Interview of Stanley Fischer, by Olivier Blanchard, Russell Sage Foundation,
May 2004.
O: When and why did you decide to go into economics?
I was a schoolboy in what was then Southern Rhodesia, later Rhodesia, later yet
Zimbabwe. The educational system was British, which meant you had to
specialize during the last two years of high school. I originally specialized in
physics, math, and chemistry, thinking I would become an engineer or maybe a
scientist or a mathematician. At some point I had a conversation with the son of
friends of my parents. He had studied at the LSE, and told me I should become
an economist. He gave me a few lessons, which were interesting – I think we
used Samuelson’s introductory book. Also, amazingly enough, I took an
economics course during my last year at high school.
O: An economics course at school. This sounds very unusual?
Well, this was the British sixth form, where students have to specialize. The
teacher was extremely good. We studied Hicks’ Social Framework, and I was
introduced to Keynes. In the vacation between school and college I read the
General Theory and was hooked by Keynes’ use of language, although I’m not
sure I understood the book. I had decided to study in England and ended up at
the LSE.
O: Why LSE? Why not the US?
We didn’t think of the US then. For us England was the center of the universe.
My teachers told me the choice was Cambridge or the LSE. I ended up at the
LSE partly because the person who had introduced me to the subject had gone
there and partly because they were willing to give me a very early decision (the
academic year in the southern hemisphere ends in December instead of June).
Although the LSE had the reputation for being left wing, that was not true of the
economics. We took very conventional courses. Richard Lipsey taught the first
principles course, and he was very good. Frank Paish taught an applied
economics course. I recall his showing his slides early in 1963 and saying: “You
see it goes up and it goes down and then it goes up again. And that’s why we’re
going to have a balance of payments crisis in 1964. “ The crisis took place on the
appointed date, and I was very impressed.
O: This was an exciting time at LSE. Did you pick up a sense of that excitement?
I had a great time at the LSE, this was my first experience of the big world, and I
took advantage of London and of the continent. But I was quite unsophisticated
about academic life and intellectual life. That was not something you picked up
in my high school—good as it was as a teaching institution. I thought the main
aim of studying was to get through the exams.
In retrospect I realize there was intellectual excitement there at the time. The
LSE was then in the midst of the controversy about the Radcliffe committee
report. Richard Sayers, who was at the LSE, was the main intellectual force
behind the report. It suggested that monetary policy worked, and was later seen
as the beginning of the revival of monetary policy in the UK. But it was full of
qualifications. It featured a three-gear view of monetary policy: if you changed
gear drastically enough, you could have an impact. Still, it marked the end of
the period in which it was believed in the UK that monetary policy didn’t work,
and the beginning of a new era in which monetary policy has increasingly been
seen as a powerful driver of the economy.
Karl Popper was the dominant force in the philosophy department, and
everyone became a Popperian in methodology. Phillips of the Phillips Curve
was there, though I didn’t take a course from him, but I did see his machine of
the economy. And there was a lot of work being done on the Phillips curve.
Other memories include a lecture by Bob Solow. He must have been about 40 at
the time. But he looked much younger, and was very funny, even in talking
about production functions. I remember him saying: “When I say K, I mean
Kuznets. Capital is that thing that Kuznets measures. “ I also remember on one
occasion being incredibly excited when someone explained to me what an
econometric model was. That you could use data to estimate parameters, and
then if you put the whole thing together, you had a set of equations that
described the economy. That was really exciting, it meant you could control the
economy. And it was obvious that was immensely important.
At the LSE then you wrote exams only at the end of the first and third years (it
was a three year degree), and you didn’t get course grades. So I didn’t really
know whether I was a good student or an average student. I had won an
economic history prize and some other prize at the end of the first year. But I
had no real idea of where I stood in the class. So I planned to work in a bank
when I graduated.
