Jewellery, Microeconomics, Macroeconomics and Econometrics
Updated: Jul 1, 2020
Ishan Kashyap Hazarika
BA (H) Economics, Hansraj College
“What should be the fair price?”—asked Aristotle, “why is diamond priced more than water?” asked Adam Smith. The field of Economics had the long quest for a scientific understanding of society, being ever propelled from moral diktats to an actual understanding of the economy, of what governs it and what drives the human spirit behind it. With the giants of Classical Economics from Smith to Ricardo expounding the intuitive basis, it was by the end of the nineteenth century, the turn of younger minds to substantiate the ideas and to devise meaningful theories that can be tested with real-world data— great minds like Marshall and Hicks developing mathematical models of supply and demand that sought to yield testable predictions. The models, with the Marshallian principle of “layman-friendly economics” were simplistic and often diagrammatic, leaving the scrutiny of what they mean at the core, to the side. Empirical testing of the theories with proper statistical treatments was also rare, rendering the theories neither theoretically rigorous, nor empirically grounded. But regardless, what economics was seeing was the first attempt to ‘quantitatively’ study the forces that govern need and human behaviour, which were hitherto considered ‘unquantifiable’. This marked a great moment in the history of social science. It was then that the term “Economics” was coined, as an independent field of study, as opposed to being a part of Political Economy. This was a beginning, but an ambitious one at that.
While this humongous turn in the history of Economics was taking place, however, far aloof in Oslo, Norway, Ragnar Frisch, the son of a gold and silversmith was preparing to carry his family’s 300-year-old business forward. Graduating high school, he joined the David Anderson workshop as an apprentice, for training. His mother, however, wanted her son to also continue studies by the side, just to be sure of his prospects. Reluctant to devote much time to study besides the apprenticeship, he purposefully chose “the shortest and the easiest” course available at the University of Oslo, a program that was initiated only a few years ago by the Faculty of Law— Economics. He graduated in the course in 1919, and a year later, passed his craftsmanship tests in 1920. He joined his father’s business as a partner.
The next year, he received a fellowship from the university, to study Mathematics and Economics, in England and France for three years. This fellowship- perhaps- changed his destiny, as the Frisch who returned, bothered not to treat his family business that was facing difficulties at the time, but chose to continue his academic endeavours instead. He believed that “research, not jewellery, was his real calling”. This fellowship perhaps impacted the history of Economics in unimaginable ways too.
Frisch authored several papers in probability theory and earned his Dr Philos. degree in 1926 with a thesis on mathematical statistics. He had started teaching at the University of Oslo from 1925 itself and after his Dr Philos., he published his first work in Economics, arguing that Economics must follow the same quantisation scheme as followed in the other sciences, especially Physics. The same year, he published what has become a seminal article of his, “Sur un problème d'économie pure”, starting the quantization scheme he called for, himself.
In this work, Frisch reduced hundreds of pages of verbal justifications of his predecessors, into just three axioms of cardinal utility—which if true, can generate most of the predictions offered earlier and more. In the same paper, he also offered the axiomatic foundations of ordinal utility theory, thus accounting for both the cases, where the utility can be considered measurable and where it cannot. This provided the much-needed exposition, of what believing in the marginal utility analysis and the theory of demand meant—it meant the belief in the truth of the three axioms offered for the cardinal theory, or the axioms for the ordinal theory in that case. While much more worked had to be done on the subject, it was an inspiration for the influential ‘Neo-Walrasian Revolution’ that was to occur in the future and complete many of the problems that were left. Frisch also started lecturing on the theory of production, his lectures over the years, building major parts of the modern theory of production and supply, mathematizing the enterprise, and bringing in greater quantitative rigour.
