Jacob Marschak Research Articles

Review of Key Risk and Uncertainty Theories Influencing Contemporary Financial Economics

Ironically, the 2008 credit crisis and the subsequent global financial meltdown were brought about by efforts of those whose stated purpose was to manage risk. Somehow, the efforts of financial regulators to manage and contain uncertainty created the greatest downside risk experienced since the Great Depression. At this juncture in financial history, it is purposeful to examine the meaning of risk and uncertainty, how it is priced, the assumptions one makes when one uses market-priced risk hedges, and the degree to which the modern science of financial risk management informs or obfuscates the very nature of risk. This paper performs such a retrospective analysis of key risk theories and how they impact financial markets, through the developments of innovators: Daniel Bernoulli, Carl Friedrich Gauss, Louis Bachelier, Jacob Marschak, Harry Markowitz, William Sharpe, Paul Samuelson, Fischer Black, and Myron Scholes. This paper makes an additional contribution to the literature by identifying unresolved issues that require additional research to improve risk management in financial markets. In particular, this paper concludes that while the author have numerous tools to manage risk, they have few tools to manage uncertainty, the latter of which is where future research should be undertaken.

European émigrés and the ‘Americanization’ of economics

The development of economics since 1945 was marked by an increasing internationalization that was simultaneously in large part a process of Americanization. This article focuses on the role refugee economists from Continental Europe played in the rise of American economics. It focuses on the emigration of German-speaking economists after 1933; and then deals with the special case of Jacob Marschak who emigrated twice, first from the Soviet Union in 1919 and then from Nazi Germany, and exerted a greater influence in Britain and in the USA. Finally important contributions by émigré economists to game theory, public finance and development economics are reflected.

Rationalizing Human Organization in an Uncertain World: Jacob Marschak, from Ukrainian Prisons to Behavioral Science Laboratories

Jacob Marschak (1898–1977) had an enormous impact on the development of postwar economics, both as an intellectual mentor of Nobel Prize winners such as Kenneth Arrow and Franco Modigliani and as forerunner and institutional organizer of several research programs, most famously at the Cowles Commission. Nevertheless, he remains understudied by historians. This article uncovers the salient characteristics of his scientific vision in the forties and fifties, at the apex of his influence on the profession: his definition of economics as the science of rational choice; his emphasis on mathematization, experimentation, and interdisciplinarity as the proper methodology; his view of uncertainty as the main characteristic of the social environment; and his claim that economists should be “social engineers.” The development of such a vision is studied against the background of Marschak's biography and of his understanding of the vicissitudes of the twentieth century, in particular his socialist beliefs and his repeated experience of emigration.

A Tale of Two Cities

Once upon a time, macroeconomics was a field organized around money and the equation of exchange, as in Fisher 1911. Today, the field is organized instead around finance and the intertemporal Euler equation. This article tells the story of how we moved from then to now, a story that revolves around the key role played by Jacob Marschak and the rise of monetary Walrasianism.

Economic Theory and the World of Practice: A Celebration of the (S,s) Model

It was the question of how best to balance the costs of ordering and of running out of stock against the costs of holding excess inventory that inspired Kenneth Arrow, Theodore Harris, and Jacob Marschak to introduce the (S, s) model in 1951. In this celebratory article, we show how this model not only answered important practical questions, but also opened the door to a quite startling range of important and challenging follow-up questions, many of great practical importance and analytic depth. The (S, s) model has become one of the touchstone models of economics, opening new vistas of applied economic theory to all who internalize its structure. Today it is universally applied to solve questions faced in inventory control. The core model elements, uncertainty and fixed costs of adjustment, are ubiquitous, which has resulted in its becoming the general purpose economic model of discrete adjustment. The (S, s) model has also become a profound source of inspiration for macroeconomists seeking to understand the role that discrete microeconomic adjustments play in macroeconomic fluctuations. Looking forward, we foresee rapid growth in the use of (S, s) modeling to aid households making complex and costly financial decisions, such as when and how to terminate a mortgage. In the projected era of “household operations research,” new modeling challenges will arise due to enriched feedback from the world of practice.

