LN-9 Ragnar Frisch and the history of econometrics Ragnar Frisch - PDF document

LN-9 Ragnar Frisch and the history of econometrics

Ragnar Frisch 1895-1973 Background Frisch, christened Ragnar Anton Kittil Frisch, was born in Oslo as the only child in a family with a jewellery business in the centre of Oslo. He was naturally expected to eventually take over the business after his father. (The firm had been established by Frisch’s grandfather in 1856; the Frisch name may have come to Norway with a mining engineer brought over from Saxony to work the silver mines at Kongsberg about 200 years earlier.) After school Frisch duly started as an apprentice in the well known Oslo firm David-Andersen. It is an often told story that Frisch’s mother, realizing how intellectually gifted Ragnar was, insisted that he along with the apprenticeship should take up a university study. Economics was because it was short and easy. Frisch graduated as cand.oecon. in 1919 and completed his probation work as a goldsmith in 1920. None of the two teachers of economics when Frisch studied (Oskar Jæger and Thorvald Aarum) were known outside Scandinavia. It was a study of limited depth but it may have served well as an introduction to the literature. Frisch did well in the exams. In one of exam papers - the question asked for a discussion of pro’s and con’s of progressive taxation – Frisch wrote something which may be read as his scientific credo: “We must not allow ourselves to be intimidated by the apparently impossible. History shows that man has a remarkable ability to make good on Aristotle’s maxim: Make the immeasurable measurable.” The unnamed “immeasurable” entity here was “utility”. Frisch was inspired as we shall see by Jevons, perhaps by others as well. We have studied earlier some persons who took up economics for serious study after they had become rich through luck or work. With Frisch it is the other way around. After his probation work his father made him equal partner in the business. That didn’t make him rich exactly but reasonably well off. Frisch chose to spend about 3 years with his wife abroad for further study. Most of the time he spent in Paris but he also visited UK and other countries. He followed some lecture

series but mostly he read voraciously and studied on this own: mathematics, statistics and economics. After returning to Oslo Frisch became universitetsstipendiat , gave some lectures and prepared a doctoral dissertation in theoretical statistics (the first in Norway) and defended it in 1926. In that year he also published his first article in economics (in a Norwegian mathematical journal). This paper, titled Sur un problème d’économie pure , is often cited, mainly for the opening paragraphs: “Intermediate between mathematics, statistics, and economics, we find a new discipline which, for lack of a better name, may be called 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.” (Frisch 1926/1971: Sur un problème d’économie pure [On a problem in pure economics]) What Jevons actually said on the page Frisch referred to was that “the price of a commodity is the only test we have of the utility of the commodity to the purchaser; and if we could tell exactly how much people reduce their consumption of each important article when the price rises, we could determine, at least approximately, the variation of the final degree of utility - the all-important element in Economics.” Frisch’s idea or turning economics into a science was really a commitment and nothing else may have been so important to him at that time. He had surveyed economics at a time of great progress in science. Economics was lagging far

behind, there was no doubt about that, despite having had great pioneers. Frisch wanted both to promote the idea of an economic science and address some of the challenges in such a science, for which he had already fount the name econometrics . Immediately after the 1926 article Frisch started to elicit support from others for the idea of econometrics and work systematically towards establishing both an organization and a journal to promote econometrics in this broad sense. Frisch was in fact building a comprehensive network covering many countries. The effort was eventually brought to an important stage of fruition at the foundation of the Econometric Society in 1930 in USA in December 1930 and the journal Econometrica two years later. Frisch worked towards this goal with Irving Fisher, Joseph Schumpeter, François Divisia and Eugen Slutsky, among others, but there is no exaggeration to say that Frisch was the driving force in this venture, which became a rather important step in the internationalization and the scientization of economics. The Econometric Society adopted a constitution, drafted by Frisch, where the key sentences expressing the aim of the Society were as follows: “The Econometric Society is an international society for the advancement of economic theory in its relation to statistics and mathematics. … Its main object shall be to promote studies that aim at a unification between the theoretical-quantitative and the empirical-quantitative approach to economic problems and that are penetrated by constructive and rigorous thinking similar to that which has come to dominate in the natural sciences.” The term econometrics has later come to have a narrower meaning than Frisch originally intended, more like the study of statistical methods for the application of economic models . We add into the story a few biographical details on Frisch. In 1926 got a Rockefeller Fellowship and visited USA in 1927. In 1928-29 he was teaching in Oslo. Frisch’s father died, the family firm was in dire straits and Frisch may have considered to give up economics as a professionnel career. It was at that time that Yale University (Irving Fisher) invited him for one year. Frisch restructured the company, left it it the hands of a manager before he left to spend a year and half in USA in 1930-31. Most of Frisch’s scientific ideas seems to have originated in during this visit. While he was away he was appointed Professor of economics and statistics in Oslo. After Frisch’s return to Oslo the University Institute of Economics was established with Rockefeller from 1932 as a research institute at the university but not part of it.

Frisch’s role in the foundation of the Econometric Society and his research at that time made him quite well known internationally, especially among younger talented economists who joined the Society. Frisch was a very active participant at the European meetings of the Econometric Society and also editor of Econometrica for many years. More on Ragnar Frisch can be found on a special web page: http://www.sv.uio.no/econ/om/tall-og-fakta/nobelprisvinnere/ragnar-frisch/ What were Frisch’s scientific concerns in the 1930s? This is more or less the same as asking what his conception of econometrics was. Econometrics was about quantification – theoretical quantification and empirical quantification. Theoretical quantification meant to make theoretical concepts measurable. A most important theoretical concept was – utility , used by many but often in imprecise and vague ways. Perhaps one could say that Frisch was more oriented towards methodological challenges than theoretical developments. Utility Measurement (and related issues) 1926 Sur un problème d’économie pure [On a problem in pure economics] 1932 New Methods of Measuring Marginal Utility , Tübingen 1936 Annual survey of general economic theory: The problem of index numbers, Econometrica 1959 A complete scheme for computing all direct and cross demand elasticities in a model with many sectors, Econometrica Utility was a prime object for theoretical quantification. To measure (marginal) utility was the challenge Jevons had formulated and what Frisch had stated in his exam paper. Frisch was naturally influenced by his close reading of Jevons, Pareto, Edgeworth, Irving Fisher and Slutsky. Frisch proposed an axiomatic approach as the foundation for the existence of utility functions in individuals, implying that the individual indifference curves/utility function could be regarded as the outcome of answers to choice questions suggested by the axioms. Frisch would have seen this as very close to the thinking of Pareto and Fisher and without the psychological overtones of Edgeworth. We can only give a very brief indication of Frisch’s axiomatic approach here. Frisch formulated such choice axioms in the 1926 paper, as the following: The axiom system for quantifying utility. 1. Local axioms 1.1 Determination ( P , a )  ( P , b ) or ( P , b )  ( P , a ) or ( P , a )  ( P , b )