Contemporary Economics in Historical Perspective
1st Essay assignment
Lana van Duijnhoven
Student number 7653085
Introduction
Reflecting on the rise of the economic sub-topics macroeconomics and econometrics around the
beginning of the 20th century, we find that in this time the focus was on capturing the economy in
models. How can we describe the economy clearly and concisely? Especially in econometrics, people
wanted to quantify the economy, but how do we measure all the included factors? And do we have to
include all of them or can we leave out certain, less important factors?
We know we certainly cannot include all factors influencing the economy, because then the work
would be endless, even more because all these variables would be connected with and through each
other. This means we have to generalize the situation we try to study.
This leads to an obvious question: How can we use and interpret these setup models if the variables
used are generalized and interconnected, leading to a not fully representative model of the
economy? Which will be the research question of this analysis.
I will try to formulate an answer to this question by studying and using the texts of Ragnar Frisch;
‘Propagation Problems and Impulse Problems in Dynamic Economics’ (Frisch, 1933) and Jan
Tinbergen; ‘An Economic Policy for 1936’ (Tinbergen, 1959). Frisch and Tinbergen are, among others
like John Maynard Keynes, prominent figures for the finding of the topics of macroeconomics and
econometrics within the economic field.
, How do we see generalization and interconnected variables in the works of Frisch and
Tinbergen?
Frisch was one of the first to visualize the economy in a framework, graphically instead of only
describing the economy and its working in language (Frisch, 1933). Tinbergen was one of the first
who tried to describe the economy mathematically in equations (Tinbergen, 1959). It is however,
quite difficult to catch an economic system in one model or a couple of equations, meaning Frisch
and Tinbergen had to generalize the economy they worked with.
Frisch states; ‘In order to attack these problems on a macro-dynamic basis so as to explain the
movement of the system taken in its entirety, we must deliberately disregard a considerable amount
of the details of the picture. We may perhaps start by throwing all kinds of production into one
variable, all consumption into another, and so on (…).’ (Frisch, 1959, p.3)
Tinbergen states; ‘However useful and necessary a study of detail may be, we also need a general
view, especially in this report. (…) In order to get our general view, generalization is indispensable.’
He goes even further; ‘The artistry in the work of the social economist lies in this stylizing.’ (Tinbergen,
1959, p.41)
Reading Tinbergen’s ‘An Economic Policy for 1936’ leads us to another interesting point to consider,
namely how we can set up these representations to be as clear as possible if the variables used are
interdependent. How do we explain a variable by using another if they are connected with each
other? Tinbergen himself states; ‘The subject is complicated (…) because many different variables in
the economic mechanism are interconnected.’ (Tinbergen, 1959, p.41) and ‘The economic variables
included in the model are constantly changing, in a mutually interdependent way for the greater
part.’ (Tinbergen, 1959, p.45)
Frisch takes this into account as well, however less specifically. He does this by making sure his
models are determinate and there are as many equations as variables. (Frisch, 1933, p.2) This is the
first step to resolving the difficulty of variables depending on each other.
Although Frisch and Tinbergen both acknowledged these difficulties, Keynes was the one who
actually drew attention to them in his reaction in The Economic Journal; ‘Professor Tinbergen’s
Method’. He questions; ‘Must we push our preliminary analysis to the point at which we are
confident that the different factors are substantially independent of one another?’ and ‘What
happens if the phenomenon under investigation itself reacts on the factors by which we are
explaining it? (Keynes, 1939, p.561) regarding interdependent variables and how to work with them.
He did not specifically discuss how we can use frameworks if generalized, but he did go in depth
about the question of whether models can be used in the future, especially if the future situation has
changed from the current one, which is unavoidable. Keynes raises the questions; ‘How far are these
curves and equations meant to be no more than a piece of historical curve-fitting and description, and
how far do they make inductive claims with reference to the future as well as the past?’ (Keynes,
1939, p.566). and ‘If the method cannot prove or disprove a qualitative theory, and if it cannot give a
quantitative guide to the future, is it worth while?’ (Keynes, 1939, p.566). With this he means to say,
can these models only be used to give statistical descriptions and analyse current times, or can they
be used in the future as well, for example to form policies? Can partly incomplete models serve the
purpose models have been set up for?