Reflections on the New School’s Founding Moments, 1919 and 1933

Ira Katznelson Reflections on the New School’s Founding Moments, 1919 and 1933 FROM ITS VERY BEGINNING, THE NEW SCHOOL HAS WRESTLED WITH the consequences of unfreedom, fear, and insecurity, working to advance John Milton’s ringing affirmation of 1643: “Give me liberty to know, to utter, and to argue freely according to conscience, above all liberties.” It has tried to emulate Thomas Huxley’s call, when he was installed as rector of Aberdeen University in 1874, that “universities should be places in which thought is free from all fetters, and in which all sources of knowledge and all aids of learning should be accessible to all comers, without distinction of creed or countiy, riches or poverty.” This singular university has touched many lives through its active values. It certainly has touched mine, offering the special privilege of serving as dean of the Graduate Faculty at a moment of transition, opportunity, and growth. I arrived in the 1983-1984 academic year. The distance of a half century from the founding made it impossible for me to know the earliest members of the faculty, with one exception: the sociologist Hans Speier, the youngest and last surviving founder of the University in Exile, who had been a member of the Graduate Faculty from 1933 to 1942 before serving in the Office of War Information and the State Department’s Occupied Areas Division. Professor Speier kindly conveyed a sense of what the first decade had been like. I also benefited from conversations with members of the second and third waves of émigré faculty and students, who shared their histories and expertise social research Vol 76 : No 2 : Summer 2009 395 with warmth and generosity. These colleagues included the Austrian jurist and political scientist Erich Hula, who arrived soon after the 1938 Anschluss, and the Stuttgart-born Adolph Lowe, a veteran of the First World War who joined the Graduate Faculty as professor of economics and as the director of a new Institute for World Affairs in 1940, having come from the University o f Manchester, where he first had found refuge. I also enjoyed conversations with the Italian New School student Franco Modigliani, who completed his PhD under Jacob Marschak’s supervision in 1944 and was awarded the Nobel Prize in Economics in 1985, and with Hans Jonas, who served as Alvin Johnson Professor of Philosophy at the Graduate Faculty from 1955 to 1976 and who first had met Hannah Arendt when they both were graduate students of Edmund Husserl and Martin Heidegger in Marburg in the mid-1920s, before Heidegger reminded the world in 1933 that even the greatest of minds were susceptible to the blandishments of National Socialism. One of the grand opportunities I experienced as dean was the chance to address the two fiftieth-anniversary celebrations that marked the 1933-1934 founding of the University in Exile. These gatherings were convened by Jonathan Fanton in April and December 1984 at the First Presbyterian Church on Fifth Avenue, and in Berlin’s strik­ ing Staatsbibliothek, in the large hall named for Otto Braun, the Social Democrat who served as prime minister of Prussia from 1920 to 1932 and who him self emigrated to Switzerland in 1933 when Hitler came to power. The New York gathering awarded the Doctor of Humane Letters degree to Hans Speier and to six exceptional contributors to human rights, including South Africa’s Helen Suzman; the Marylcnoll Sisters, for their courageous work in Central America; and Poland’s Adam Michnilc. Erich Hula and Adolph Lowe served as honorary marshals. The Berlin ceremony and commemorative seminar included a memorable talk byJurgen Habermas on German academic culture and the impact of the absence of a once-vibrant Jewish intellectual and cultural presence, and a moving account of personal and scholarly duress and renewal by Aristide Zolberg, the first holder of the New School’s University in Exile Chair, awarded by the city of Berlin. 396 social research The commemoration’s highlight was an address by Richard von Weizsäcker, who received an honorary degree for his commitment, as the citation said, “to the ideals exemplified by the University in Exile: the freedom of intellectual inquiry, the defense of human...

From the Editor…

All of the papers in this issue focus on the value of obtaining information about uncertainties. We begin with an article by J. Eric Bickel on “The Relationship Between Perfect and Imperfect Information in a Two-Action Risk-Sensitive Problem.” Next, is an article by Philippe Delquié on “The Value of Information and Intensity of Preference.” Our third article, which uses an example of an oilfield decision to demonstrate an approach to “Valuing Future Information Under Uncertainty Using Polynomial Chaos,” is by Michael Prange, William J. Bailey, Benoit Couët, Hugues Djikpesse, Margaret Armstrong, Alain Galli, and David Wilkinson. In the final article, Thomas Eppel and Detlof von Winterfeldt describe the calculation of value of information about the contents of waste storage tanks in “Value-of-Information Analysis For Nuclear Waste Storage Tanks.” Since information is the topic of this issue, our trivia question is about the late Jacob Marschak, from whom I learned about the economics of information and about clarity of thought.

THE RISE AND FALL OF EXTRANEOUS ESTIMATION: LESSONS FROM ECONOMETRIC HISTORY?