However, the theory was not his only calling. The very foundation of science is the synergy of theory with evidence. The emphasis on evidence was, however, as described, largely missing in those days in Economics, with the lack of experiments and an understanding of how to find evidence in non-experimental data. Frisch’s interest was drawn to this situation. By the late 1920s itself, Frisch began the foundational work in how to use statistical techniques to comprehend non-experimental data, to ground economic theory better in reality. In 1927-28, he published several papers exploring the statistical analysis of time-series data, and in 1928 and 1934, he published major works in ‘regression analysis’—which is a staple diet for economists in the present. His work was the first to see and simplify the statistical deductions and arguments in this analysis using vector and matrix calculus. In 1929, he published his paper, “Statics and Dynamics in Economic Theory”, introducing dynamic analysis in economics. His work laid the foundations of a significant body of future empirical research, introducing novel techniques and spurring newer ways of asking questions, such as the distinction between endogenous and exogenous variables, lags and distributed lags, relations of instantaneous equilibrium etc. He became in a sense, the pioneer of several major fields of modern economics. He named his specialised use of statistics to study the economy, ‘Econometrics’. For the study of individual economic agents, he coined the term, ‘Microeconomics’ and for the study of the economy as a whole, he coined the term, ‘Macroeconomics’. As we see, his work was instrumental in the creation of these fields, which he named with such interest.
Frisch’s and his fellow economists’, such as Timbergen’s interest in econometrics led to the creation of the first international society of economists, the ‘Econometric Society’. Associated with this society, Frisch and his colleagues turned their attention to the macroeconomic problem of business-cycles—booms and busts across several sectors in the economy and short-term forecasting. Two papers related to this question made tremendous contributions in the transition of economics from a qualitative to a quantitative discipline. The first was a paper in Cassel’s Festschrift (1933), by Frisch himself. Imagine a pendulum swinging—left untouched, it will after some time, come to the position of rest. But if force is randomly applied to it at intervals, it will keep swinging, returning to the equilibrium and swinging again, exhibiting cyclical motion. This was physicist Hugo’s understanding of the pendulum problem—but Frisch’s understanding of the business cycles. The economy would return to the long-run equilibrium if left undisturbed, but with random external shocks, it swings away from equilibrium and then tends to return, exhibiting a cyclical pattern. This paper later influenced the formulation of the Real Business Cycle Theory, developed after Keynesian macroeconomics fell out of favour in the 1970s-80s. Frisch’s works greatly contributed to the understanding of such dynamic economic phenomena, which was to quite an extent missing in the static theories before him. This can be considered a major contribution to the same.
Partly with Frisch and Timbergen’s work as the basis, and partly with other ideas, analysis of the dynamic nature of economies and short-term forecasting became popular and influential fields of research in the economics community. Frisch has contributed tremendously to this field, however, he moved on to newer areas, shaping newer endeavours. His attention turned towards long-run forecasting and economic planning. He experienced an increasing interest in the economies of developing countries, studying economies where even the basic requisites such as freedom from hunger and infrastructure, posed severe problems. He mentored and advised governments across all continents, and attempted to leave a mark and influence the lives of people in the most direct way.
We know today of course, how his works have tremendously influenced and enriched both the abstract theoretical pursuit of truth and beauty and the empirical world of people and problems—enabling both the formulation of pure economic theories of choice to explore the human truth as well as rigorous evaluation of countless models and policies by future researchers using methods pioneered by him, which shaped and touched lives across the world. His works, led the way for a much better understanding of the economy, with well-backed theories and innovative techniques for empirics, his theories contributed to the making of economics as a predictive science, studying a dynamic system. “For having developed and applied dynamic models for the analysis of economic processes”, he was awarded the first Nobel Prize in Economics in history, along with Tinbergen, in 1969.
References:
https://www.nobelprize.org/prizes/economic-sciences/1969/summary/https://www.jstor.org/stable/1402316
Huhnhäuser, Alfred (1944). Die deutsche Einwanderung in Kongsberg. Beiträge zur Geschichte des Deutschtums in Norwegen. Oslo.
https://www.nobelprize.org/nobel_prizes/economics/laureates/1969/frisch-autobio.html
Olav Bjerkholt (2000), "A turning point in the development of Norwegian economics – the establishment of the University Institute of Economics in 1932". Memorandum No 36/2000, University of Oslo