A Dynamic Approach to Economic Theory

The Yale Lectures of Ragnar Frisch

Ragnar Frisch, Olav Bjerkholt,Duo Qin

• Éditeur: Routledge
• Année: 2013
• ISBN:
  9781136927843
• Édition: 1
• Sujet: Negocios y empresa
• Sous-sujet: Negocios en general

This book contains a set of notes prepared by Ragnar Frisch for a lecture series that he delivered at Yale University in 1930. The lecture notes provide not only a valuable source document for the history of econometrics, but also a more systematic introduction to some of Frisch's key methodological ideas than his other works so far published in various media for the econometrics community. In particular, these notes contain a number of prescient ideas precursory to some of the most important notions developed in econometrics during the 1970s and 1980s

More remarkably, Frisch demonstrated a deep understanding of what econometric or statistical analysis could achieve under the situation where there lacked known correct theoretical models. This volume has been rigorously edited and comes with an introductory essay from Olav Bjerkholt and Duo Qin placing the notes in their historical context.

1
General considerations on statics and dynamics in economics

1.1 What is economic theory?¹

If we take the words ‘science’ and ‘scientific’ in their old-fashioned restricted sense, we may perhaps say that astronomy is a field of study which is ‘scientific’ more than any other of the fields of study having as their object the exploration of the exterior world. The reason for this, it seems, is that in astronomy the fusion between theory and observation has been realized more perfectly than in the other fields of study. When astronomy is a science, it is not because it has an abstract theoretical structure, nor is it because it is built on minute prolonged observations, but it is because the astronomical observations are filled into the theoretical structure. It is this unification that raises astronomy to the dignity and significance of a true science.

Also in economics we have had theoretical speculations, but most of the time it has not been that kind of theory which is built with a view to being verified by observations. Economic theory has not as yet reached the stage where its fundamental notions are derived from the technique of observations. On the other hand, we also have had observations in economics, plenty of them. In the last century there has been accumulated an overwhelming statistical and historical material on economic facts. But these observations have not been guided and animated by constructive theoretical thinking in the same way as the astronomical observations. Theory and observations in economics have gone along in a more or less disconnected way. There have been cycles of empiricism and rationalism. At times when it became too obvious that economics did not progress so rapidly as, for instance, astronomy, physics and biology, even though theoretical thinking had been applied to it, some economists would lose confidence altogether in theoretical thinking in this field and plunge themselves into a pure empirical fact collection in the hope that such a blind grappling with facts should reveal something of the nature of the complicated phenomena with which the economist is faced. Then again when it became obvious that such a pure empiricism did not lead anywhere, theoretical speculations in economics had a revival and the abstract-minded type of people ruled the ground for a while. The latest phase of such a cycle is the reaction which is now little by little coming forth against the superficiality of the extreme institutionalists.

This situation, it seems to me, is very unfortunate. What is needed more than anything else in economics now is a new fusion between theory and observations. We need a theoretical structure more than anything else. But it must be a theoretical structure which is such that it is capable of being connected directly or indirectly with actual numerical observations. The true theorist in economics has to become at the same time a statistician. He has to formulate his notions in such a way that he gets a possibility of ultimately connecting his theory with actual observations. This will be stimulating, not only for the observational work, but for the abstract speculations themselves. I know of no better check on foggish thought in economic theory than to have the theorist specify his notions in such a way as if he were to apply the notions immediately to some actual or hypothetical statistical material.

Whether or not the economist shall be able to realize such a fusion between theory and observations is an important issue which has far-reaching consequences for mankind’s future. Man has proved sufficiently intelligent to create a huge economic machine capable of producing a great variety of useful things. But he has not been sufficiently intelligent to understand how to handle this big machine. He stands beside his big machine, not knowing how to steer it, only hoping that the running of the machine will be not too disastrous to him. The picture, I think, is not exaggerated. We may only think, for instance, of the situations which occur again and again in the production cycle; huge productive forces, machinery and labour being idle at the same time as there are millions of people who want very badly a great variety of things which could be produced by the idle machinery and labour.

Not only has man been able to create a big economic machine which he cannot handle, but he is making it bigger and bigger and more complicated all the time. He is constantly getting more and more handicapped in his attempt to steer it. If he shall ever catch up with it will depend on whether or not the science of economics will prove itself capable to cope with the new situations that constantly arise. It is a race of life and death, and man is certain to lose if he does not succeed in developing economics into the state of a true science, that is, a study based not only on fact collection, but also on constructive theoretical thinking.

The present lecture will be devoted to an analysis of the nature of economic theory and its place within the whole system of economics. Later in the course we shall make a humble attempt at formulating some parts of economic theory in such a form as to make an empirical verification possible. We shall also try to carry through some such verification by an intensive analysis and utilization of actual statistical material.