It is possible to view econometric history as the retrospective assessment of intellectual resource allocations. This paper uses such a perspective to examine the history of extraneous estimation. Independently proposed by Marschak (1939, Econometrica 7, 332–335) and Wold (1940, Efterfrågan på jordbruksprodukter och dess känslighet för prisoch inkomstförändringar (The demand for agricultural products and its sensitivity to price and income changes)), extraneous estimation was widely used as a collinearity solution in demand analysis from 1950 to 1980. We give a detailed account of the origins of this procedure and the theoretical work that clarified the statistical structure that underpinned it. The subsequent literature is then assessed in terms of the optimal use of available econometric tools and the interaction between theory and applications. We find that optimal econometric procedures were rarely used and that theoretical refinements continued to be published well after extraneous estimation had ceased to be a useful tool for demand analysis.An earlier version of this paper titled “To Pool or Not to Pool? Why Is That Still a Question?” was presented at the Thirteenth Annual Meeting of the Canadian Econometrics Study Group, University of Waterloo, September 21–22, 1996. I thank Robin Carter for his comments at that presentation. Another version titled “The Optimum Amount of Econometrics” was presented on October 31, 1998, at Concordia University on the occasion of Gordon Fisher's seventieth birthday. I am indebted to Lady Giovanna Stone and Peter Jones of King's College Library for arranging access to Sir Richard Stone's papers and to the staff of the UCLA Research Library for access to the Jacob Marschak Archive. James Tobin was kind enough to share some of his recollections of the “extraneous estimation” period. George Szava-Kovats and Chris Minns provided able research assistance, and Charlene Hill typed the manuscript with her customary efficiency. Colin and Sally Ash, Reinhold Bergstrom, Jim Hamilton, Balder von Hohenbalken, Joe Ostroy, and Martin Weale provided help of the sort that does not lend itself to detailed elaboration. An earlier version of the paper had the benefit of a close and perceptive reading by John Aldrich. The referees' and editor's comments have also helped shape the paper into its present form, and I thank them for their contributions.

Patinkin, the Cowles Commission, and the theory of unemployment and aggregate supply

The paper provides an account of Don Patinkin's long-time search for an explanation of the notions of an aggregate demand constraint and unemployment under the assumption of a perfectly competitive goods market. It is argued that Patinkin's quest is reflected on the development of the concept of an aggregate supply function in the goods market. Patinkin's interpretation of aggregate supply and unemployment is compared to similar ideas put forward by Jacob Marschak, Trygve Haavelmo and Lawrence Klein, his former colleagues at the Cowles Commission in Chicago.

The Genesis of “Optimal Inventory Policy”

I have been asked to write on the steps leading to the paper by Theodore E. Harris, Jacob Marschak, and myself (1951), “Optimal Inventory Policy.” The account will be brief, for two reasons: (1) The origins are rather simple; (2) the event happened a long while ago, the details are not as clear in my memory as might be desired, and my records for the period appear to be nonexistent (I am not too sure that much of the relevant history ever got into my file, because most arrangements were made orally). Let me give a brief account of my whereabouts and affiliations during this period because they are relevant to the story. In fact, my involvement in inventory research could be described as a confluence of chance events. I had started my graduate study at Columbia University in 1940. My main interest was mathematical statistics; one of the few teachers was Harold Hotelling. However, there was then no Department of Statistics anywhere in the United States; Hotelling’s official position at Columbia was Professor of Economics. He had, of course, written several very famous papers on theoretical economics; in addition, Columbia did have the view that statistics was going to be very important in economic analysis. I first enrolled in the Department of Mathematics, but Hotelling made it clear to me that he had no influence in that department with regard to getting scholarship aid, and so I switched to the Department of Economics. Under Hotelling’s influence, the compulsory exposure to economics, and the evolution of my own interests, I became more involved in economic theory. I also had the pleasure and honor of taking courses with Abraham Wald, who had been hired by Hotelling with funds from outside the university. My studies were interrupted by World War II. I volunteered for military service and spent a little over three years on duty as a weather officer. While in the military, I received one of the first documents outlining the idea of sequential statistical analysis, as developed by Wald, and was excited by it both for practical reasons and for the intellectual horizons it opened up. I returned to graduate study in January 1946 and started work on a dissertation. None of my ideas seemed to me sufficiently good. In the meantime, I had acquired a reputation as a very good student, and I received an offer from Jacob Marschak, Director of the Cowles Commission for Research in Economics, then located at the University of Chicago though not formally a part of it. Marschak also had the position of Professor of Economics at Chicago. After stalling for a while, hoping to finish a thesis, I joined the Commission in April 1947. I met, almost immediately, a graduate student, Selma Schweitzer. Within a few months, we were married and are still enjoying our happiness. My wife had been a junior researcher at the United States Department of Agriculture; she worked there for the distinguished mathematical statistician Meyer A. Girshick, who had received his Ph.D. under Hotelling. His work overlapped the econometric research program of the Cowles Commission; he visited the Commission and Selma. He was leaving the Department of Agriculture to go to a project that developed into the RAND Corporation. After we met, he invited me to spend the summer of 1948 at RAND. He had also invited David Blackwell, and the three of us started trying to understand systematically sequential analysis from a decision-theoretic viewpoint. We wrote a paper in which was clearly displayed the recursive nature of the optimization problem (Arrow et al. 1949). That is, each stage involved a choice of actions and a random event, which together changed the prospects for the future. However, the problem at each stage was described in terms of a few parameters, and only these were altered by the outcome of the previous stage. Sequential analysis was a special case of what Richard Bellman a few years later termed, “dynamic programming” (Bellman 1957); indeed, he has credited our paper with suggesting the general formulation to him. (That summer was very fruitful in my research. As part of RAND’s efforts to understand the general concept of “military worth,” i.e., “national interest,” I was led to pose the problem of social choice and to demonstrate the impossibility of its general resolution. I had finally found a suitable dissertation topic.)

