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A Short History of the Generation That Reinvented Economics

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A Short History of the Generation That Reinvented Economics The Years of High Econometrics The creation of econometrics was the most important transformation in twentieth-century economics and the establishment of the Econometric Society, the Cowles Commission and the journal Econometrica were just three of the events that would shape its development. Taking Ragnar Frisch as the narrator, Francisco Louçã presents a comprehensive history of this fascinating innovation. Louçã includes all the major players in this history from the economists like Wesley Mitchell, Irving Fisher, Joseph Schumpeter and Maynard Keynes to the mathematicians like John von Neumann, as well as the statisticians like Karl Pearson, Jerzy Neyman and R.A. Fisher. He discusses the evolution of their thought, detailing the debates, the quarrels and the interrogations that crys- tallised their work. Louçã even offers a conclusion of sorts, suggesting that some of the founders of econometrics became critical of its later development. This book will be of great interest to students, academics and researchers alike in the history of economics, not least because it contains archive material that has not been published. It would be a welcome accompaniment to students taking courses on statistics and probability, econometric methods, macroecono- metrics and the history of economic thought. Francisco Louçã is Professor of Economics at the ISEG in Lisbon. He is also a member of Parliament. The Years of High Econometrics A short history of the generation that reinvented economics Francisco Louçã First published 2007 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business This edition published in the Taylor & Francis e-Library, 2007. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2007 Francisco Louçã All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-203-94683-9 Master e-book ISBN ISBN10: 0-415-41974-3 (hbk) ISBN10: 0-203-94683-9 (ebk) ISBN13: 978-0-415-41974-1 (hbk) ISBN13: 978-0-203-94683-1 (ebk) Contents List of illustrations xiii Acknowledgements xv List of characters xvi Introduction 1 PART I Foundation 7 1 ‘Not afraid of the impossible’: Ragnar Frisch (1895–1973) 9 2 The emergence of social physics: the econometric people are assembled 25 3 The years of high theory 49 PART II Construction 87 4 What counts is what can be counted 89 5 Particles or humans?: paradoxes of mechanics 105 PART III Debates 123 6 Intriguing pendula: delights and dangers of econometric conversation 125 7 Challenging Keynes: the econometric movement builds its trenches 184 xii Contents 8 Quod errat demonstrandum: probability concepts puzzling the econometricians 213 PART IV Theory and practice at the edge 257 9 Chaos or randomness: the missing manuscript 259 10 Is capitalism doomed? A Nobel discussion 267 11 Prometheus tired of war 279 12 Conclusion: a brave new world 304 Notes 313 Bibliography 352 Index 369 Illustrations Figures 1.1 Portrait of Ragnar Anton Kittil Frisch sitting by his desk. Taken in 1968 12 1.2 Irving Fisher, the first president of the Econometric Society 15 2.1 Second Econometric Conference in Europe (Paris, 1–4 October 1932) 33 2.2 Homage of the Econometric Society to Walras, by the centenary of his birth 34 3.1 Jerzy Neyman 58 4.1 D’Avenel series for the price of wheat for six centuries, represented according to Frisch’s method 104 6.1 The three pendula of Bernoulli 126 6.2 Frisch’s representation of the Schumpeterian pendulum 141 6.3 Frisch’s cycles obtained from the model of PPIP 158 6.4 Zambelli’s representation of the process obtained from PPIP 159 6.5 Bifurcation map for the double pendulum 163 6.6 Frisch’s representation of a ‘gravitational theory’ 166 6.7 Trajectory of the double pendula over time 167 6.8 Periodic motion and chaos generated by the double pendula 168 6.9 Frisch’s representation of Marshall’s triple pendula 169 7.1 John Maynard Keynes, taken in 1936 187 7.2 Roy Harrod. Taken when he went to Christ Church, Oxford 195 7.3 Jan Tinbergen 197 8.1 Tjalling Koopmans. Taken probably in 1952 233 8.2 Portrait of Trygve Magnus Haavelmo. Taken 10 June 1939 240 9.1 Poster announcing the lectures by Frisch at the Poincaré Institute in Paris 259 9.2 Empirical distribution of the Xi 262 9.3 Linear transformation with a singular matrix 262 10.1a The behaviour of the model: the evolution of sales 271 10.1b The behaviour of the model: phase