Maurice Allais
Even then, the ponderings of Allais do have an important place in modern economic theory such that they won him the Noble Prize in economics in 1988.
Life
Born in France in 1911, Maurice Allais’s parents owned and operated a cheese shop in urban Paris. When he was only aged at three, his father was taken into World War one and would die a year later in German captivity. Having studied primarily Latin and science in secondary school, Allais graduated in 1928 and not more that two years later received baccalaureate degrees in mathematics and philosophy. In 1933, he graduated first in his class from the École Polytechnique.
Economics was not the first interest of Maurice Allais. His excelling in his educational career gave him his choice of government employment and decided to work as an administrative engineer for the Nantes Mines and Quarries service in 1937. After an wartime interlude he continued his work and developed a fascination for economic theory, but not economic theory alone.
In his autobiography, Allais described his two “parallel interests” as history and physics. In the early sixties he would publish an economic analysis of declining civilizations, Essor et declin des civilizations – Facteurs economiques. In physics his love was the pendulum, and he attempted to find relationships between gravity and electro-magnetism on the effects of it.
The Allais Effect, Physics, and the Singularity of Science
Allais’s study of the pendulum did not manage to warrant as much laud as his work in economics. Yet, marking bizarre phenomena in the oscillation of pendula during solar eclipses, he posited what would be called the “Allais Effect.” His explanation of the occurrence, which seemed to violate traditional laws of gravitation, would not gain mainstream support, due to his invocation of æther in the abnormality; yet physicists still debate on the subject to the day.
More important than his contributions to the study of physics are the study of physics’s contribution to his economic perspective. Like Adam Smith before him, Allais hoped to model economics after natural sciences, and at that, hoped to mold economics into the greater context of the social sciences. In his 1988 Nobel Acceptance speech he said:
“Throughout my work, my dominant concern has been with synthesis: to bring together into one comprehensive view the study of real and monetary phenomena; to associate the analysis of the conditions for efficiency and that of income distribution; to link closely theoretical analysis and applied economics; to relate economics to the other social sciences, Psychology, Sociology, Political Science, and History. Such have been my constant aims.”
Golden Rate of Saving
Robert Solow is most often accredited with the conception of the Golden Rate of savings, yet Allais described it before Solow integrated it into his growth model. Allais noted in 1947 that in an absolutely stationary economy, the optimal interest rate is 0%. At this point, because of the absolute stability of the economy, no investment can increase the real value of any product, thus loans cannot be paid back in aggregation over 100%, thus loaning money with intent to profit becomes impossible.
American economist Edmund Phelps, who himself would later go on to receive a Nobel Prize, realized that from this, the optimal savings rate is a function of the growth rate of a given economy (Phelps 1961). Allais and Phelps presented their findings at the Econometric Society later that year; that to maintain a constant capital to worker ratio, a “Golden Rate” of saving must be targeted which is equivalent to the growth rate. By the time these ideas were integrated into the Exogenous Growth Model, which would win Solow his own Nobel Prize in Economics, they took fully into account changes in population as well as depreciation of capital.
The Allais Paradox
Although not his most significant contribution to economic theory, the Allais Paradox is perhaps his most well-known input, bearing his namesake. His paradox is a critique of the independence axiom of the expected utility hypothesis of Daniel Bernoulli. As assumed by the independence axiom, the addition of two simultaneous outcomes in a probability matrix both of the same percentage will not change the choices of a decision maker in making a gamble. Allais took issue with this with a paradox that contradicted this assumption. The below is a game matrix displaying two games, both with two choices which yield payoffs based on probability.
In the case that two of the options have a percentage of the same payoff, according to the independence axiom, it would be as if they were equal and cancel each other out; the decision therefore, would be made by the percentages that differ between the two choices. However according to Allais, most people would prefer to choose the option A of Game 1 and the option C of Game two, countervailing traditional expected utility theory. This was confirmed in numerous studies; Kahneman and Tversky 1979 finds that about 82% of people choose Game 1 option 2 and 83% then choose option 2 of Game 1, employing the same value matrix as presented above.
The bizarrity of the Allais paradox is that an agent would change their preferences based on a value that is changed in the game matrix by the precise same among in both possible outcomes. This ultimately means that payoffs cannot be transitive with other possible payoffs. In the traditional transitive notation, in the first game, there is a 66% of a choice of A yield $2400; this would yield the same payoff as a choice of B, thus these 66% sections “cancel each other out.” The agent must then choose between (A) a 33/34 chance of receiving $2500 or 1/34 chance of receiving nothing or (B) a doubtless $2400.
