The Life Cyclists Fisher, Keynes, Modigliani, and Friedman Colin Read The Life Cyclists Great Minds in Finance Series editor: Professor Colin Read Titles include: The Life Cyclists The Portfolio Theorists The Pricing Analysts The Efficiency Hypothesists Great Minds in Finance Series Standing Order ISBN: 978–0–230–27408–2 (outside North America only) You can receive future titles in this series as they are published by placing a standing order Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England The Life Cyclists Fisher, Keynes, Modigliani, and Friedman Colin Read © Colin Read 2011 Softcover reprint of the hardcover 1st edition 2011 978-0-230-27413-6 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-32429-3 ISBN 978-0-230-34944-5 (eBook) DOI 10.1057/9780230349445 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Read, Colin, 1959– The life cyclists : Fisher, Keynes, Modigliani, and Friedman / Colin Read p cm Includes index Finance—History Economics—History Economists—History Life cycles—Economic aspects—History I Title HG171.R337 2011 330.15092'2—dc23 2011029575 10 20 19 18 17 16 15 14 13 12 11 Contents List of Figures and Tables vii Preface to the Great Minds in Finance series viii Introduction A World Before Fisher Section 1: Irving Fisher 10 The Early Years 11 The Times 20 The Theory 25 Applications 41 Life and Legacy 52 Section 2: John Maynard Keynes 59 The Early Years 61 The Times 71 10 The Theory 89 11 Applications 107 12 Life and Legacy 121 Section 3: Franco Modigliani 128 13 The Early Years 129 14 The Times 135 15 The Theory 141 16 Applications 154 17 The Nobel Prize, Life, and Legacy 161 Section 4: Milton Friedman 166 18 The Early Years 168 19 The Times 176 v 9780230274136_01_prex.indd v 9/6/2011 7:21:51 PM vi Contents 20 The Theory 179 21 Applications 186 22 The Nobel Prize, Life, and Legacy 190 Section 5: What We Have Learned 196 23 Combined Contributions 197 24 Conclusions 202 Glossary 205 Notes 209 Index 215 List of Figures and Tables Figures 5.1 The utility curve 27 5.2 The trade-off of two goods at one point 28 5.3 A trade-off of one good for another 29 5.4 An indifference curve and various points 30 5.5 31 The wealth line 5.6 The wealth line and various indifference curves 32 5.7 Intertemporal consumption and the discount rate 35 9.1 The Standard and Poor’s stock market index 1920–1932 78 10.1 A narrow distribution of output around full employment 101 10.2 A wide distribution of output around full employment 102 10.3 Graph of investment and the interest rate 103 10.4 Pessimistic investment and the interest rate 103 10.5 105 Keynes’ liquidity preference 11.1 US Federal Reserve discount rate 1913–2010 108 11.2 US Federal Reserve discount rate 1960–2010 109 11.3 US Treasury six-month bond interest rate 1960–2010 110 15.1 Lifetime consumption and asset accumulation 145 Tables 15.1 A simple life cycle example with overlapping generations 146 15.2 A simple overlapping generations model with rising income 147 15.3 An overlapping generations model with constant income 148 15.4 An overlapping generations model with rising income 15.5 An overlapping generations model with more modest growth 149 150 vii 9780230274136_01_prex.indd vii 9/6/2011 7:21:51 PM Preface to the Great Minds in Finance series This series covers the gamut of the study of finance – from the significance of financial decisions over time and through the cycle of one’s life to the ways in which investors balance reward and risk; from how the price of a security is determined to whether these prices properly reflect all available information – examining the fundamental questions and answers in finance We will delve into theories that govern personal decision-making, those that dictate the decisions of corporations and other similar entities, and the public finance of government This will be done by looking at the lives and contributions of the key players upon whose shoulders the discipline rests By focusing on the great minds in finance, we draw together the concepts that have stood the test of time and have proven themselves to reveal something about the way humans make financial decisions These principles, which have flowed from individuals, many of whom have been awarded the Nobel Memorial Prize in Economics for their insights (or perhaps shall be awarded some day), allow us to see the financial forest for the trees The insights of these contributors to finance arose because these great minds were uniquely able to glimpse a familiar problem through a wider lens From the greater insights provided by a more expansive view, they were able to focus upon details that have eluded previous scholars Their unique perspectives provided new insights that are the measure of their genius The giants who have produced the theories and concepts that drive financial fundamentals share one important characteristic: they have developed insights that explain how markets can be used or tailored to create a more efficient economy The approach taken is one taught in our finance programs and practiced by fundamentals analysts We present theories to enrich and motivate our financial understanding This approach is in contrast to the tools of technicians formulated solely on capitalizing on market inefficiencies without delving too deeply into the very meaning of efficiency in the first place From a strictly aesthetic perspective, one cannot entirely condemn the tug-of-war