The Invention of the Independence Condition for Preferences

This paper discusses the history and interrelations of three central ideas in preference theory: the independence condition in decision under risk, the sure-thing principle in decision under uncertainty, and conjoint independence for multiattribute decisions and consumer theory. Independence was recognized as an important component of decision under risk in the late 1940s by Jacob Marschak, John Nash, Herman Rubin, and Norman Dalkey, and first appeared in publication in Marschak (Marschak, J. 1950. Rational behavior, uncertain prospects, and measurable utility. Econometrica 18 111–141.) and Nash (Nash, J. F. 1950. The bargaining problem. Econometrica 18 155–162.). The sure-thing principle can be credited to Savage (Savage, L. J. 1953. Une Axiomatisation du Comportement Raisonnable Face à l'Incertitude. Colloq. Internal. Centre National Rech. Sci. 40 Econométrie 29–40; Savage, L. J. 1954. The Foundations of Statistics. Wiley, New York (2nd edn., Dover, New York, 1972.). Conjoint independence for consumer theory was introduced by Sono (Sono, M. 1943. The effect of price changes on the demand and supply of separable goods (in Japanese). Kokumin Keisai Zasshi 74 1–51.) and Leontief (Leontief, W. W. 1947a. A note on the interrelation of subsets of independent variables of a continuous function with continuous first derivatives. Bull. Amer. Math. Soc. 53 343–350; Leontief, W. W. 1947b. Introduction to a theory of the internal structure of functional relationships. Econometrica 51 361–373.); a form of it can also be recognized in Samuelson (Samuelson, P. A. 1947. Foundations of Economic Analysis. Harvard University Press, Cambridge, MA.), presented earlier in Samuelson (Samuelson, P. A. 1940. Foundations of analytical economics, the observational significance of economic theory. Ph.D. dissertation, Harvard University, Boston, MA.). Independence and the sure-thing principle are equivalent for decision under risk, but in a less elementary way than has sometimes been thought. The sure-thing principle for decision under uncertainty and conjoint independence are identical in a mathematical sense. The mathematics underlying our three preference conditions has an older history. The independence condition for decision under risk can be recognized in the characterization of “associative means,” and conjoint independence for multiattribute decisions in solutions to the “generalized associativity functional equation.”

Games Economists Play: A Noncooperative View

* For some thirty years following World War II, most bright young economists did not go into industrial organization. It was not hard to see why this was so. The quick, big payoffs in economics tend to go to theorists, and industrial organization was a subject in which theory was not only unsatisfactory, but moribund. The promise of the Chamberlin-Robinson revolution of the early 1930s had not been fulfilled, and, while institutional and verbaltheoretic writings on the subject were sometimes illuminating, there was no hard analytic theory formalizing the structure-conduct-performance paradigm. Oligopoly, in particular, showed no signs of analytic tractability. Today, the atmosphere is altogether different. The profession is full of young theorists whose principal occupation is industrial organization. Indeed, industrial organization has become the hot topic for microtheorists. Journals, meetings, and seminars abound in research on oligopoly, and, judging by the market, this is a booming industry. Of course, the principal reason for the change is the rise of game theory and its applications in these areas. Von Neumann and Morgenstern's great work was published in 1944 and hailed immediately by theorists (von Neumann and Morgenstern, 1944). Jacob Marschak, indeed, stated in reviewing it (Marschak, 1946, p. 1 15 ): Ten more such books and the progress of economics is assured. Nevertheless, it was not until the last decade that game theory came to the ascendant as the premier fashionable tool of microtheorists. That ascendancy appears fairly complete. Bright young theorists today tend to think of every problem in game-theoretic terms, including problems that are easier to deal with in other forms. Every department feels it needs at least one game theorist or at least one theorist who thinks in game-theoretic terms. Oligopoly theory in particular is totally dominated by the game-theoretic approach. The field appears to be in an exciting stage of ferment. To understand why I believe that such excitement is not warranted, it is necessary to step back, briefly review the history of oligopoly theory before the game-theory revolution, and consider what it is that one wants theory to deliver.