In Game 2, there are in both options at least 66% of chances of receiving 0, and in traditional notation, these cancel each other out as well. The speaker is then left with the same payoff possibilities as before, a 33/34 chance of $2500 and if not $0, or a sure-fire $2400, however as said above, most people prefer choices A and C, although the expected utilities of A and D and then B and C are truly the same according to the independence axiom. The Allais paradox shows, therefore, that decisions are not typically perfectly independent of similar payoffs between two choices, nor transitive, but are influenced by the agent’s perception of a payoff in the context of the entirety of the matrix.
Overlapping Generations Model
Paul Samuelson is often accredited with the initial conception of an overlapping generations model, yet Allais, in his Économie et Intérêt introduces the idea in 1947, ten years prior to Samuelson. Before an OGM was in use, generations were loosely defined and were not interacting at the same time in theory, but the idea of an OGM is to evaluate the effects on multiple groups of people performing at different niches in an economy.
The important note of overlapping generations modeling is that populations are not wholly homogenous in their ability to work and save money; this is a caveat to developed nations, many of which are finding themselves with fewer and fewer young people in proportion to a maturating population who will no longer function in the workplace.
Monetarism
Acknowledging and strongly emphasizing the effects of nominal values on the real, Maurice Allais was often an advocate of the Monetarist school of economic thought. Allais objected to a fractional reserve banking system, as it allowed private banks to create effective money in a way similar to a monetary authority. In 1948, in his Économie et Intérêt, he endorsed the “Chicago Plan” of depression relief, arguing for a 100% reserve requirement in banks, as it would place monetary power exclusively in the hands of federal banks, rather that the more capricious money creation indirectly resulting from banking derivatives. He would say of private banks:
“In essence, the present creation of money, out of nothing by the banking system, is similar - I do not hesitate to say it in order to make people clearly realize what is at stake here - to the creation of money by counterfeiters, so rightly condemned by law.”
These ideas would influence Milton Friedman, endorsing similar measures years later (Friedman 1959). It may sound peculiar that an economist as liberally inclined as Friedman would support such an abounding regulation on a private establishment, but ultimately he felt that if anything, government regulators would have less to do with private enterprise if derivatives on deposits were made impossible.
In Final
Maurice Allais was an economist who refused to be limited to a single sector of economics, or by economics itself. His works cover a colorful array of subjects, economic growth, game theory, temporal economics, monetarism among others and nearly all of the most significant and well-known economists of the 20th centrury, Robert Solow, Paul Samuelson, Milton Friedman, were absolutely unable to escape his influence and his theories.
Allais cites his major influences as Vilfredo Pareto and Léon Walras. The similarities he shares with Walras are not limited to his desire to describe the general equilibrium and find overarching economic patterns; he made, as did Walras, the mistake of writing in French instead of English. His Économie et Intérêt remained unpublished in English until the 1980s, four decades after it writing in French; his other works suffered similar fates. His original conception of the Golden Rate of Saving is mostly unknown and he is nearly exclusively associated with the Allais Paradox.
Still Allais remains as one of the most wide-ranging polymaths of the 20th century. In October 2010, however, he died at the age of 99 after being retired from academia for nearly twenty years.
Selected Sources
Allais, Maurice. “An Outline of My Main Contributions to Economic Science.” 1988 Royal Academy of Sciences, Sweden.
Allais, Maurice. “Autobiography.” The Nobel Prizes Oct. 1998.
Allais, Maurice. 1948. Économie et Intérêt: Exposition Nouvelle des Problèmes Fondamentaux, Relatifs au Rôle Économique du Taux de l’Intérêt et de leurs Solutions. Paris: Librairie des Publications Officielles.
Allais, Maurice. La Libéralisation de Relations Économiques Internationales. Paris: Gauthier-Villars, 1972.
Bossone, Biagio. (2002). “Should Banks be “Narrowed?”” Public Policy Brief 69.
Friedman, Milton. 1959. A Program for Monetary Stability. The Millar Lectures Number Three. New York: Fordham University Press.
Kahneman, Daniel and Amos Tversky. (1979). “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47.2: 263-291.
Munier, Bertrand R. Markets, Risk and Money. Boston: Kluwer Academic Publishers, 1995.
Phelps, Edmund S. (1961). "The Golden Rule of Capital Accumulation". American Economic Review 51: 638–643.