of profits sought by the technicians, viii 9780230274136_01_prex.indd viii 9/6/2011 7:21:51 PM Preface to the Great Minds in Finance series ix even if they little to enhance – and may even detract from – efficiency The mathematics and physics of price movements and the sophistication of computer algorithms is fascinating in its own right Indeed, my appreciation for technical analysis came from my university studies toward a Bachelor of Science degree in physics, followed immediately by a PhD in economics However, as I began to teach economics and finance, I realized that the analytic tools of physics that so pervaded modern economics have strayed too far from explaining this important dimension of human financial decision-making To better understand the interplay between the scientific method, economics, human behavior, and public policy, I continued with my studies toward a Master of Accountancy in taxation, an MBA, and a Juris Doctor of Law As I taught the economics of intertemporal choice, the role of money and financial instruments, and the structure of the banking and financial intermediaries, I recognized that my students had become increasingly fascinated with investment banking and Wall Street Meanwhile, the developed world experienced the most significant breakdown of financial markets in almost eight decades I realized that this once-in-a-lifetime global financial meltdown arose because we had moved from an economy that produced things to one in which, by 2006, generated a third of all profits in financial markets, with little to show but pieces of paper representing wealth that had value only if some stood ready to purchase them I decided to shift my research from academic research in esoteric fields of economics and finance and toward the contribution to a better understanding of markets by the educated public I began to write a regular business column and a book that documented the unraveling of the Great Recession The book, entitled Global Financial Meltdown: How We Can Avoid the Next Economic Crisis, described the events that gave rise to the most significant economic crisis in our lifetime I followed that book with The Fear Factor, which explained the important role of fear as a sometimes constructive and at other times destructive influence in our financial decision-making I then wrote a book on why many economies at first thrive and then struggle to survive in The Rise and Fall of an Economic Empire Throughout, I try to impart to you, the educated reader, the intuition and the understanding that would, at least, help you to make informed decisions in increasingly volatile global economies and financial markets 24 Conclusions One cannot help but be struck with the larger-than-life personas of four very different individuals who would found and define the field of personal finance From self-made descendants of pioneer stock to British blueblood, and a pair of brilliant theoreticians with Jewish immigrant heritage, each embraced their upbringings to enlighten their insights into the cornerstones of personal finance Irving Fisher transcended academics to become a millionaire many times over and a Wall Street titan Along the way, he developed an elegant model of savings and the interest rate over time that, for the first time, took account of the intertemporal nature of personal financial planning This founder of analyses of our financial life cycle was also a health fanatic, no doubt because of brushes with death for himself and his family, and a proponent of eugenics Like others in his day, he had great faith in the power of the social and physical scientists to re-engineer their economic and physical environments Fisher was a man of blind faith in free markets, and his faith was ultimately his financial ruin Before the Great Crash, he was arguably the most well-known economist of his day Following his exuberance before the Crash and the malaise afterward, he left his Wall Street podium disgraced and crestfallen, even though he himself began to recognize the shortcomings of his own economic philosophy Fisher’s dimmed star was replaced by someone who came from privilege, as opposed to Fisher’s humble beginnings Fisher shared with John Maynard Keynes a mutual lifelong advocacy for the controversial social engineering then called eugenics Indeed, shortly before his death, Keynes stated that eugenics was “the most important, significant and, in addition, genuine branch of sociology which exists.”160 However, Keynes accepted that the free market sometimes fails, a 202 9780230274136_25_cha24.indd 202 8/30/2011 3:44:33 PM Conclusions 203 conclusion to which Fisher, his classical predecessor and peer, would not dare subscribe Keynes was a towering man and a towering figure who defined and dominated economics for the first half of the “economics century.” He delivered a message that the public found compelling Financial and productive markets sometimes fail, savings are sometimes put to less than productive use, and government can something to fix an ailing economy Consequently, Keynes became well known by a public that became desperately interested in the workings of the economy Perhaps like no other since Adam Smith, and no other following him, Keynes contributed to the popularization of economic theories and to a better understanding of savings and investment However, his model of savings, while intuitively attractive, was