Friday, April 14, 2017

Ragnar Frisch's critique of macro econometrics

Ragnar Frisch (1895-1973) was an influential economist and is remembered as the father of econometrics. Frisch helped establish the Econometrics Society in 1930 and the economic journal Econometrica in 1933. He also received the first Nobel Prize in Economics in 1969.

Contrary to what one may think, Frisch provides a has doubts that econometrics can be used for macroeconomics. I always find it interesting when historical figures in economics (especially the father of econometrics) question the usefulness of mathematical economics.

This post is a collection of quotes from Frisch critiquing econometrics.

What is econometrics?

"Econometrics has as its aim to subject abstract laws of theoretical political economy or 'pure' economics to experimental and numerical verification, and thus to turn pure economics, as far as possible, into a science in the strict sense of the word." (On a Problem in Pure Eco­nomics, 1926)

"I believe that economic theory has arrived at a point in its development where the appeal to quantitative empirical data has become more necessary than ever. At the same time its analyses have reached a degree of complexity that require the application of a more refined scientific method than that employed by the classical economists." (Quoted in Ragnar Frisch1895-1995 by O. Bjerkholt)

Is macroeconomics unpredictable?

"The majority of the economic oscillations which we encounter seem to be explained most plausibly as free oscillations." (Propagation problems and impulse problems in dynamic economics, 1933)

"Deep in the human nature there is an almost irresistible tendency to concentrate physical and mental energy on attempts at solving problems that seem to be unsolvable." (From Utopian Theory to Practical Applications, 1970)

"Questions of convergence under an infinite time horizon will depend so much on epsilontic refinements in the system of assumptions - and on the infinite constancy of these refinements - that we are humanly speaking absolutely certain of getting infinite time horizon results which have no relevance to concrete reality. And in particular we are absolutely certain of getting irrelevant results if such epsilontic exercises are made under the assumption of a constant technology." (Econometrics in the World of Today, 1970)

What is bad econometrics?

"In this feverish world of ours, where one wants the economic analyses to produce easily understandable results quickly and at the least possible cost, some of us have fallen into the habit of assuming for simplicity that the hundreds sometimes thousands of variables that enter into the analyses are linked together by very simple relationships." (Theory of Production, 1964)

"I have insisted that econometrics must have relevance to concrete realities, otherwise it degenerates into something which is not worthy of the name econometrics, but ought rather to be called playometrics." (Quoted in The Concise Encyclopedia of Economics)

"We may perhaps start by throwing all kinds of production into one variable, all consumption into another, and so on, imagining that the notions 'production', 'consumption', and so on, can be measured by some sort of total indices. At present certain examples of micro-dynamic analyses have been worked out, but as far as I know no determinate macro-dynamic analysis is yet to be found in the literature." (Propagation problems and impulse problems in dynamic economics, 1933)

Support for General Equilibrium models

"An important object of the Journal should be the publication of papers dealing with attempts at statistical verification of the laws of economic theory, and further the publication of papers dealing with the purely abstract problems of quantitative economics, such as problems in the quantitative definition of the fundamental concepts of economics and problems in the theory of economic equilibrium. The term equilibrium theory is here interpreted as including both the classical equilibrium theory proceeding on the lines of Walras, Pareto, and Marshall, and the more general equilibrium theory which is now beginning to grow out of the classical equilibrium theory, partly through the influence of the modern study of economic statistics." (A Dynamic Approach to Economic Theory, 1927)

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