portrait of the sales of primus 271 xiv Illustrations 10.2 An aggressive intervention by primus at t–1 272 10.3a An irregular cyclical regime (ψ=0.202102994) 272 10.3b An irregular cyclical regime (ψ=0.204455702) 273 10.4a Inflationary regime provoked by the reaction of secundus (␰=0.310531146) 274 10.4b Inflationary regime provoked by the reaction of secundus (␰=0.3105311467) 274 10.5 The virtue of coordination 275 10.6 Coordination under threat 275 Tables 2.a.1 List of presidents and vice-presidents of the Econometric Society (1930–40) 46 2.a.2 Presidents of the Econometric Society after 1940 46 2.a.3 List of Fellows (1933–8) 47 2.a.4 Research Directors of the Cowles Commission 47 2.a.5 Conferences of the Econometric Society 47 2.a.6 Econometrica compared to the Economic Journal (1933–55) 48 3.1 Age of economists, econometricians and statisticians in 1933 50 6.1 Pendulum: non-mechanistic versions 151 6.2 Mechanistic metaphors in the early analysis of business cycles 151 10.1 Initial conditions and values of the parameters 271 Acknowledgements The author and the publishers would like to thank the following people and institutions: The Frisch Archive at the University of Oslo for permission to use the image of Ragnar Frisch (Chapter 1). The Manuscripts and Archives Department at the University of Yale Library for permission to use the image of Irving Fisher, B.A., 1888, Ph.D., 1981. Pro- fessor of Political Economy, 1889–1935. The National Library of Oslo for permission to use the image of the Paris Con- ference (Chapter 2). The Econometric Society for permission to reprint the ES Poster on Lausanne (Chapter 2). The University of California, Berkeley for permission to use the image of Jerzy Neyman (Chapter 3). Dr Milo Keynes in the name of the family of the late Mr Keynes for permission to use the photo of Maynard Keynes (Chapter 7). Levien Willemse for permission to use the photo of Jan Tinbergen (Chapter 7). The Senior Common Room, Christ Church, Oxford for permission to use the photo of Roy Harrod (Chapter 7). Anne W. Koopmans Frankel for permission to use the image of Tjalling Koop- mans (Chapter 8). The Department of Economics at the University of Oslo for permission to use the image of Trygve Haavelmo (Chapter 8). The Institut Henri Poincaré at the University of Paris for permission to reprint the Faculté des Sciences poster (Chapter 9). Every effort has been made to contact copyright holders for their permission to reprint material in this book. The publishers would be grateful to hear from any copyright holder who is not here acknowledged and will undertake to rectify any errors or omissions in future editions of this book. Characters Founders of the Econometric Society (present at the 1930 Cleveland Conference) Frisch, Ragnar (1895–1973). See Chapter 1 for a short biography. Hotelling, Harold (1895–1973). Statistician and Professor at Columbia Univer- sity until 1946, and then at the University of North Carolina. He was respons- ible for important developments in correlation analysis, hypothesis testing and the estimation of confidence regions. His contributions to economics include the revival of the marginalist revolution, as it came to be known in the 1930s, namely in the field of Paretian welfare economics. (Chapters 2, 5, 6, 8) Menger, Karl (1902–85). Born in Vienna, studied physics and mathematics and attended meetings of the Vienna Circle, taking part in the discussions about science and philosophy, with another young student, Kurt Godel. He was attracted to economics by a lecture given by his supervisor, Hans Hahn, in 1925. Menger was invited by Brouwer to Amsterdam for two years but, as they quarrelled, their collaboration was soon terminated. In 1927, he was invited by Hahn to take a chair in geometry in Vienna. Moved to Notre Dame, USA, in 1938, where he developed work on probability, geometry and the algebra of functions and, with Morgenstern, on game theory. Finally, he moved to Chicago. (Chapter 2) Mills, Frederick (1892–1964). Studied with Mitchell at Berkeley and followed him to Columbia University. Took a job at the US Commission on Industrial Relations and in 1914, as a young graduate, travelled on behalf of the Cali- fornian Commission of Immigration and Housing under an alias, working for farms and lumber camps in order to report on the work conditions there. Fin- ished his Ph.D. at Columbia University in 1917, where he was hired in 1919 as an instructor and in 1920 as a Professor of Business Statistics.
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