insufficiently rigorous to tease out all the necessary results Of the four great minds, Franco Modigliani brought the greatest grace and elegance to the mix He was eloquent and oozed panache He was also generous with his words and for his contemporaries, developed great insight with his theories, and provided an intuitive framework for the analysis of the life cycle of personal finance decisions His analysis furthered our intuition and his simplifying assumptions were not problematic Finally, Milton Friedman was the most diminutive in size, but was arguably as towering in his stature as Keynes Some of his stature was selfcultivated, but his contributions to personal and high finance, economics, and public policy are undeniable Friedman almost single-handedly established in the public mind the notion of libertarianism His intuition too was easy to comprehend and he had an ability to see through a problem with great insight, even if his angle was, at times, somewhat doctrinaire Friedman also communicated best the direction in which the study of personal finance must proceed While these four great minds each added to our understanding of the personal finance decision, our analysis remained incomplete by the middle of the twentieth century The financial discipline had gone from static models to the dynamic context that is so essential for practitioners and theorists in the saving decisions of households However, one ingredient remained elusive Friedman became increasingly convinced of the need to model how uncertainty and human anticipations determine the path of a dynamic economy Trained in the static world of classical economics, but steeped in the real world in which economies seem to retrench in the face of uncertainty, Friedman became increasingly convinced of the wide gulf between classical economic prescriptions and real-world economic tribulations Just as in the 1920s, when his mentor, Frank Knight, first 204 The Life Cycluists recognized the complexity and subtlety of uncertainty, Friedman began to recognize the profound costs uncertainty imposes on economic and financial decision-making In a manner characteristic for Friedman, his solution was to reduce regulation, and its intendant uncertainty, bolster market mechanisms, and increase transparency This introduction of uncertainty into the dynamics of personal finance was the next challenge for the financial literature and will be the subject of the next book in this series However, what each mind brought to the problem was the casting away of conventional wisdom While we hear the term “conventional wisdom” often used as an appeal for acceptance of the status quo, it actually means something entirely distinct from the broadly accepted truth Conventional wisdom is often false; rather, it is frequently invoked as a shield against an open mind and the consideration of new information These theorists each opened our minds and, in the process, often met with criticism because of their penchant for making theories richer and fresher, but less conventional Albert Einstein was once purported to have said that “Great spirits have always found violent opposition from mediocrities.”161 If many entertain and try to absorb one’s new view of the world, then we have established interest If a few also become highly critical of a new approach, we have likely established relevance These great minds were unconventional, interesting, and relevant They overcame the inertia of conventional wisdom by allowing us to view old problems in new light, and often to realize new problems that we did not know existed before Their models were so eloquent and intuitive that the expert was left thinking “why did I not think of that?” or “the concept is so familiar that perhaps I did once think of that.” The intuitive appeal of these ideas is also so accessible that the layperson should be able to understand and absorb the theories of personal finance These are the qualities of genius The genius of Irving Fisher, John Maynard Keynes, Franco Modigliani, and Milton Friedman was not necessarily in the sophistication of their models but in the insights that we all can draw from their results Each in their own way brought the study of personal finance out of the ivory tower and into our living rooms Their new intuitions allowed us to make better personal financial decisions Ultimately, because of their works, we became more financially secure or can realize more opportunities They made tangible differences in lives, in financial markets, in societies, and in economies And while they each received accolades and awards throughout their lives, the rewards of their work have been bestowed upon us all Upon the foundations built by these four great minds, personal finance was born Glossary Asymptotic – the value that a variable converges on in the limit as time goes to infinity Autonomous consumption – the minimum amount of necessary consumption regardless of one’s income level Bond – a financial instrument that provides periodic (typically semi-annual) interest payments and the return of the face value upon maturity, in exchange for a fixed price Budget constraint – the amount of income made available by a household in a given period to support consumption Calculus of variations – a mathematical technique that can determine the optimal path of a variable, like savings or consumption, over time Central bank – the primary