O: (laughing) It eventually happened, but it took a long time…
Touche. ... I wrote the first degree, and it turned out that I did very well. I had
gone to Israel to work for the summer, where I got a telegram indicating that I
had gotten a scholarship and should come back to do graduate work. So I didn’t
know I was going to be an academic until after the first degree
O: So passion was not there yet.
No it was not there. I really liked the subject, but research was not central to
what we did. That came later, with the graduate studies at MIT. Even though I
did a master’s degree at LSE, up to that point my view of economics was always
that it was what these great professors did and do. Your job as a student was to
study what they said.
O: Was MIT the logical choice for you when you wanted to go on or was
Chicago in the picture?
To me, MIT was the logical choice. Everybody said ”Why do you want to go to
MIT?” And I’d say “Samuelson and Solow.” Even though Harry Johnson, who
was at LSE while I was there, recommended Chicago, and even though we read
Friedman’s restatement of the quantity theory, I thought MIT was the best. And
I got in there and went there.
O: How was MIT?
Because I hadn’t thought of going to graduate school until after completing my
first degree, I had done a one-year master’s degree at the LSE. So I was better
prepared when I went to MIT than most of the students. But that wore off pretty
quickly. The faculty member I was most close to, almost by geographic accident,
was Miguel Sidrauski who was a Chicago graduate, an Argentine, who started as
an Assistant Professor at MIT the same year I arrived. We happened to live in
the same apartment building in Cambridge, and became very friendly.
Miguel was a terrific mentor. The relationship of the young assistant professor
with the student is a very nice one, because you are so close in age. I worked a
lot with Miguel in my first summer as a research assistant for him and Duncan
Foley. Tragically Miguel died of cancer at the end of his second year at MIT. I
also worked for Don Patinkin, who was visiting MIT and was one of my heroes.
So I really got into things.
My MIT experience was truly formative. The professors were great and the
courses were great. The department emphasized good teaching, and most of the
professors were available if you wanted to talk to them. And we had enough
term papers to do to be drawn into research. Samuelson used to say interesting
things in class and throw out interesting problems. Sidrauski was an excellent
teacher, who made you understand the economics that was represented in his
phase diagrams, and Bob Solow did that too. Frank Fisher taught econometrics,
and had a big influence on the students. And there were many others who
influenced us.
No less important, I was with a really remarkable group of fellow students. The
class above me in particular included a whole host of people whose names you
know. Bob Hall was there, as was Bill Nordhaus, Avinash Dixit, Bob Gordon,
Ray Fair, Mike Rothschild, Joe Stiglitz and others who later made their mark.
Avinash Dixit could do the Times crossword puzzle in about 10 seconds. Bob
Merton arrived a year after me, and we shared an office for a year.
O: Your thesis was on macro. Why?
I focused on macro as a graduate student, as I had at the LSE. I think I liked
macro because I was interested in big questions but that may be an ex -post
rationalization. Maybe it was because I had read Keynes’ General Theory and was
intrigued. I had this image of the world as we knew it having nearly collapsed
in the 1930s, and that these guys had saved it.
My thesis was actually on lifetime portfolio choice. We were very much into the
microfoundations of macro at the time, and that topic was about the
microfoundations of portfolio choice and saving, in the presence of life
insurance. In part I chose that topic because Paul Samuelson was working on
lifetime portfolio choice at the time, as was Bob Merton.
O . Then, you moved to Chicago.
I went to Chicago as a post-doc, financed partly through Al Harberger’s Latin
America workshop. It was the best university that made me an offer. My first
year as post-doc I went to the Money Workshop, Harberger’s Latin American
workshop, the trade workshop, Milton Friedman’s money course, and no doubt
much else. That was also the year I met Rudi Dornbusch and Jacob Frenkel, and
other outstanding students, including Mike Mussa. Chicago enabled me to
combine MIT’s analytics with the policy relevance that Milton Friedman typified.
O: MIT was more in theory mode?
