Nordic Journal of Political Economy Volume 33 2007 Article 1 The Rise and Fall of the Oslo School ‡ Ib E. Eriksen* Tore Jørgen Hanisch † Arild Sæther * University of Agder, Faculty of Economics and Social Sciences, Kristiansand, Norway ‡ University of Agder, Faculty of Economics and Social Sciences, Kristiansand, Norway † University of Agder, Faculty of Economics and Social Sciences, Kristiansand, Norway This article can be dowloaded from: http://www.nopecjournal.org/NOPEC_2007_a01.pdf Other articles from the Nordic Journal of Political Economy can be found at: http://www.nopecjournal.org The Rise and Fall of the Oslo School 1 Ib E. Eriksen, Tore Jørgen Hanisch1, Arild Sæther The Rise and Fall of the Oslo School2 Abstract In 1931 Ragnar Frisch became professor at the University of Oslo. By way of his research, a new study programme and new staff he created the ”Oslo School”, characterised by mathematical modelling, econometrics, economic planning and scepticism towards the market economy. Consequently, detailed state economic planning and governance dominated Norwegian economic policy for three decades after WWII. In the 1970s the School’s dominance came to an end when the belief in competitive markets gained a foothold and the economy had poor performance. As a result a decentralized market economy was reintroduced. However, mathematical modelling and econometrics remain in the core of most economic programmes. JEL classification: B23, B29,B31, B59, O21, P41, P51 1. Introduction The main purpose of this presentation is to tell the story of how Ragnar Frisch founded the so-called Oslo School in economics, and secondly, to outline the main features of this School and investigate its major influence on the Norwegian post-war economy. Also, the presentation aims to tell the story of how the School was challenged, the following downfall, and what is left of the Oslo School today. 2. Background At the end of the 1920s and the beginning of the 1930s the world economy broke down. Prices were falling, production declined and unemployment increased to a formerly unknown level. The monetary system failed and the gold standard was abandoned by 1 Unfortunately our good friend and colleague Tore Jørgen Hanisch passed away on January 15, 2006. 2 Previous editions of this paper have been presented at the 9th Nordic Meeting in the History of Economic Thought at Stockholm University, 25-27 August 2006, and at the 29th National Research Meeting for Economists at University of Tromsø, 4-5 January 2007. Two anonymous referees are acknowledged for their careful reading of the paper and constructive criticism improving the presentation. 2 Ib E. Eriksen, Tore Jørgen Hanisch, Arild Sæther most countries. According to many, although not all, the market economy and capitalist system had gone bankrupt. As a consequence there was a transition from a relatively passive and organised state to a more active state with more explicit responsibility not only for economic development but to a large degree also for social and cultural development. The breakdown of international trade in the 1930s saw a return to widespread protectionism. But an important feature of the development was also the increased use of direct market regulations and increased acceptance of cartels to secure profitable prices. The great depression changed the attitudes of politicians, academics and ordinary people. Market regulations were commonly accepted, to an increasing degree encouraged by the authorities and partly accomplished by law. In the last-mentioned case the regulations implied an important curtailment of contractual freedom. Direct market regulations played an increasingly important role in the Norwegian economy from about 1930, first in agriculture, then in fisheries and as time went by in other industries. The crisis put the trust of the economic profession to a serious test. In the economic situation at that time the economists could not claim that everything would turn out well in the end if development was left to the market forces - in line with classical and neo-classical theory. They were faced with the question of how the activity level of the economy could be influenced to conquer unemployment. The most extreme alternatives were communist, socialist or fascist planned economies. However, John M. Keynes (1883- 1946) had presented another solution, which was later called ”the mixed economic system”. This was a system where production still was in a private market regime but where the state played a much more important role than under economic liberalism. It included an active state within the framework of a democratic and liberal constitutional state. Keynes did not want to do away with the market forces or private initiative, he just wanted to secure that the market economy again could function satisfactorily. Freedom of trade and commerce based on private ownership of the means of production should continue to be the institutional foundation. Other economists and politicians in Western Europe wished to go further in the direction of planning and state governance. They envisaged a relatively high degree of state control over the means of production to secure efficient production and at the same time obtain what they saw as a just distribution of goods among social groups. The world economic crisis hit Norway more severely than most other European countries. Production decreased and unemployment reached levels that had not been seen before. As an example GDP per capita fell by more 8 % in 1931 and during the winter of 1932-33 unemployment across the entire labour force was more than 15 %. Prices were according to the consumer price index reduced by about 50 % during the period 1920-34.3 In the beginning of the 1930s not only the Norwegian economy was at low ebb. This was also the case for the status of economics as a science. The economic profession had not come up with any realistic solutions to how the country could manage to come 3 Grytten (2002) pp. 5-6. The Rise and Fall of the Oslo School 3 out of the crisis. Economics as a science was looked down upon by both politicians and business people. Traditional economic policies did not give the expected results, in fact policies of increased saving and tightening of state budgets made the situation worse. The use of the price, trust and cartel regulations that were passed by the parliaments in the 1920s, and which aimed to secure free competition and market prices, did not have the intended effects.4 According to the liberal economic journal Farmand, the use or abuse of these laws interfered with the markets to such an extent that they contributed to worsen the crisis. Politicians especially on the centre-left side of the political spectrum began to work on the development of an alternative policy to alleviate the crisis based on the new ideas about economic planning and a strong state. In particular, the circles in the Labour movement and the Labour party were central in the efforts to work out a new policy to combat the crises. Inspired by what they believed were the good results from the 5-year plans in the Soviet Union, they claimed that it was only possible to bring the Norwegian economy out of the crisis through planned economic governance, with a strong state that played an active and decisive role in society. One of the central documents in the crisis programme prepared by the Labour party was Colbjørnsen & Sømme (1933) ‘A Norwegian Three Year Plan’, which sketched a framework for economic growth where the sweeping themes were economic planning and a governance system with considerable corporate features. The Labour party came into power in 1935 on a programme which went far in the direction of central planning and government control. However, the party did not have the majority in the Parliament, and as a result the possibility of carrying out its programme was limited. Under WWII the elements of state administered resource allocations increased in most countries, including Norway, and they were far more extensive than under WWI. Norway introduced quite strong price and quantity regulations in the autumn of 1939 and these regulations were further developed during and after the Nazi occupation. During the war numerous plans for post-war reconstruction had been proposed. The Labour party and the trade unions wanted to maintain the war regulations and on this basis develop a democratic socialist planned economy. However, here it should be emphasised that there were circles within the trade unions that went far in the curtailment of democratic institutions. In particular, this was the case of the trade unions in exile in Great Britain and Sweden.5 The 50th year celebration of the Norwegian Economic Association in 1933 released a debate among economists as to what extent the low esteem of the profession stemmed from a crisis in the science itself or could be found in an abuse of the science among economists. The reputation of economics had according to many economists, been hurt 4 The new ’Price Act’ passed by Parliament in 1920, the ’Unfair Competion Act’ in 1922, and the ’Act Controlling Trade Practices in Restrain of Trade (The Anti Trust Law) in 1926. 5 Stenersen (1973) pp. 81-91. 4 Ib E. Eriksen, Tore Jørgen Hanisch, Arild Sæther by economists who had participated in the political debate and misused the science in areas where it should not have been used. Among outsiders there was, however, a tendency to claim that there was a crisis in the science as such. They pointed out that the science could not be used to find solutions to present-day problems. According to Bergh and Hanisch (1984)6, this debate took place at a time when both the economy and economics as a science showed signs of improvements, and in the next 10-20 years the status of economics and its position in the public policy-making would gain a reputation it never have had before.