Cambridge and Econometrics

Jim Thomas

Introduction

In his Editorial in the first issue of Econometrica in 1933, Ragnar Frisch set out to explain what econometrics was and what it was not. He wrote (Frisch 1933: 1-4; italics in original):

A word of explanation regarding the term econometrics may be in order. Its definition is implied in the statement of the scope of the Society, in Section I of the Constitution, which reads: ‘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 of 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.’

But there are several aspects of the quantitative approach to economics, and no single one of these aspects, taken by itself, should be confounded with econometrics. Thus, econometrics is by no means the same as economic statistics. Nor is it identical with what we call general economic theory, although a considerable portion of this theory has a definitely

J. Thomas (*)

Emeritus Reader in Economics, London School of Economics and Research Associate, STICERD, UK e-mail: This email address is being protected from spam bots, you need Javascript enabled to view it

R.A. Cord (ed.), The Palgrave Companion to Cambridge Economics,

DOI 10.1057/978-1-137-41233-1_5

quantitative character. Nor should econometrics be taken as synonomous [sic] with the application of mathematics to economics. Experience has shown that each of these three view-points, that of statistics, economic theory, and mathematics, is a necessary, but not in itself a sufficient, condition for a real understanding of the quantitative relations in modern economic life. It is the unification of all three that is powerful. And it is this unification that constitutes econometrics.

Thus, Frisch’s description of econometrics involves the coordination of statistical data, economic theory, and quantitative analysis. The form of the quantitative analysis is not specified, but the early emphasis in the work of Haavelmo (1943) and the Cowles Foundation in developing statistical methods for estimating the parameters in sets of simultaneous equations came to be equated with econometrics, as is clear from the contents of such early successful textbooks in econometrics as Goldberger (1964) and Johnston (1964). The result, one can argue, is that econometrics became narrower than was envisaged in Frisch’s Editorial, and my interpretation of econometrics will be broader than that covered in textbooks of econometrics. I shall include quantitative methods of analysis that are relevant to the investigation of the economic problem being considered.¹

To evaluate Cambridge’s contribution to econometrics, I shall consider both microeconomics and macroeconomics. Under these two headings I shall examine the three components of econometrics broadly defined, namely (1) the relevant theory, (2) the relevant data, and (3) the appropriate quantitative analysis. Separate attention will be given to the work of the Department of Applied Economics (DAE) under Richard Stone.^[1] ^[2] This chapter will be a historic survey through to the 1960s, to cover the period in which Cambridge made significant contributions to the development of quantitative analysis.^[3]

[1] This approach is consistent with Richard Stone’s view of econometrics, for as Hashem Pesarannotes (Pesaran 2004: 1,167): In July 1945 Stone returned to Cambridge as the first Director of thenewly founded Department of Applied Economics (DAE). As Director, Stone was given a free handin initiating the Department’s main programme of research. Encouraged by this he developed aresearch proposal organised around the aims of econometrics, which to him were defined muchmore broadly than its narrow textbook sense of today. He considered the ultimate aim of appliedeconometrics as increasing “human welfare by the investigation and analysis of economic problemsof the real world”, and believed that this lofty aim can best be achieved by the synthesis of threetypes of study: observations, formulation of testable hypotheses and the development of appropriatestatistical methods’.
[2] The discussion will be brief in some sections in order to avoid repetition with material presented in otherchapters.
[3] Backhouse (1996) provides a good overview of changes in British economics during the period from1945 to 1960 as part of a survey of the post-war period.