monetary authority in a nation that often acts as the bank for commercial banks In the USA, the central bank is called the Federal Reserve Classical model – a microeconomic-based approach to economic decision-making that assumes all actors are rational and maximize their self-interest, and is driven by the principle that prices adjust quickly and freely to ensure that supply is equal to demand Cognitive dissonance – the observation that humans may simultaneously and uncomfortably hold a common but irrational perspective Consumption – the purchase of goods and services to satisfy a household’s wants and needs Consumption tax – an ad valorem tax levied evenly on all goods and services Corporate finance – the study of financial decisions made by corporations to maximize shareholder value Correlation – the statistical relationship between two variables, typically measured by demonstrating that the movement of one variable is associated with the movement of the other Coupon rate c – the periodic payment to the owner of a bond Deflation – a measure of the rate by which prices fall over time Derivative – in mathematics, the instantaneous rate of change of one variable as a function of the change of another In finance, a financial instrument that derives its value from another underlying asset or instrument Differential equation – an equation that specifies the relationship between the rates of change of a collection of variables Discount rate – the rate at which humans will reduce the value of future income in the determination of its present value This term is also used to signify the interest rate set by a nation’s central bank Dissavings – borrowing that results when consumption exceeds income Dynamic – the analysis of a process as it changes over time Equilibrium – a state in which a relationship converges upon a constant balance Face value F – the nominal value of a bond that is returned to the bondholder upon maturity 205 9780230274136_26_glos.indd 205 8/30/2011 3:44:50 PM 206 Glossary Federal Open Market Committee – the committee of the US Federal Reserve Board that determines the policy for bond purchases and sales as a method to adjust the amount of cash and liquidity in a monetary system Federal Reserve – the central bank of the USA Fisher equation – an equation that derives how one can calculate a real return on an asset by subtracting the inflation rate from the nominal interest rate Full employment – the characterization of a macroeconomy when all those who wish to have a job are employed Gross domestic product – the level of production, output, and income in a macroeconomy Homeostasis – the property of a system to attain and maintain a stable and constant balance or relationship Homothetic – a property of indifference curves in which the ratio of consumption between one period and another is constant as permanent income changes Income – the flow of financial resources that are used to support consumption or are diverted toward savings The term is also used as a measure of total earnings by all participants in a macroeconomy Income tax – a government tax levied based on the amount of one’s income Indifference curve – a locus of points of constant utility derived from consumption of one good or service and another, or of consumption of all goods and services in one period and another Infinite time horizon – an economic planning horizon that has no end: for instance, an infinitely lived individual or society would make decisions with due consideration to an infinite future Inflation – a measure of the rate by which prices rise over time Interest rate – the rate of periodic payments, as a share of the principal amount borrowed, to compensate for the inherent preference of humans for the present over the future Intertemporal – a reference to decisions made across time Keynesian model – a model developed by John Maynard Keynes that demonstrates that savings may not necessarily be balanced with new investment and the gross domestic product may differ from that which would result in full employment Life cycle – the characterization of a process from its birth to its death Life Cycle Model – a model of household consumption behavior from the beginning of its earning capacity to the end of the household Lifetime income – a conversion of a household’s present and future income to a net asset value today Liquidity preference – a description of the amount of assets a household or firm would prefer to keep in highly liquid form This amount depends, among other factors, on the interest or other earnings sacrificed if assets are kept liquid Marginal propensity to consume – the rate of increase of consumption as a share of an increase in income Marginal propensity to save – the rate of increase of savings as a share of an increase in income Marginal rate of substitution – the rate at which one would willingly substitute the consumption of one good or service for a unit change in consumption of another, while maintaining the same level of overall satisfaction Glossary 207 Maturity – in reference to a bond or financial instrument, the time at which the instrument becomes due and the financial relationship ends Mortgage-backed securities – a derivative financial instrument that derives its asset value on a collection of underlying mortgages; in other words, a financial security that is backed by a collection of financial securities Myopia – a