Most of all, I hope this puzzle will be fun, but I also hope it will somehow be a bit enlightening.
It’s a sort of “who am I?” puzzle, but with a twist:
Back in the interwar period, a famous British economist modeled a problem that can occur at certain times and places. He then suggested what sort of public policies could address this problem.
Many decades later, another brilliant economist saw that the early theory had misconstrued the actual nature of the problem. He wrote a paper re-conceptualizing what the problem was actually all about.
Along with this new formulation came a new a new policy approach, which might not involve as much government action. However this brilliant economist did not stop there, he also recognized that this “first best” solution might also be impractical in many situations, and that the original policy proposals recommended during the interwar period might actually be appropriate in many cases, as a sort of second best option.
I suppose this puzzle is not all that difficult for someone familiar with economics. But let me make it a bit more difficult by asking for two answers to the puzzle. I want the names of two modern economists who each have first-rate intuition, and who each radically transformed our understanding of a longstanding problem in the way I just described, not just one economist.
Note to commenters. I’m going to make an unusual request, and ask people to hold off on naming just a single person for a day, until we give people a chance to find both names at once. So please only leave a comment if you have both names. I’d rather have the puzzle not be solved “by committee”, if possible. It makes it more challenging.
READER COMMENTS
Eric Rall
Mar 16 2018 at 3:34pm
The interwar British economist is Lord Keynes.
Milton Friedman and Paul Samuelson both fit the bill for the modern economist.
Jeff G.
Mar 16 2018 at 3:44pm
Just to clarify, the two modern day economists transformed our understanding of the same problem as the original economists? Not just any longstanding problem.
Intern looking for a paid position
Mar 16 2018 at 3:47pm
Pigou and Coase, of course.
Scott Sumner
Mar 16 2018 at 6:39pm
I’m looking for two postwar economists who changed the way we view the nature of two very different problems. Name the two economists, how the two problems were originally understood, and how the two problems are understood today. Also explain why the original solutions are now viewed as applying only under certain restricted situations.
One is pretty easy, but the other is much harder.
Timothy Hopper
Mar 16 2018 at 8:07pm
I also thought Keynes – Friedman and Pigou – Coase. I thought no one else might have mentioned Pigou – Coase (only 4 comments at the time) then saw Intern’s comment.
So for fun, some other possibilities:
Whichever interwar economist recommended the Smoot–Hawley Tariff – Paul Krugman.
Irving Fisher (compensated dollar plan) – John Taylor (Taylor Rule with weight on inflation less than 1, i.e. partially compensated dollar.)
Benito Mussolini – Donald Trump. Mussolini was initially an actual Socialist, while Trump praises business over government but then is an economic interventionist.
Also: Smoot and Hawley – Donald Trump.
Timothy Hopper
Mar 16 2018 at 8:11pm
On second reading, I missed the word “British” in the original post (Keynes and Pigou are obvious without it.) And I took a slightly expansive definition of the word “economist”.
dlr
Mar 16 2018 at 9:12pm
I agree Pigou/Coase fits. Original conception is that externalities were a cost from a villain upon a victim efficiently remedied by regulation. Update is both sides of externalities are symmetric victims and the efficiency of any solution depends importantly on bargaining costs. In many cases this might imply no intervention with the most efficient solution internalized. Second best reversion to original solution can apply with high enough transaction costs.
I’ll also go with Keynes/Krugman on the liquidity trap. Original conception is that standard monetary policy of swapping money for bonds can become ineffective in a depression and require fiscal intervention. Update is that even at the zero bound a liquidity trap is really an expectations trap and what matters is central bank credibility over time rather than what they are swapping at the moment. Promising to be irresponsible is the first best solution, but if that doesn’t work then second best reverts to fiscal policy.
Rajat
Mar 17 2018 at 12:59am
I also vote for Coase as one.
The other one sounds like Krugman, based on what we know about your views on Krugman’s intuition (“first-rate”), your reference to a “paper” (his May 1998 paper) and the first-best/second-best approach (which sounds very much like Krugman’s view).
The argument against Krugman is based on the requirement to have “radically transformed our understanding of a longstanding problem”. I’m no economic historian, but did Krugman really do that? Maybe he did for the Keynesians, but I thought that well before 1998 most economists had rejected old Keynesianism and accepted Friedman’s view that the Fed could have done more during the Depression. Maybe by 1998, Friedman’s view was under threat by the Japanese experience and so we needed Krugman to remind us of what to do? On the other hand, in December 1997, Friedman was published in the WSJ on Japan explaining what Japan should do (reprinted in the April 1998 Hoover Digest article you often cite). So was it Friedman? I’m just not aware of if or when Friedman ever saw the case for fiscal stabilisation policy.
Or perhaps Krugman’s contribution was to develop and formalise the Friedman-based conventional wisdom in a model that was acceptable to academics operating in the NK paradigm? On balance, I vote for Krugman.
Antischiff
Mar 17 2018 at 7:41am
Dr. Sumner,
Most of Friedman’s career was post-study war, so I offer Friedman and Krugman.
An Igyt
Mar 17 2018 at 10:21am
I thought right away Keynes-Lucas. Many will raise an eyebrow at the notion that Lucas “recognized that this ‘first best’ solution might also be impractical in many situations, and that the original policy proposals recommended during the interwar period might actually be appropriate in many cases, as a sort of second best option,” but I think it could be defended if you aren’t insistent on distinguishing “policy” from “action”.
The Pigou-Coase suggested by others is a near-perfect fit. But the puzzle suggested that there were two post-war figures and just one inter-war…
Scott Sumner
Mar 17 2018 at 2:34pm
Everyone, Thanks, lots of good answers. See my newer post.
Rajat, I also thought the whole liquidity trap thing had been rejected, but in 2008 I discovered otherwise.
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