Economics One

I just heard the sad news that one of my truly extraordinary economics teachers, E. Philip Howrey, recently died in a biking accident. When I was an undergraduate, Phil taught me an approach to macroeconomics—very new at the time—which has served me well throughout my career, and for which I will forever be grateful. Several years ago Robert Leeson asked me “Who influenced you most when you were an undergraduate at Princeton? What sparked your interest in policy rules?” I talked mostly about Phil in my answer.

Looking back I would say that Phil Howrey had the most influence on me, at least in areas that turned out to be closely related to my career as an economist. Phil had a great deal of interest in time series analysis as it applied to macroeconomics. For example, he had written an important paper on the “Long Swing” hypothesis with Michio Hatanaka. Hatanaka had published a book in 1964 with Clive Granger on Spectral Analysis of Time Series. Granger visited Princeton at the invitation of Oscar Morgenstern who had an interest in applying frequency domain techniques to economic data. While I met Morgenstern then, I did not meet Granger until many years later.

I think my initial interest in policy rules goes back to a course I took from Howrey. Except for Economics 101, it was probably my first introduction to macroeconomics. But we didn’t study ISLM or the other textbook models of the time; instead we studied dynamic models of the economy, with equations that included lags and shocks defining the stochastic processes. In retrospect it was quite unusual that I had the opportunity to learn about these methods as an undergraduate, but at the time I had no idea that it was unusual. The methods forced me to think of the economy as a moving dynamic structure. So the only way one could think about policy was with some kind of policy rule. You couldn’t say let’s shift the LM curve by increasing the money supply by one unit or do whatever people would be doing at the time. Instead you had to have some kind of policy rule. So to me it was natural. I couldn’t think of how else you would do it in those models.

When it came time to choose a topic for a senior thesis, I approached Phil Howrey saying that I was interested in macroeconomic policy issues and wanted to work with the types of models we studied in his course. He suggested that I look into stabilization policy in a model that combined economic growth and the cycle, which we called “endogenous cyclical growth” at the time; he said that no one had done this before, and so it sounded like a great topic and that is what I did. In the preface to my senior thesis I thanked Phil “for suggesting the topic and indicating how I might proceed.” In the end the thesis was about simulating different types of monetary policy rules.

On Day 1, of course, we focus on the central idea that economics is about choices people make when faced with scarcity and the interaction between people when they make these choices. Accordingly, we modify slightly the Stanford motto, “The Winds of Freedom Blow” (Die Luft der Freiheit Weht) to get the Economics 1 motto: “The Winds of Economic Freedom Blow.  Examples of opporunity costs this year were hi-tech leaders Mark Zukerberg, Steve Jobs and Larry Ellison, who considered the opportunity cost of college, dropped out, and did pretty well—or Eric Schmidt, John Chambers, and Art Levinson (Google, Cisco, Genentech) who also considered opportunity cost of college, stayed in, and also did pretty well.

This year we are trying out a new Economics 1 lecture hall, CEMEX Auditorium in Zambrano Hall, named after the Mexican-based global cement company and its CEO Lorenzo Zambrano, who also didn’t drop out of college and then did well enough to donate the money for the lecture hall.

Ten years after 9/11 we now have a “new greatest generation” of Americans on the scene and ready to lead. It includes, of course, all the post 9/11 Afghanistan and Iraq veterans to whom Time Magazine dedicates its cover this week. Fifty-one have enrolled at Stanford with more to come. As [Stanford President] John Hennessy and [Stanford Provost] John Etchemendy say, “We are honored and proud to have many excellent current students and alumni who have served in the military.

But I see a new greatest generation that also includes equally dedicated civil servants, like those at the US Treasury who froze terrorists’ assets after 9/11 or funded new schools in Afghanistan; young entrepreneurs, who through ingenuity and hard work have been developing new products to improve peoples’ lives; and the teachers, the doctors, the engineers who are just beginning their careers.

This is the best news and the most promising.