process of decision-making that looks at the past or the present rather than the future Nominal interest rate – the listed interest rate on a financial instrument Optimal control theory – an extension of the calculus of variations that is a powerful tool in the modeling of dynamic processes Ordinary least squares – a linear regression method that determines the relationship between a dependent variable as a weighted sum of independent variables This technique minimizes the squared difference between the dependent variable and the predicted amount from an estimate of a weighted combination of the independent variables Before the recent advent of significant computing power, this readily calculable technique was used to estimate relationships between dependent and independent variables Permanent income – the share of income that is considered permanent and constant in the future, as opposed to transitory income Personal finance – the study of household and personal savings decisions as a method to enhance lifetime consumption Rate of time preference – the rate at which an individual or a household will discount the future over the present This rate is determined by individuals based on their inherent risk preference, their age and life expectancy, their expectations of future earnings, and the evolving time dynamics of their consumption needs Real interest rate – the return on a financial instrument in terms of its buying power adjusted for inflation Regression – a technique used to fit a dependent variable as a weighted sum of independent variables Relative prices – the measurement of the price of one good, service, or instrument at one time in comparison to the price of another good, service, or instrument, or the same item at another time Return – the expected surplus offered to entice individuals to hold a financial instrument Risk – in finance, the degree of uncertainty associated with exchanging a known sum for a larger future but less certain sum Savings – the difference between current income and consumption that can be set aside to support future consumption Say’s law – a principle widely interpreted to suggest that the production of goods and services generates sufficient income to ensure the demand for the goods and services This premise is often characterized as “supply creates its own demand.” Static – the consideration of mathematical, physical, or economic relationships that not change over time Transitory income – the share of income that is considered transitory and timevarying, as opposed to permanent income Treasury Inflation-Protected Securities (TIPS) – a method, originally proposed by Irving Fisher, that provides Treasury bond holders with indemnification from inflation 208 Glossary Uncertainty – the degree to which the value of future variables cannot be fully known today Utility curve – an unmeasurable but philosophically helpful construct that relates an individual’s level of happiness or wellbeing to the level of consumption of a good or service Volatility – a measure of the degree of uncertainty and unexplained movements of a variable over time Wealth line – a locus of points that connects various levels of consumption of goods over time for a given and known level of income or wealth Notes I say the Nobel Memorial Prize in Economics with some precision because most people now drop the term “memorial” from its name This is because the Prize is not technically a Nobel Prize It is awarded by a group distinct from the Nobel Committee, even if it is awarded in the same weeks and in the same location as are the prizes first contemplated by the Norwegian inventor of dynamite, Alfred Nobel In fact, only the Nobel Peace Prize is awarded in Norway The others are granted in Sweden, the country that was united with Norway in Nobel’s time The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was created in 1968 on the 300th anniversary of the Sveriges Riksbank, Sweden’s central bank That said, from hereon in, I shall refer to the award as the Nobel Prize in Economics, even if it is often a Nobel Prize in Finance Milton Friedman, Money Mischief: Episodes in Monetary History San Diego, CA: Houghton Mifflin Harcourt, 1994, p 37 Carl Menger, Principles of Economics, trans James Dingwall and Bert F Hoselitz New York University Press, 1981, p 146 Irving Norton Fisher, My Father – Irving Fisher New York: Comet Press, 1956 Ibid., p 11 Ibid., p 13 Ibid., p 21 Ibid., p 24 Ibid., p 25 10 http://history.state.gov/departmenthistory/people/stimson-henry-lewis, date accessed June 1, 2011 11 http://www.measuringworth.com/uscompare/result.php?use[]=DOLLAR& year_source=1888&amount=700&year_result=2010, date accessed June 1, 2011 12 Fisher, My Father, p 33 13 Ibid., p 42 14 http://en.wikipedia.org/wiki/William_Graham_Sumner, date accessed June 1, 2011 15 Fisher, My Father, p 45 16 Ibid., p 52 17 Ibid., p 60 18 http://www.measuringworth.com/uscompare/result.php?use[]=DOLLAR& year_source=1895&amount=1000&year_result=2010, date accessed June 1, 2011 19 Fisher, My Father, pp 45 and 46 20 Ibid., p 51 21 Ibid., p 85 22 John Rae, “Statement of Some New Principles of the Subject of Political Economy, Exposing the Fallacies of the System of Free Trade, And of some 209 9780230274136_27_notes.indd 209 8/30/2011 3:45:07 PM 210 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Notes other Doctrines maintained in the Wealth of Nations,” entered