1st Essay assignment
Lana van Duijnhoven
Student number 7653085
Introduction
Reflecting on the rise of the economic sub-topics macroeconomics and econometrics around the
beginning of the 20th century, we find that in this time the focus was on capturing the economy in
models. How can we describe the economy clearly and concisely? Especially in econometrics, people
wanted to quantify the economy, but how do we measure all the included factors? And do we have to
include all of them or can we leave out certain, less important factors?
We know we certainly cannot include all factors influencing the economy, because then the work
would be endless, even more because all these variables would be connected with and through each
other. This means we have to generalize the situation we try to study.
This leads to an obvious question: How can we use and interpret these setup models if the variables
used are generalized and interconnected, leading to a not fully representative model of the
economy? Which will be the research question of this analysis.
I will try to formulate an answer to this question by studying and using the texts of Ragnar Frisch;
‘Propagation Problems and Impulse Problems in Dynamic Economics’ (Frisch, 1933) and Jan
Tinbergen; ‘An Economic Policy for 1936’ (Tinbergen, 1959). Frisch and Tinbergen are, among others
like John Maynard Keynes, prominent figures for the finding of the topics of macroeconomics and
econometrics within the economic field.
, How do we see generalization and interconnected variables in the works of Frisch and
Tinbergen?
Frisch was one of the first to visualize the economy in a framework, graphically instead of only
describing the economy and its working in language (Frisch, 1933). Tinbergen was one of the first
who tried to describe the economy mathematically in equations (Tinbergen, 1959). It is however,
quite difficult to catch an economic system in one model or a couple of equations, meaning Frisch
and Tinbergen had to generalize the economy they worked with.
Frisch states; ‘In order to attack these problems on a macro-dynamic basis so as to explain the
movement of the system taken in its entirety, we must deliberately disregard a considerable amount
of the details of the picture. We may perhaps start by throwing all kinds of production into one
variable, all consumption into another, and so on (…).’ (Frisch, 1959, p.3)
Tinbergen states; ‘However useful and necessary a study of detail may be, we also need a general
view, especially in this report. (…) In order to get our general view, generalization is indispensable.’
He goes even further; ‘The artistry in the work of the social economist lies in this stylizing.’ (Tinbergen,
1959, p.41)
Reading Tinbergen’s ‘An Economic Policy for 1936’ leads us to another interesting point to consider,
namely how we can set up these representations to be as clear as possible if the variables used are
interdependent. How do we explain a variable by using another if they are connected with each
other? Tinbergen himself states; ‘The subject is complicated (…) because many different variables in
the economic mechanism are interconnected.’ (Tinbergen, 1959, p.41) and ‘The economic variables
included in the model are constantly changing, in a mutually interdependent way for the greater
part.’ (Tinbergen, 1959, p.45)
Frisch takes this into account as well, however less specifically. He does this by making sure his
models are determinate and there are as many equations as variables. (Frisch, 1933, p.2) This is the
first step to resolving the difficulty of variables depending on each other.
Although Frisch and Tinbergen both acknowledged these difficulties, Keynes was the one who
actually drew attention to them in his reaction in The Economic Journal; ‘Professor Tinbergen’s
Method’. He questions; ‘Must we push our preliminary analysis to the point at which we are
confident that the different factors are substantially independent of one another?’ and ‘What
happens if the phenomenon under investigation itself reacts on the factors by which we are
explaining it? (Keynes, 1939, p.561) regarding interdependent variables and how to work with them.
He did not specifically discuss how we can use frameworks if generalized, but he did go in depth
about the question of whether models can be used in the future, especially if the future situation has
changed from the current one, which is unavoidable. Keynes raises the questions; ‘How far are these
curves and equations meant to be no more than a piece of historical curve-fitting and description, and
how far do they make inductive claims with reference to the future as well as the past?’ (Keynes,
1939, p.566). and ‘If the method cannot prove or disprove a qualitative theory, and if it cannot give a
quantitative guide to the future, is it worth while?’ (Keynes, 1939, p.566). With this he means to say,
can these models only be used to give statistical descriptions and analyse current times, or can they
be used in the future as well, for example to form policies? Can partly incomplete models serve the
purpose models have been set up for?