Demand and supply values of information

To further develop the contributions by Kenneth Arrow, Jacob Marschak, and others on information economics, this paper aims at clarifying the concept of the value of information from both demand and supply aspects. Given a logarithmic utility function of a single decision maker, demand and supply values of information are proved to be the explicit functions of the amount of information in Shannon's measure. A comparison is also made between alternative schemes of payment for information, i.e., the payments after and before the investment decision.

Mixed models, random utilities, and the triangle inequality

A new probabilistic binary choice model, which we call the mixed model is proposed. This model is used to give an interpretation of probabilistic choice behavior in terms of complete and partial orders. The model is used as a guide to disprove Jacob Marschak's conjecture that the binary random utility model is equivalent to the triangle inequality. Another result is presented concerning the relation between moderate stochastic transitivity and the triangle inequality.

Jacob Marschak's contributions to the economics of decision and information

Jacob Marschak's contributions to the economics of decision and information

J. Michael Montias' The Structure of Economic Systems

* J. Michael Montias' book Structure of Economic Systems is an ambitious and important contribution to the literature on comparative economic systems. It also has ramifications for the study of industrial organization and, for that matter, of complex economic organizations quite generally. Inasmuch as the distinctive approach which Montias takes involves a study of the interface between organization theory and (p. 5), one might anticipate that this book would elicit wide interdisciplinary interest. It draws, however, very selectively from the economics and organization theory literatures. Unsurprisingly, the book relies extensively on Montias' earlier work (including his collaboration with Tjalling Koopmans). Other scholars upon whose work he greatly relies are Jacob Marschak and Roy Radner, Martin Weitzman, and Janos Kornai. It is not accidental that these authors are all associated with mathematical modeling approaches to the study of organizations. Montias observes that when faced with a choice between a clear articulation of a simple relationship and a realistic description of a complex process, I have generally opted for the former (p. 6). This is consonant with prevailing preferences among economists for hard analysis over what is sometimes referred to as story telling. This preference for mathematical modeling is traceable to what is often a justifiable sense that propositions which are derived less rigorously are inherently suspect. Such a position on verbal versus mathematical argument has been expressed by Herbert Simon (1957) as follows: The of mathematics is an that does not parade imaginary riches before the world. . . . When we cannot solve the system, we can at least be sure which questions we can answer and which we cannot and we are protected from reaching invalid conclusions whose error is concealed by the vagueness of a verbal formulation. statement was written in 1957, when Simon still entertained hopes that much of social science could be reworked to advantage in the language of nonlinear differential equations. Simon's interests have since gone off in different directions, however, and Simon's disciples and fellow travelers have failed to deliver on these aspirations. Possibly the only alternative to honest poverty is disreputable (inflated, pretentious, or otherwise suspect) verbal analysis. But inasmuch as the twenty years which have expired since Simon's pronouncement have brought only meager progress towards a full blown mathematical social science (by which I mean one that is not preoccupied with toy problems),' and since marking time until new

Decision and Organization. A Volume in Honor of Jacob Marschak. Edited by C.B. Mc Guire and Roy Radner. Studies in Mathematical and Managerial Economics, volume 12. Amsterdam, London, North-Holland Publishing Company, 1972 X p. 361 p., fl. 63.00.

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Decision and Organization: A Volume in Honor of Jacob Marschak.

Decision and Organization: A Volume in Honor of Jacob Marschak.

Decision and Organization. A Volume in Honor of Jacob Marschak.

Decision and Organization. A Volume in Honor of Jacob Marschak.

Decision and Organisation: A Volume in Honor of Jacob Marschak.

Journal Article McGuire (C. B.) & Radner (R.), (Eds.). Decision and Organization Get access Decision and Organisation: A Volume in Honor of Jacob Marschak. Edited by C. B. McGuire and R. Radner. (Amsterdam: North Holland Publishing Company, 1972. Pp. x + 361. Dfl. 63.00.) B. J. Loasby B. J. Loasby University of Stirling Search for other works by this author on: Oxford Academic Google Scholar The Economic Journal, Volume 82, Issue 328, 1 December 1972, Pages 1414–1416, https://doi.org/10.2307/2231324 Published: 01 December 1972