according to the Act of Congress in the year 1834, by Hilliard, Gray, & Co., in the Clerk’s Office of the District Court of the District of Massachusetts, http://socserv2 socsci.mcmaster.ca/~econ/ugcm/3ll3/rae/newprin.html, date accessed June 1, 2011 Fisher, My Father, pp 131, 132 Ibid., pp 133–4 John Geanakoplos, “The Ideal Inflation-Indexed Bond and Irving Fisher’s Impatience Theory of Interest with Overlapping Generations,” in Robert W Dimand and John Geanakoplos (eds), Celebrating Irving Fisher – The Legacy of a Great Economist Oxford: Blackwell Publishing, 2005 Irving Fisher, The Purchasing Power of Money New York: Macmillan, 1911 http://www.ssa.gov/OACT/TRSUM/index.html, date accessed June 1, 2011 Barclays Capital Research A, “Global Inflation-Linked Products: A User’s Guide,” February 20, 2008 Peter C.B Phillips, “Econometric Analysis of Fisher’s Equation,” American Journal of Economics and Sociology, 64(1) (2005), 125–68 Irving Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica, 1(4) (October 1933), 337–57 Fisher, My Father, pp 159–60 Irving Fisher, The Nature of Capital and Income New York: Macmillan, 1906 Irving Fisher, The Rate of Interest: Its Nature, Determination and Relation to Economic Phenomena New York: Macmillan, 1907 Fisher, My Father, p 179 Ibid., p 219 “Seriously Off Track: When Smart People Get the Future Wrong,” New York Times opinion page, December 27, 2010, http://www.nytimes.com/interactive/ 2010/12/27/opinion/2010127-predictions.html, date accessed June 1, 2011 Fisher, My Father, p 284 John Kenneth Galbraith, The Affluent Society New York: Houghton Mifflin, 1958, Chapter Roy Harrod, The Life of John Maynard Keynes New York: W.W Norton and Company, 1951 Ibid., p http://en.wikipedia.org/wiki/Amersham_Hall, date accessed June 1, 2011 Samuel Macauley Jackson (ed.), The New Schaff-Herzog Encyclopedia of Religious Knowledge New York: Funk and Wagnalls, 1905, p 1912 http://www.library.yale.edu/div/beecher.html, date accessed June 1, 2011 Harrod, Life of John Maynard Keynes, p 11 Ibid., p http://www.pbs.org/wnet/redgold/innovators/bio_keynes.html, date accessed June 1, 2011 Harrod, Life of John Maynard Keynes, p 10 Ibid., p 10 John Neville Keynes, The Scope and Method of Political Economy London: Macmillan, 1891 http://www.newworldencyclopedia.org/entry/John_Neville_Keynes, date accessed June 1, 2011 Notes 211 51 Harrod, Life of John Maynard Keynes, p 52 Ibid., p 13 53 “Eton – the establishment’s choice,” BBC News Online, London, September 2, 1998, http://news.bbc.co.uk/2/hi/uk_news/162402.stm, date accessed June 1, 2011 54 Ralph Nevill, Floreat Etona: Anecdotes and Memories of Eton College London: Macmillan, 1911 55 Harrod, Life of John Maynard Keynes, p 107 56 Irving Fisher, Mathematical Investigations in the Theory of Value and Prices New York: Cosimo Classics, [1892] 2007, Appendix III, “The Utility and History of Mathematical Method in Economics,” p 109 57 Harrod, Life of John Maynard Keynes, p 111 58 http://www.maynardkeynes.org/john-maynard-keynes-economist-1905-to1914.html, date accessed June 1, 2011 59 Harrod, Life of John Maynard Keynes, p 121 60 Ibid., p 122 61 http://www.maynardkeynes.org/john-maynard-keynes-economist-1905-to1914.html, date accessed June 1, 2011 62 John Maynard Keynes, A Treatise on Probability London: Macmillan and Company, 1921 63 http://www.maynardkeynes.org/john-maynard-keynes-reparations-probabilitygold.html, date accessed June 1, 2011 64 Frank P Ramsey, “A Mathematical Theory of Savings,” Economic Journal, 38(152) (December 1928), pp 543–59 65 Ibid., p 543 66 Ibid., p 555 67 Ibid., p 558 68 John Maynard Keynes, “Frank Plumpton Ramsey,” in John Maynard Keynes, Essays in Biography New York: W.W Norton, 1933 69 Thorstein Veblen, The Theory of the Leisure Class, Introduction by John Kenneth Galbraith Boston: Houghton Mifflin, 1973 70 Kenneth Galbraith, The Great Crash New York: Houghton Mifflin, 1954 (reprinted 1997), p 71 Ibid., p 72 Lionel Robbins, The Great Depression New York: Macmillan, 1934, p 53 73 John Carswell, The South Sea Bubble London: Sutton, 1993 74 Charles Amos Dice, New Levels of the Stock Market New York: McGraw-Hill, 1929 75 Galbraith, The Great Crash, p 18 76 American Magazine, June 1929 77 Galbraith, The Great Crash, p 70 78 Irving Fisher, The Stock Market Crash – and After New York: Macmillan, 1930 79 John Maynard Keynes, The General Theory of Employment, Interest and Money New York: Harcourt Trade, 1964, p 160 80 Fisher, The Stock Market Crash, p 176 81 Fisher, The Nature of Capital and Income, p 298 82 Gustave Le Bon, The Crowd: A Study of the Popular Mind New York: Macmillan, 1896 212 Notes 83 Paul Roazen, Freud: Political and Social Thought, 3rd edn New Brunswick, NJ: Transaction Publishers, 1999, p 228 84 Keynes, The General Theory of Employment, pp 161–2 85 William Worthington Fowler, Inside Life in Wall Street: On How Great Fortunes are Lost and Won with Disclosures of Doings and Dealings on Change, including the Secret History of the Noted Speculations since the Crash of 1857, the Great Rises and Panics of the Age, and How They Were Produced, Including Full Descriptions of the “Black Friday” of 1869, and an Inside View of the Great Panic of 1873 Hartford, CT: Dustin, Gilman, and Company, 1873, pp 322–3 86 http://www.archives.gov/education/lessons/fdr-inaugural/images/address1 gif, date accessed June 1, 2011 87 Keynes, The General Theory of Employment, Book 