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The Palgrave Companion to Cambridge Economics pp 93–109Cite as

Palgrave Macmillan

Cambridge and Econometrics

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Abstract

In 1933, Ragnar Frisch explained that econometrics involved the coordination of (i) economic theory, (ii) statistical data, and (iii) the appropriate quantitative methods of analysis. These quantitative methods of analysis cover a wider range of techniques than that conventionally covered in textbooks on econometrics. This chapter provides an historical account of the important contributions made by Cambridge economists to the development of all three components of econometrics during the period up to the 1960s.

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Notes

  1. 1.

    This approach is consistent with Richard Stone’s view of econometrics, for as Hashem Pesaran notes (Pesaran 2004: 1,167): ‘In July 1945 Stone returned to Cambridge as the first Director of the newly founded Department of Applied Economics (DAE). As Director, Stone was given a free hand in initiating the Department’s main programme of research. Encouraged by this he developed a research proposal organised around the aims of econometrics, which to him were defined much more broadly than its narrow textbook sense of today. He considered the ultimate aim of applied econometrics as increasing “human welfare by the investigation and analysis of economic problems of the real world”, and believed that this lofty aim can best be achieved by the synthesis of three types of study: observations, formulation of testable hypotheses and the development of appropriate statistical methods’.

  2. 2.

    The discussion will be brief in some sections in order to avoid repetition with material presented in other chapters.

  3. 3.

    Backhouse (1996) provides a good overview of changes in British economics during the period from 1945 to 1960 as part of a survey of the post-war period.

  4. 4.

    See Dow (1998) for a detailed analysis of the various brands.

  5. 5.

    Tily (2009: 343, fn. 20; italics in original) reports that ‘On January 2 1933, Keynes wrote to Clark: “I have just finished reading your book carefully … I think it is excellent. An enormous step forward. I hope it is selling all right”’. For a further evaluation of Clark’s work, see Groenewegen (2003).

  6. 6.

    Stone describes these events in his Nobel Prize autobiographical notes. These are reprinted in Mäler (1992: 109–114). See also Deaton (1992) and Johansen (1985).

  7. 7.

    In addition to the construction of current NIAs, historical British data for the years between 1688 and 1973 were published in Mitchell and Deane (1962), Deane and Cole (1962) and Matthews et al. (1982); these have gladdened the hearts of many cliometricians.

  8. 8.

    Wassily Leontief constructed the first input–output tables for the USA in the 1930s (see Maragoni and Rossignoli 2014). The basic idea for the SAM may be traced back to the 1758 Tableau Économique of François Quesnay, but recent work stems from the work published in Meade and Stone (1941). See Kehoe (1998) for further details. An early example of CGE modelling is Johansen (1960). While the development of CGE models lies outside the period focused on in this chapter, Cambridge economists have made important contributions to this method of quantitative analysis of macroeconomic data and its disaggregation (see Cunningham et al. 1998; Barker 1998).

  9. 9.

    See Thomas (1989: 146).

  10. 10.

    Here R is an index of retail sales in nominal terms, as a proxy for consumption, Y L is aggregate labour income in nominal terms, P w is an index of wage rates, and B is a measure of income inequality defined on median incomes. If the MPC declines with increasing income and income distribution matters, then both β1 and β2 should be negative, which they were. Staehle published his data, and when I reran his regression it yielded stable estimates and performed well against the standard specification tests (see Thomas 1992).

  11. 11.

    For the details of the debate, see Garrone and Marchionatti (2004).

  12. 12.

    If we contrast Keynes’s negative reactions to the studies of the MPC and to Tinbergen’s business cycle analysis, the issues targeted are very different. In the MPC exchanges, Keynes’s major concern was to avoid too narrow an interpretation of the MPC and he did not comment on or criticise the statistical analysis used in the studies by Staehle and Gilboy. In his response to Tinbergen’s work, his own theories are not in question and he was able to take a broader view of the dangers he saw in the application of multiple correlation analysis to economic theorising.

  13. 13.

    In the opening footnote, Samuelson writes that ‘I owe much in what follows to discussions with my former student, Dr. Lawrence R. Klein’ (Samuelson 1946: 187, fn.1).

  14. 14.

    See Stone and Pesaran (1991: 96–105).

  15. 15.

    Some of the research was made possible by work going on at Cambridge to develop digital electronic calculators that began to make large-scale number crunching exercises possible. See Smith (1998: 98–99 and the references given therein) for more details.

  16. 16.

    However, when interviewed by Deaton and asked about how giving up his Directorship of the DAE had affected his work, Stone replied: ‘Very little: it really worked out for the best from my point of view. At first I was a little put out as I had come to think of the Department as mine’ (Stone quoted in Stone and Pesaran 1991: 105).

  17. 17.

    This is a convenient spot at which to end this historical survey of the many contributions to econometrics made by Cambridge. What followed the move to London will be explored in a chapter ‘LSE and econometrics’ to be included in the forthcoming Palgrave companion to LSE economics.

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  1. Emeritus Reader in Economics, London School of Economics and Research Associate, STICERD, London, UK

    Jim Thomas

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    Robert A. Cord

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Thomas, J. (2017). Cambridge and Econometrics. In: Cord, R. (eds) The Palgrave Companion to Cambridge Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-41233-1_5

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