Ragnar Frisch

1. History of Modern MacroeconomicsLecture 3. Macroeconometrics (1930’s)Kevin D. HooverDepartment of EconomicsDepartment of PhilosophyCenter for the History of Political EconomyDuke University Economics 314S. History of Modern Macroeconomics (Fall 2017)

2. Inventor of important terminology: microeconomics/macro-economics econometrics Influential in development of: dynamic economics econometric (empirical) methods Creator of modern professional institutions Founder of Econometric Society First editor of Econometrica Ragnar Frisch Ragnar Frisch (1895-1973), Nobel Laureate (1969) Economics 314S. History of Modern Macroeconomics (Fall 2017)

3. Contrasts and Complementarities Between Frisch and Keynes • micro vs. macrodynamics • econometrics • pragmatism and aggregation • dynamics • pervasive micro analysis • system properties and emergence • against econometrics Frisch Keynes Economics 314S. History of Modern Macroeconomics (Fall 2017)

4. Frisch: Dynamics and the Macro/Micro Distinction • “micro-dynamic analysis is an analysis by which we try to explain in some detail the behaviour of a certain section of the huge economic mechanism, taking for granted that certain general parameters are given . . .” • “macro-dynamic analysis, on the other hand, tries to give an account of the fluctuations of the whole economic system taken in its entirety.” • Macro not built on micro; micro presupposes macro. Economics 314S. History of Modern Macroeconomics (Fall 2017)

5. Frisch: The Economic Pragmatist • “it is always possible to give even a macro-dynamic analysis in detail if we confine ourselves to a purely formal theory . . . Such a theory, however, would only have a rather limited interest”for actual business-cycle problems. • “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.” Economics 314S. History of Modern Macroeconomics (Fall 2017)

6. Keynes on Dynamics • “The real task of [monetary] theory is to treat the problem dynamically, analysing the different elements involved, in such a manner as to exhibit the causal process . . . and the method of transition from one position of equilibrium to another.” Treatise on Money Economics 314S. History of Modern Macroeconomics (Fall 2017)

7. Keynes and the Centrality ofMicroeconomic Analysis • All the main Keynesian functions analyzed microeconomically: • consumption function • labor supply • labor demand • liquidity preference • investment Economics 314S. History of Modern Macroeconomics (Fall 2017)

8. An Illustration: Keynes on Liquidity Preference • Speculative demand for money • normal rate of interest—individual and heterogenous • hold bonds if market rate above normal  expected capital gain; hold money if market rate below normal  expected capital loss • market rate = rate at which market is divided into balanced groups of bulls and bears • no aggregation; market rate = some particular agent’s normal rate Economics 314S. History of Modern Macroeconomics (Fall 2017)

9. Another Illustration: Keynes on the Labor Market – 1 • Labor demand: standard firm optimization problem • Labor supply: not principally money illusion but a relative efficiency-wage argument: • “the struggle for money-wages is . . . essentially a struggle to maintain a high relative wage . . .” General Theory • Kevin Hoover, “Relative Wages, Rationality, and Involuntary Unemployment in Keynes’s Labor Market,”History of Political Economy 1995. Economics 314S. History of Modern Macroeconomics (Fall 2017)

10. Another Illustration: Keynes on the Labor Market – 2 • Defines unemployment not by aggregative version of individual situation: real wage > marginal disutility of labor but by market test:“Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.“ • No reference to aggregate labor-supply function. Economics 314S. History of Modern Macroeconomics (Fall 2017)

11. Keynes vs. Frisch: Role of Theory • Frisch: • macro system a giant machine approximated by coarser simplifications; • the “economic engineer”; models as mechanical analogues. • Keynes: • economy organic; macro properties emergent; • the “economic physician”; models as diagnostic tools Economics 314S. History of Modern Macroeconomics (Fall 2017)

12. Frisch’s Vision: Two Versions of the Tableau Economique Ragnar Frisch 1933 François Quesnay 1759 Economics 314S. History of Modern Macroeconomics (Fall 2017)

13. The Economy as Machine Economics 314S. History of Modern Macroeconomics (Fall 2017)

14. Keynes’s Vision: Mandeville’s Fable of the Bees “the gay of tomorrow are absolutely indispensable to provide a raison d'être for the grave of to-day” (Keynes, General Theory, pp. 105-106). Economics 314S. History of Modern Macroeconomics (Fall 2017)

15. Keynes: Economist as Physician or Mechanic? “[i]f economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid” Keynes Essays in Persuasion “The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems . . .” Keynes Economics 314S. History of Modern Macroeconomics (Fall 2017)

16. The Body Economic: The Economist as Physician Economics 314S. History of Modern Macroeconomics (Fall 2017)

17. Keynes vs. Frisch: Aggregation and Econometrics • Frisch: aggregation pragmatically necessary for econometrics; • Keynes: against econometrics; despite introducing terms such as aggregate supply and aggregate demand, aggregates do not drive dynamics Economics 314S. History of Modern Macroeconomics (Fall 2017)

18. Frisch: The Economy as Machine: A Simple Pendulum as an Analogue of the Business Cycle Economics 314S. History of Modern Macroeconomics (Fall 2017)

19. Complex Pendulums Economics 314S. History of Modern Macroeconomics (Fall 2017)

20. Propagation and Impulse Mechanisms Economics 314S. History of Modern Macroeconomics (Fall 2017)

21. Jan Tinbergen and Applied Macroeconometrics • Trained as physicist • Created first modern econometric models: • Smaller Dutch model • Larger U.S. model Jan Tinbergen (1903-1994) Economics 314S. History of Modern Macroeconomics (Fall 2017)

22. Jan Tinbergen • Socialist • In 1950s director of the Dutch Central Planning Bureau Jan Tinbergen (1903-1994), Nobel Laureate (1969) Economics 314S. History of Modern Macroeconomics (Fall 2017)

23. Tinbergen’s League of Nations Study (1939) • Two-volume study of U.S. business cycles for the League of Nations (1939) • vol. 1. statistical methodology and application • aim: develop modeling methods and test different business –cycle theories on data from several countries • regression analysis of systems of equations • dynamic equations: zt = zt-1 + xt+ wt+ ztxt = xt-1 + zt+ wt+ xt • reduced forms: zt = wt+ ztxt = wt+ xt • formulated through common-economics (i.e., without a lot of formal theory) and trial and error • object of Keynes’s attack on econometrics • vol. 2. a model of the United States economy 1919-1932 Economics 314S. History of Modern Macroeconomics (Fall 2017)

24. Frisch-TinbergenianPolicy: Outside the Machine Economics 314S. History of Modern Macroeconomics (Fall 2017)

25. Keynesian Policy: Inside the Game Economics 314S. History of Modern Macroeconomics (Fall 2017)

26. Economic Management Centrally Planned Liberal Economics 314S. History of Modern Macroeconomics (Fall 2017)

27. Thanks  The End Economics 314S. History of Modern Macroeconomics (Fall 2017)