Jacob Marschak and the Cowles approaches to the theory of money and assets

Abstract

Jacob Marschak shaped the emergence of monetary theory and portfolio choice at the Cowles Commission (which he directed from 1943 to 1948, but with which he was involved already from 1937) at the University of Chicago, where he was the doctoral teacher of Leonid Hurwicz, Harry Markowitz and Don Patinkin, and then from 1955 at the Cowles Foundation at Yale University, where he was a senior colleague of James Tobin until moving to UCLA in 1960. Marschak’s later attempts to clarify the concept of liquidity and to emphasise the role of new information for economic behaviour date back as far as to his early experiences with hyperinflationary processes in the Northern Caucasus during the Russian Revolution. Marschak came to monetary theory with his 1922 Heidelberg doctoral dissertation on the quantity theory equation of exchange (published in 1924 as “Die Verkehrsgleichung”), and embedded monetary theory in a wider theory of asset market equilibrium in studies of “Money and the Theory of Assets” (1938), “Assets, Prices, and Monetary Theory” (with Helen Makower, 1938), “Role of Liquidity under Complete and Incomplete Information” (1949), “The Rationale of the Demand for Money and of ‘Money Illusion’” (1950), and “Monnaie et liquidité dans les modèles macroéconomiques et microéconomiques” (1955), as well as in Income, Employment and the Price Level (lectures Marschak gave at Chicago, edited by Fand and Markowitz, 1951a). We examine Marschak’s analysis of money within a broader theory of asset market equilibrium and explore the relation of his work to the monetary and portfolio theories of his doctoral students Markowitz and Patinkin and his colleague Tobin and to the revival of the quantity theory of money by Milton Friedman, a University of Chicago colleague unsympathetic to the methodology of the Cowles Commission.

Keywords:

• Jacob Marschak
• money in a theory of assets
• Cowles Commission
• Harry Markowitz
• James Tobin

JEL CLASSIFICATIONS:

• B22 History of Economic Thought since 1925: Macroeconomics
• B31 History of Economic Thought: Individuals
• E Macroeconomics and Monetary Economics

Acknowledgements

We gratefully acknowledge helpful comments from Perry Mehrling and other participants when this paper was presented to the European Society for the History of Economic Thought, ESHET conference in Lílle, May 24^th, 2019, from the late Olav Bjerkholt and from two anonymous referees.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Franco Modigliani, Marschak’s doctoral student at the New School, recalled in his autobiography that “Marschak was at once a great economist, a supreme teacher, and an exceptionally humane person … a connoisseur of economic theory with a certain bent for mathematical economics and statistics” (Modigliani 2001, 19).

2 See Marschak (1971, 48–49)

3 Whereas Marschak (1941c) later wrote an article on ‘Wicksell’s two interest rates’, surprisingly, Wicksell’s analysis in Interest and Prices (1898) was largely neglected in Marschak’s thesis.

4 See Marschak (1924, 356).

5 Interestingly, this was the first publication listed in the official information leaflet of the American Economic Association when Marschak was candidate for office as President-Elect in 1977.

6 Franklin Roosevelt’s New Deal mixed policies such as the National Industrial Recovery Act and Agricultural Adjustment Administration, targeting individual prices, wages and quantities, with policies such as raising the dollar price of gold, aimed at purchasing power and the price level. Marschak’s paper stressed that these variables were not independent of each other.

7 “For each of the r individuals in the market there are two sets of unknowns: (1) his best accessible balance sheet, or best accessible collection of m present assets a, b, …; and (2) his best accessible consumption plan, or best combination of n future consumption items x, y, … which we shall call for brevity ‘yields,’ because unfortunately ‘consumptions’ would be ungrammatical. A further set of unknowns are (3) the m market prices of assets: p (of a), q (of b), etc.” (Marschak 1938, 313).

8 Similarly, Markowitz, in his New Palgrave entry on mean-variance analysis (quoted by Tobin with Golub 1998, 70n), held “mean-variance approximations to be quite accurate for a variety of utility functions and historical distributions of portfolio returns.”

9 As Rutterford and Sotiropoulos (2016) document, the benefits of diversification had been recognized by practitioners long before theorists began to formalize the topic. See also Poitras (2000) on the early history of financial economics.

10 As Colin Read (2012, 23) reports, “Markowitz later professed that he was unfamiliar with this groundbreaking work of his supervisor.” However, citation of Marschak (1949a) in Markowitz’s earliest Cowles Commission Discussion Paper (Markowitz 1950) suggests that, while studying with Marschak, Markowitz did read Marschak’s articles even if he later forgot having done so.

11 Marschak (1938, 316, equation 4.4’). See note 7 for the notation.

12 Ivo Maes (1991) draws attention to Chambers (1934) as a striking contribution to portfolio theory parallel to and contemporary with Hicks (1935), but Marschak, Makower, Markowitz and Tobin do not appear to have noticed Chambers’s article. In addition to Hicks (1935), Makower and Marschak (1938) cited Hicks’s 1931 Economica article and 1933 Econometric Society paper (abstracted in Econometrica in Marschak 1934b), both preceding Chambers (1934). In contrast to the mathematical formalism of Marschak (1938), Hicks’s 1935 article (which influenced Tobin as well as Marschak) gave a verbal, intuitive account of the theory of money and assets in a world of risk and uncertainty. Hicks’s 1933 conference paper, on the application of mathematical methods to the problem, was never published, apart from the brief summary in Marschak (1934b).

13 Bernstein (1992, 60, 66–67, 165) also reported that Marschak took part in Markowitz’s thesis defense, that Tobin’s first encounter with the Cowles Commission was in 1948 as a discussant of a Marschak paper on statistics (Bernstein’s only mention of Marschak writing anything), and that at the New School Marschak encouraged Modigliani’s interest in quantitative methods.

14 The numbering of the economics series of Cowles Commission Discussion Papers, which had started with no. 201 in 1947, jumped from no. 299, the last working paper of 1950 (by Gerard Debreu), to no. 2001, the first of 1951, because the statistics series had been started with no. 301 in 1947 and the mathematics series with no. 401 in 1949, suggesting unduly modest expectations about the scale of the commission’s future activities. The Cowles Commission Papers, a series of reprinted articles started in 1943, was labelled New Series, implying the existence of a previous series that has not been traced.

15 Friedman nonetheless emphasized that “Marschak was a warm, outgoing human being … a truly learned person who had wide interests and contributed to different areas of economics. He and I both taught courses in money in the department and as a result we frequently served together on departmental committees to draw up and grade the Ph.D. preliminary examination in the field of money, always amicably – though we often differed in our judgment of individuals.” In contrast, Friedman considered Koopmans “rather cold and authoritarian … Unlike Marschak, he was much less cooperative in departmental matters” (Friedman and Friedman 1998, 198). Bernstein (1992, 60) recounts Markowitz’s recollection of Friedman and Marschak disagreeing on whether to accept Markowitz’s dissertation because Friedman felt that it was not economics. David Fand, who collaborated with Markowitz on editing Marschak’s lectures, also collaborated with another graduate student to turn Friedman’s lectures on price theory into a provisional textbook.

A touching portrait of Marschak is also given by Paul Samuelson (1988, 323) who characterizes Marschak “as a warm and tireless member of the working parties seeking scientific truth.”

16 Lange (1944) had a mathematical appendix on the stability of economic equilibrium, which was issued as Cowles Commission Paper No. 8, but the main text of the book did not use mathematical notation. In 1945, Lange, a socialist from Poland, left the Cowles Commission and University to Chicago to become envoy in the United States for the new Communist government of Poland and then to return to Poland as chair of a council of economists advising the planning commission.