That was the impression I had at the time. I remember a discussion at MIT with
the faculty during the student disturbances at Harvard in 1968 when I said that
“we know a lot of economics, but we don’t know much about the economy.”
And Chicago then was the perfect antidote for this. Plus Chicago too had an
extraordinary group of students. I taught micro with Harberger and later taught
macro.
But as I reflect on the question, I realize I must have been thinking of what I did
at MIT, rather than what was happening there in the late 1960s. After all, that
was when Franco Modigliani and his students were working on the FRB-MIT-
Penn macromodel, and Bob Solow was the devotee par excellence of using small
tractable analytic models to get to the essence of a problem.
O: How central was Milton Friedman in all of this?
To the macro? Absolutely central. Macro was the money workshop. It was his
workshop. In those days I regretted that they did not have people from another
tradition except for a few of us, Bob Gordon in particular. Later, I decided that if
Chicago wasn’t Chicago, who would be? It was all right for them to pursue a
particular line. But, as an assistant professor, although I benefited in the long
run, it was at times difficult.
O: But did it change the way you did macro? The way you thought about macro?
Your choice of topics?
It did have a long-run impact. I started working then on monetary rules with
Phil Cooper, an MIT fellow-student, who became an Assistant Professor at the
Chicago Business School. I also talked a lot to Rudi Dornbusch, and served on
his thesis committee, and wrote a few papers with Jacob Frenkel.
O: You went back to MIT in 1973?
During the time I was at Chicago I had taken a six month sabbatical at the
Hebrew University. And we had very seriously thought about living in Israel.
When I went back to MIT in the fall of ’73, I thought that it might be an
interesting two year interlude on the way to living in Israel and teaching at the
Hebrew University.
The first course I co-taught when I got back to MIT was monetary economics
with Paul Samuelson. That was intimidating. He would insist on taking the
chalk and explaining things better than me. Then, I sort of eased into the role
with which you are familiar. You came in 1973, right?
O: Right. 73.
… And gradually I became a decent teacher. I taught the introductory macro,
got a lot of students over the course of time. Coming from Chicago where the
money workshop was so central, I built up the money workshop at MIT. Franco
Modigliani was the star attraction. I loved advising on theses. Then in 75, I
persuaded my colleagues to bring Rudi Dornbusch to MIT. He had taught at
Rochester and then went back to Chicago. He was very analytic. Not very
interested in the real world. Very pure. He wrote his ``overshooting’’ article
within a few months of coming to MIT. Our collaboration grew, and that also
made a huge difference. So I had terrific elder colleagues, terrific students, and a
great contemporary colleague in Rudi. Probably an ideal setup.
O: Did Israel recede as an option?
We always maintained a close contact, and took several sabbaticals there. But
after we made up our mind to live in the States, around 1975, we didn’t look
back. At least not more than once every two weeks or so… But we never really
came close to changing our minds because MIT was such a wonderful place to
be. And because we liked Boston. And our kids were growing up
O: When did you shift towards more applied topics?
I should have mentioned that one of the things that got me interested in
economics, peculiarly, was that Dag Hammarskjold was an economist. When I
was in high school, Dag Hammarskjold was this great man. Then he was killed
in the then-Belgian Congo, right next door. I knew he had done good in the
world and my parents had brought me up to believe I should do good in the
world. I realized that economics would help you do good. So I always wanted
to use what I had learned. That factor was probably there and moved me over
the course of time.
My first really intense applied work was when I visited the Bank of Israel and
spent a month there in 1979. They gave me a lot of applied questions, since they
were suffering from high inflation. My real opportunity came in 1983 when
George Shultz asked me join an advisory group he was creating on the Israeli
economy. I had in the meantime become somewhat of an American expert on
the Israeli economy.
That was when I got into the policy game. It was a very fortunate introduction.
