatic.  I told my research assistant we were going to do a cost-benefit study of the restraints.  His job was to estimate the # of lives saved by deducting actual deaths from some empirically determined counterfactual (i.e., the benefits part).  He kept coming back to report a difficulty in finding positive benefits. Then - and only then -  did I do some hard thinking about the underlying theory.  You could include it under ‘how economics is actually done v. how we say it is (should be) done.’”

Email exchange, January 22, 2014.

Eureka! Lessons Learned(the production function)

Always look at your data, or a sample of it, and descriptive statistics. You may discover a relationship lurking there. And don’t go it alone. Take on reinforcements when you hit an intellectual wall!

1892 - 1976

Paul Douglas

1919 - 2013Find the time to browse the stacks in the library. Don’t let Google do all the work! Along the way, learn another language!

James Buchanan

1932 - 1998Visit places and cultures that are different from your own. Try to understand what’s going on, and why they are different.

Mancur Olson

1910 - 1913Visit the wonderful world of work. Talk with people who are producing things. Compare their world with your models…, and adjust where necessary!

Ronald Coase

1927 -

Don’t let your education cripple you. Instead, let it be a springboard to the discovery of new knowledge. Much of what we think we know today will turn out to be wrong!

Vernon Smith

Be careful picking your friends and people with whom you spend lots of time. Make sure some of them are smarter than you are! They may be your ticket to a Eureka moment!

1920 -

Douglass North

Claudia Goldin

1946 -Enjoy continual conversation with close colleagues away from the workplace, especially late at night. These can inspire Eureka moments. And “conversations” with economic models can lead to new discoveries!

Amy Finkelstein

When Eureka strikes, “drop everything” and go with the inspiration. 1973 -

1938 -When it appears that the horse you are trying to ride is really dead, it’s time to change horses.

Sam Peltzman

One Last Eureka Moment

Eureka! I’ve found it!

Long live Clemson Economics!