1, Chapter 3, section III 88 Keynes, A Treatise on Probability, p 10 89 Keynes, The General Theory of Employment, Book IV, Chapter 12, sections I and II 90 Ibid., Book VI, Chapter 24, section III 91 http://www.federalreserve.gov/newsevents/speech/bernanke20100827a htm, date accessed June 1, 2011 92 John Steele Gordon, “A Short Banking History of the United States,” Wall Street Journal, October 10, 2008, http://online.wsj.com/article/ SB122360636585322023.html, date accessed June 1, 2011 93 Harrod, Life of John Maynard Keynes, p 479 94 Ibid., p 485 95 Ibid., p 489 96 John Maynard Keynes, How to Pay for the War New York; Harcourt, Brace and Co., 1940 97 http://www.samuelbrittan.co.uk/text92_p.html, date accessed June 1, 2011 98 http://www.worldlingo.com/ma/enwiki/en/United_Nations_Monetary_ and_Financial_Conference, date accessed June 1, 2011 99 Harrod, Life of John Maynard Keynes, p 584 100 John Maynard Keynes, A Tract on Monetary Reform London: Macmillan, 1923, Chapter 101 Irving Fisher, “Is ‘Utility’ the Most Suitable Term for the Concept It is Used to Denote?” American Economic Review, (1918), 335–7 102 http://www.alumni.hbs.edu/bulletin/2000/april/profile.html, date accessed June 1, 2011 103 Franco Modigliani, Adventures of an Economist, New York: Texere LLC, 2001 104 Ibid., p 105 Ibid., p 106 Ibid., p 11 107 Franco Modigliani, “Liquidity Preference and the Theory of Interest and Money,” Econometrica, 12(1) (January 1944), 45–88 108 Modigliani, Adventures of an Economist, p 53 109 http://nobelprize.org/nobel_prizes/economics/laureates/1985/modiglianiautobio.html, date accessed June 1, 2011 110 Modigliani, Adventures of an Economist, p 68 Notes 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 213 Ibid., p 58 Keynes, The General Theory of Employment, p 94 Ibid., pp 127–8 Simon Kuznets, The National Product since 1869 New York: National Bureau of Economic Research, 1946, p 119 Arthur Smithies, “Forecasting Postwar Demand: I,” Econometrica, 13(1) (1945), 1–14 Franco Modigliani, “Fluctuations in the Savings Income Ratio: A Problem in Economic Forecasting,” National Bureau of Economic Research, 11 (1949), 370–443, at p 373 Dorothy Brady and Rose Friedman, “Savings and the Income Distribution,” in Studies in Income and Wealth, Volume X New York: National Bureau of Economic Research, 1947 Keynes, The General Theory of Employment, p 88 Modigliani, “Fluctuations,” pp 384–5 Modigliani, Adventures of an Economist, p 53 Roy Harrod, Toward a Dynamic Economics London: Macmillan, 1948 Roy Harrod, “An Essay in Dynamic Theory,” Economic Journal, 49 (March 1939), 14–33 Modigliani, Adventures of an Economist, p 69 Franco Modigliani and Richard Brumberg, “Utility Analysis and the Consumption Function: An Interpretation of Cross-section Data,” in Kenneth K Kuhihara (ed.), Post-Keynesian Economics New Brunswick, NJ: Rutgers University Press, 1954, pp 388–436 http://www.answers.com/topic/franco-modigliani, date accessed June 1, 2011 Modigliani, Adventures of an Economist, p 68 Franco Modigliani and Richard Brumberg, “Utility Analysis and Consumption Functions: An Attempt at Integration,” in Andrew Abel (ed.), The Collected Papers of Franco Modigliani: Volume 2, The Life Cycle Hypothesis of Saving Cambridge, MA: MIT Press, 1979, pp 128–97 “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1969.” http://nobelprize.org/nobel_prizes/economics/laureates/1969/, date accessed June 1, 2011 Kenneth Arrow, T Harris and J Marschak, “Optimal Inventory Policy,” Econometrica, 19 (1951), 250–72 Modigliani, Adventures of an Economist, p 110 “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1985,” http://nobelprize.org/nobel_prizes/economics/laureates/1985/, date accessed June 1, 2011 http://nobelprize.org/nobel_prizes/economics/laureates/1985/modiglianilecture.pdf, date accessed June 1, 2011 Francesco Giavazzi, “Professor Franco Modigliani: Nobel prizewinning economist and author of the ‘life-cycle theory of spending,’” The Independent, September 29, 2003, http://www.independent.co.uk/news/obituaries/professor-franco-modigliani-548827.html, date accessed June 1, 2011 Louis Uchitelle, “Franco Modigliani, Nobel-Winning Economist, Dies at 85,” New York Times, September 26, 2003, http://www.nytimes.com/2003/09/26/ 214 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 Notes business/franco-modigliani-nobel-winning-economist-dies-at-85.html, date accessed June 1, 2011 Milton Friedman and Rose Friedman, Two Lucky People University of Chicago Press, 1998 Ibid., p 19 Lanny Ebenstein, Milton Friedman New York: Palgrave Macmillan, 2007 Friedman and Friedman, Two Lucky People, p 21 Ibid., p 22 Ibid., p 23 Ibid., p 30 Ibid., pp 30–1 Ibid., pp 40–1 Milton Friedman and Simon Kuznets, Income from Independent Professionals New York: National Bureau of Economic Research, 1945, p 352 Milton Friedman, A Theory of the Consumption Function Princeton University Press, 1957, p 222 The Charlie Rose Show, December 26, 2005 Milton Friedman, “The Methodology of Positive Economics,” in Milton Friedman, Essays in Positive Economics University of Chicago Press, 1953 Friedman, A Theory of the Consumption Function, p 224 John Maynard Keynes, A Treatise on Money New York: Harcourt, Brace and Company, 1930 Milton Friedman and Anna J Schwartz, A Monetary History of the United States, 1867–1960 Princeton University Press, 1963 Friedman and Friedman, Two Lucky People, p 444 Ibid., p 