There are five types of mental activities in which the scientific worker has to engage.

1 The descriptive procedure. One sort of question that the scientist has to answer is: what happened? What is the situation? What course did the events follow? In order to answer these three questions he has to engage in descriptive, historical and experimental work. In some sciences, like economics, direct experiment is more or less impossible and the scientist must rely largely on the descriptive and historical answers to the questions here considered.

2 The understanding procedure. Another sort of question that the scientist has to answer is: why did it happen? Why did this situation exist? Why did the events follow the course they did? The answer to these questions constitutes the rational part of the investigation. By the power of his mind the scientist tries to bring some reasonable order into the happenings and the things he observed.

3 The prediction procedure. The questions here are: what will happen? What will the course of events be in the future? In order that this sort of questions shall have a meaning, the phenomenon considered must be such that it cannot easily be controlled by man. If it can be fairly completely controlled, no forecasting problem exists.

4 The human purpose decision. Here the questions are: what do we wish shall happen? What do we wish the situation to be? The three first sorts of questions are exclusively of an intellectual character. On the contrary the sort of questions here considered are of an ethical or moral sort. It cannot be answered unless we adopt some sort of a standard of social values. If the answer to such a question shall be socially significant, it must, of course, in some way or another weigh the opinions of different individuals. It is not a question of what you or I personally think in this matter, but of what is a socially fair position.

5 Social engineering. The question here is: what can we do to produce such happenings or such situations? This last sort of question is the most complicated we can ask. In order to give a significant answer to this sort of question, we have to build on an analysis of all the first four sorts of questions.

Now as to theory. What part of the mental activities mentioned above constitutes theory? The answer might be different accordingly as we interpret the word theory in a narrower or a broader sense. Some people have a tendency of interpreting ‘theory’ as synonymous with research in general. If this is done theory would, of course, include all the five mental activities tabulated. This, however, would not be in accordance with the common usage of the word and would also be scientifically rather a useless interpretation. We shall here take theory to mean the type of scientific work which comes under the heading (2). It is the attempt at understanding, at bringing a rational order into things which constitutes the essential feature of theory as we shall here take the word. We now proceed to a closer analysis of the nature of theory as thus defined, emphasizing in particular the place of theory within economics.

The observational world itself, taken as a whole in its infinite complexity and with its infinite mass of detail, is impossible to grasp. Taken in its entirety, in its immediate form of sense impressions, it resembles, so to speak, a jelly-like mass on which the mind cannot get a grip. In order to create points where the mind can get a grip, we make an intellectual trick: in our mind we create a little model world of our own, a model world which is not too complicated to be overlooked, and which is equipped with points where the mind can get a grip, so that we can find our way through without getting confused. And then we analyse this little model world instead of the real world. This mental trick is the thing which constitutes the rational method, that is, theory. The system of straight lines, circles, etc., of geometry is an intellectual model of the straight lines, circles, etc., which occur in the real world. The economic market in the abstract sense is a model of really existing markets, etc. Instead of the expression ‘model world’, we could also use the expressions, ‘schemes of thought’ or ‘system of fictions’.

When we create the model world it is up to ourselves to decide which features and characteristics the model world shall have and what kind of relations shall exist between the various phenomena and groups of phenomena in the model world. This we can do because we are sovereigns in the model world, so long as we do not break the rules of formal logic.²

This does not mean, of course, that our decisions regarding the constitution of the model world are ruled completely by free fantasy or caprice. The model world shall serve a purpose. It shall help to adopt a way of thinking that will ultimately be useful in our fight for control over nature and social institutions. It shall picture those indefinable things in the real world which we might call ‘essentials’, meaning by that, of course, essentials with regard to our own ends.

What kind of criterion have we, then, by which to judge if our model world conforms to this ideal? We have no such criterion – none that can be formulated as a definite logical rule. We have nothing except a mysterious, inborn ‘sense of smell’ which as a rule will guide us so that we finally get on the right track. This is precisely the reason why the scientist is to be considered a logical sovereign in his model world. He is just like a wise, absolute monarch. He uses his prerogatives with tact and care. He knows that this is the only way of ultimately obtaining his ends. He listens to the suggestions of facts but takes care to consider them non-obligatory.

The laws of the model world will often consist only in typification, an idealization of some observed empirical law. We observe, for instance, empirically that a given market will most frequently be able to absorb a greater quantity of an article, the lower the price. And having observed this, we create a model world with a demand curve, sloping downward.

But often the investigator will equip his model world with something more tha...

Table des matières

• Routledge studies in the history of economics
• Contents
• Illustrations
• Foreword
• Acknowledgements
• Editors’ introduction
• 1 General considerations on statics and dynamics in economics
• 2 Dynamic formulation of some parts of economic theory
• 3 Statistical verification of the laws of economic theory
• Index