Ragnar Frisch Tinbergen Economics Theory

Ragnar Frisch, Jan Tinbergen Economics and the Development of Large Macroeconometric Models

One of the most influential econometricians of the late 1920s and early 1930s was the Norwegian economist Ragnar Frisch (1895-1973). Frisch was a highly trained mathematician who made contributions to both macro- and micro-econometrics and played an important role in redirecting empirical economics away from the institutional approach and toward an econometric approach. In fact, it was he who coined the term econometrics. Although Frisch made some important discoveries in microeconometrics (he carried out a conclusive mathematical treatment of Working's identification problem and showed that the ordinary least squares estimator was biased), it was his contribution to macro­econometrics that accounts for his importance. Together with Jan Tinbergen, he played an important role in creating the field of macroeconometrics by developing a macroeconometric model of the economy. Frisch's primary work is found in his book Statistical Confluence Analysis by Means of Complete Regression Systems (1934). Here he argued that most economic variables were simultane­ously interconnected in "confluent systems" in which no variable could be varied independently; he worked out a variety of methods to handle these problems.

Jan Tinbergen (1903-1994), a friend of Frisch, was recruited by the League of Nations in 1936 to undertake statistical tests of business-cycle theories. His report was published in 1939 under the title Statistical Testing of Business Cycle Theories. This work focused on developing dynamic macroeconomic theories from the data and testing them. Tinbergen developed a theory of the business cycle, or model of the macroeconomy, that exhibited cyclical tendencies.

Econometricians such as Frisch and Tinbergen recognized that econometric work in macroeconomics was conceptually far more difficult than economet­ric work in microeconomics. In microeconomics one was worried about identi­fication with two separate structural equations, supply and demand; in macroeconomics, theory suggested that there was a large system of interdepend­ent equations that underlay macroeconomic forces. Somehow, the researcher had to extend the microeconomic analysis almost ad infinitum for large num­bers of equations, specify a system of structural equations, and test those equations.
It was to this task that Frisch and Tinbergen directed their analysis, and both won Nobel Prizes for their contributions. Like Moore's, their purpose was more than simply testing the validity of a theory: they were interested in policy. They believed that if they could specify a structural set of equations describing the economy, they could thereafter determine a set of policies to change the structure of those equations and through those policies achieve desirable results in the economy.

Tinbergen's work evoked serious criticism from both John Maynard Keynes and Milton Friedman, both of whom objected to the entire process and the implications drawn from it.'They argued that Tinbergen's estimation procedures made use of the same data to derive the model that were used to test among possible competing theories, which would make the normal tests of statistical significance irrelevant. Their views represented the conviction that econometrics cannot replace educated common sense. Significant questions were raised about macro-econometrics even at its initial stages.