445 Robert Skole, “En-Nobeling Milton Friedman,” Nation, January 22, 1977, p 68 Editorial letter published in the New York Times, October 14, 1975 Editorial, Wall Street Journal, December 19, 1975 “The Prize in Economics 1976 – Press Release,” http://nobelprize.org/ nobel_prizes/economics/laureates/1976/press.html, date accessed June 1, 2011 Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement New York: Harcourt Brace Jovanovich, 1980 Ibid., p 503 Charles Goodhart, “Obituary: Milton Friedman,” The Guardian, November 17, 2006, http://www.guardian.co.uk/news/2006/nov/17/guardianobituaries.politics, date accessed June 1, 2011 John Maynard Keynes, “Opening Remarks: The Galton Lecture,” Eugenics Review, 38(1) (1946), 39–40 Quote from the New York Times, March 19, 1940 Index Arrow, Kenneth, 163 Asymptotic, 205 Auspitz, Rudolf, 20 Autonomous consumption, 205 Baruch, Bernard, 83 Bernanke, Ben, 110, 112, 113 Böhm-Bawerk, Eugen von, 7, 8, 23, 41 Bond, 45, 47, 205 Brady, Dorothy, 138, 163, 174 Brumberg, Richard, 143, 144, 145, 151, 152, 154, 156, 159, 161, 162, 163, 199 Budget constraint, 205 Burns, Arthur F., 172 Calculus of variations, 205 Central bank, 109, 205 Classical model, 205 Cognitive dissonance, 205 Consumption, 34, 147, 148, 149, 150, 151, 174, 184, 205 Consumption tax, 205 Coolidge, Calvin, 56, 76, 79, 80, 86 Corporate finance, 205 Correlation, 205 Coupon rate c, 205 Cournot, Augustin, 18 Darwin, Charles, 54, 62 Deflation, 205 Derivative, 205 Differential equation, 205 Discount rate, 205 Dissavings, 205 Duesenberry, James, 139, 140, 163 Dynamic, 205 Edgeworth, Francis Ysidro, 18, 20, 22, 69 Einstein, Albert, 20, 87, 90, 143, 204 Equilibrium, 205 Face value F, 205 Federal Open Market Committee, 111, 206 Federal Reserve, 76, 77, 78, 81, 83, 108, 110, 111, 112, 113, 114, 162, 164, 172, 191, 205, 206 Fisher equation, 37, 38, 39, 40, 44, 45, 46, 47, 48, 49, 50, 51, 52, 87, 95, 120, 206 Fisher, Irving, 1, 2, 5, 10, 11, 12, 14–23, 25–8, 33, 34, 36–41, 43–76, 78–80, 83–6, 87, 89, 91, 92–6, 98, 113, 119–22, 125–30, 135, 138, 140, 141, 144, 154, 161, 164, 166, 170, 171, 172, 176, 177, 186, 196, 197, 199, 201, 202, 203, 204, 206, 207, 211 Fowler, William Worthington, 91 Freud, Sigmund, 90 Friedman, Milton, 1, 2, 5, 77, 132, 138, 147, 163, 166–8, 170–96, 199, 200, 201, 203, 204, 211 Friedman, Rose, 1, 2, 5, 77, 132, 138, 147, 163, 166–8, 170–96, 199, 200, 201, 203, 204, 211 Frisch, Ragnar, 162 Full employment, 206 Galbraith, John Kenneth, 60, 165, 190 Galton, Francis, 54, 62 Gibbs, Josiah Willard, 17 Gross domestic product, 206 Harrod, Roy, 63, 140 Hicks, John, 163 Homeostasis, 206 Homothetic, 206 Hoover, Herbert, 16, 57, 80, 83, 194 Hotelling, Harold, 174 Income, 22, 53, 138, 147, 148, 150, 151, 187, 188, 189, 206 Income tax, 206 Indifference curve, 206 215 9780230274136_28_ind.indd 215 8/30/2011 3:45:24 PM 216 Index Infinite time horizon, 206 Inflation, 38, 47, 206 Interest rate, 206 Intertemporal, 1, 35, 206 Jevons, William Stanley, 20, 26, 65, 69, 129 Jones, Homer, 82, 121, 173 Keynes, John Maynard, 1, 2, 56, 58–71, 72, 74, 80, 85–7, 89, 90–9, 102–5, 107, 110, 121–33, 135–41, 144, 153, 161, 163, 166, 167, 172, 174, 176, 177, 179, 181, 184, 190, 191, 195, 196, 197, 198, 199, 201, 202, 203, 204, 206 Keynes, John Neville, 61, 62, 63, 184 Keynesian model, 98, 146, 161, 199, 206 Knight, Frank, 173, 174, 177, 178, 203 Kuznets, Simon, 138, 139, 161, 163, 174, 179, 180, 194 Lawrence, Joseph, 83 Le Bon, Gustave, 90 Lieben, Richard, 20 Life cycle, 206 Life Cycle Model, 1, 144, 151, 159, 160, 161, 164, 166, 206 Lifetime income, 206 Liquidity preference, 206 Marginal propensity to consume, 206 Marginal propensity to save, 206 Marginal rate of substitution, 206 Marshall, Alfred, 63, 65, 69, 172 Marx, Karl, 6, 91, 195 Maturity, 207 Modigliani, Franco, 1, 2, 128–34, 137–45, 147, 151, 152, 154, 156, 159, 161–6, 168, 171, 172, 174, 176, 185, 186, 187, 188, 190, 196, 199, 200, 201, 203, 204 Mortgage-backed securities, 207 Myopia, 207 Newton, Isaac, 78, 87, 88 Nominal interest rate, 207 Optimal control, 207 Ordinary least squares, 207 Permanent income, 207 Personal finance, 3, 137, 159, 199, 207 Pigou, Arthur Cecil, 65, 66 Ponzi, Charles, 77, 81 Rae, John, 23 Ramsey, Frank, 1, 71, 72, 73, 74, 154, 156, 199 Rate of time preference, 207 Real interest rate, 207 Regression, 207 Relative prices, 207 Return, 47, 66, 207 Risk, 85, 165, 207 Robbins, Lionel, 77 Roosevelt, Franklin Delano, 16, 56, 57, 58, 92, 125 Savings, 72, 135, 138, 141, 147, 148, 149, 150, 151, 198, 207 Say, Jean-Baptiste, 86, 137, 207 Schultz, Henry, 174 Smith, Adam, 12, 13, 15, 41, 67, 195, 203 Smithies, Arthur, 138 Solow, Robert, 72 Spencer, Herbert, 54 Sraffa, Piero, 72 Static, 207 Stimson, Henry Lewis, 16 Tinbergen, Jan, 162 Transitory income, 207 Treasury Inflation-Protected Securities (TIPS), 47, 201, 207 Uncertainty, 208 Utility curve, 208 Veblen, Thorstein, 140 Viner, Jacob, 174, 175, 177, 178 Volatility, 208 Walras, Leon, 18, 20 Wealth line, 208 ... 3:30:30 PM The Life Cyclists We will begin with the early life and times of these great minds because it is apparent that their life experiences informed their great insights We then describe their.. .The Life Cyclists Great Minds in Finance Series editor: Professor Colin Read Titles include: The Life Cyclists The Portfolio Theorists The Pricing Analysts The Efficiency Hypothesists... 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