It’s extremely unusual to have the Secretary of State take some young guy he
doesn’t know and appoint him as an adviser, and then let him have an active
role. Herb Stein and I were appointed as George Shultz’s advisers on the Israeli
economy. On the occasions Herb and I traveled to Israel, we essentially had
George Shultz’s authority behind us. And we could say, “The Secretary of State
believes this.” As a professor, that didn’t especially impress me. But when you
say “the Secretary of State believes’’ to a government that depends on the United
States, they are not listening only to the economics.
O: Was the shift to more applied topics in the air in the 1980s ? Rudi Dornbusch
moved in a similar way at the same time.
Well, there were all those high inflations around, and we’d studied and taught
about them. There were countless conferences on what to do about inflation and
that seemed to be the general policy problem of most of the countries we were
working with. Also, foreign travel was exciting. I went to Japan in 1981,
together with Ben Friedman and Jeff Sachs, on a trip organized by Ezra Vogel of
Harvard. I had never been to the East. There was this incredibly exciting
economy, Japan, which was doing the most amazing things, growing by leaps
and bounds. It was exciting. So I can’t quite explain my transition, except that
these opportunities came along and they were interesting. I guess it was a
combination of being interested in the real world, wanting to be useful, being
able to travel, and being given interesting problems.
O: That’s the right transition to the next stage: the World Bank.
The World Bank was another opportunity to be in the policy world, and so I was
very happy to take the offer.
O: What did you know about development at the time?
I had studied development and taken development economics as one of my
fields in the MIT generals. And on the macro side, I did know the economies of
developing countries. Also, at that time, the main issues were stabilization and
the debt crisis, and I knew a lot about them.
At the World Bank, I got into structural adjustment and associated issues. I
visited China, visited India for the first time. I spent ten days in China and met
Zhou Ziang, then the premier, about six months before Tiananmen Square. I was
impressed by how much he knew about western economics. He told me that my
views differed from those of Milton Friedman and from those of Lawrence Klein.
I couldn’t imagine that the Prime Minister was studying all these matters, but he
was. Visiting India was also a wonderful experience.
I was gripped by the problem of development. And that problem hasn’t left me.
I grew up in a very small town in Northern Rhodesia for the first 13 years of my
life, living among Africans. So the development issue was with me all the time.
I also began to understand a lot both about the way organizations work, because
the World Bank is an unusually complex organization, and also about the
problems confronting the world. And so I left with a much better idea of what
mattered and what needed to be done.
O: You stayed at the World Bank for two years?
It was originally a two-year term and it ended up being two and a half years. I
did think about staying, and giving up my MIT tenure. But because I was not
ready to give up MIT tenure, and for family reasons, we decided to go back to
MIT. It was hard readjusting. I remember going to theory seminars and saying
to myself, what difference does it make whether this guy is right or wrong, why
should anyone care about that theorem and so forth. But I did somewhat
readjust. I was obviously more interested in the policy side of things. I continued
my involvement with Israel. I began writing a column for an Italian newspaper. I
tried my hand at writing occasional columns for American newspapers. I was
interested in both international problems and American problems but I became
tagged as an international expert more than a macro expert.
When I got back everyone thought I would revolutionize development at MIT,
but I didn’t. The younger generation, which came not so long after, including
Abhijit Banerjee, probably did.
O: Do you think we have today the macro tools we need to understand the
world?
The quantity theory goes a very long way in dealing with inflation. And the
intertemporal budget constraint, and the equation for debt dynamics, take you
further along… I’d say the political economy is much harder. There’s a bunch
of guys who try to get policies done and the question is how they get them done.
This became clear to me even before the World Bank, when, in 1985, I was
involved in the implementation of the Israeli stabilization. That stabilization
was the work of Michael Bruno and colleagues. Discussions about how to do it
were exciting, and I learned a tremendous amount. But I learned even more
watching the administrative and political battles that had to be fought in making
the program work.
O: How much does it matter at those critical moments to have people with clear
minds?
Oh! It matters entirely. The Bruno team understood what i