Economic Theories

Microeconomic Theories: To the extent that ‘It’s all in Marshall’, as Pigou claimed, then Marshall’s Principles of Economics must have a generic claim to provide the basis for much of the microeconomic theory underlying quantitative analysis.

Macroeconomic Theories: For the theory behind much macroeconomic modelling, whether the author would have approved or not, Keynes’s General Theory is clearly the main source that was then developed by various brands of Keynesians: Neo-Keynesians, New Keynesians, anti-Keynesians, and Post-Keynesians.^[1]

Relevant Data

To investigate macroeconomic theories using conventional macroeconomic models one needs data on the variables in the model, and these are provided by National Income Accounts (NIAs).

The historical survey of the development of NIAs in Kendrick (1970) traces their origins in the UK back to Sir William Petty (1665) and Gregory King (1688). Moving forward to the twentieth century, accounts were produced by Arthur Bowley (1919, 1920) and Bowley and Stamp (1927) and although Bowley was at the London School of Economics (LSE) when the work was carried out, he was a Cambridge mathematician, a student of Alfred Marshall, who recommended him to the LSE, so there is a Cambridge link. These studies presented estimates of national income in terms of factor shares and also contained considerable information on industrial structure.

The work of Bowley and Stamp was updated by Colin Clark, a Lecturer at Cambridge from 1931 to 1937. In Clark (1932) he presented estimates of Britain’s annual national income for the period from 1924 to 1931 and also constructed estimates for the production and expenditure accounts. Some earlier estimates made by Clark had been used by Richard Kahn to estimate the multiplier in Kahn (1931) and Keynes was impressed by Clark’s results.^[2] Clark produced a major study on national income in Clark (1937) but then left Cambridge for Australia and did little other work in this area. Nevertheless, with the outbreak of the Second World War, Keynes published How to Pay for the War in February 1940, making use of Clark’s figures to make the calculations for his proposed income deferral policy to control excess demand during the war.

Among the academics drawn into government service as part of the war effort were James Meade and Richard Stone.^[3] Meade was based at Oxford but had been involved in discussions in Cambridge before the publication of The General Theory, and Stone had been taught by Clark while he was a student. They began working together on producing NIAs, with considerable encouragement and support from Keynes, and the publication of annual White Papers containing the estimates.

At the end of their war service, Meade went to the LSE and undertook the research in international economics that led to the award of the Nobel Prize (joint with Bertil Ohlin) in 1977. Stone returned to Cambridge, continued to work on NIAs, and played a major role in establishing internationally consistent standards. In 1984, he was awarded the Nobel Prize for Economics for this work.

While Keynes’s strong interest in the construction of NIAs was for the guidance they could provide for policy-making, they have provided the raw material for the estimation of macroeconomic models.^[4] The NIAs represent one method of measuring the economic activities of a country over a period of time, but there are other ways of measuring economic activity and of extending the NIAs, such as input-output tables, social accounting matrices (SAMs), and computable general equilibrium (CGE) models.^[5]

In parallel with his continuing work on the standardisation of NIAs, Stone considered how input-output tables might be used to provide a disaggregated analysis of the business sector to complement the information given by the NIAs (see Stone et al. 1949; Stone and Utting 1950; Stone 1951-1952). One of the more important developments was the concept of transaction models, which involve a matrix of transactions and a matrix of responses. The former presents a record of transactions between the different sectors in an economy, while the latter introduces changes into the model and examines their effects.

The information in a set of NIAs could be transformed into a SAM, a square matrix with rows and columns corresponding to the sectors in an economy being considered. The entries in the rows represent receipts and the columns expenditures, yielding a complete picture of all the monetary flows in the economy. Stone (1954a) provided a link between the various methods of presenting economic data by showing that both the NIAs and input- output tables could be derived from a SAM by pre- and post-multiplication of the SAM by grouping matrices. This integration of three different ways of analysing economic information greatly increased the flexibility and range of economic analysis.

• [1] See Dow (1998) for a detailed analysis of the various brands.
• [2] 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 hopeit is selling all right”’. For a further evaluation of Clark’s work, see Groenewegen (2003).
• [3] Stone describes these events in his Nobel Prize autobiographical notes. These are reprinted in Maler(1992: 109-114). See also Deaton (1992) and Johansen (1985).
• [4] In addition to the construction of current NIAs, historical British data for the years between 1688 and1973 were published in Mitchell and Deane (1962), Deane and Cole (1962) and Matthews et al. (1982);these have gladdened the hearts of many cliometricians.
• [5] Wassily Leontief constructed the first input—output tables for the USA in the 1930s (see Maragoni andRossignoli 2014). The basic idea for the SAM may be traced back to the 1758 Tableau Economique ofFrancois Quesnay, but recent work stems from the work published in Meade and Stone (1941). SeeKehoe (1998) for further details. An early example of CGE modelling is Johansen (1960). While thedevelopment of CGE models lies outside the period focused on in this chapter, Cambridge economistshave made important contributions to this method of quantitative analysis of macroeconomic data andits disaggregation (see Cunningham et al. 1998; Barker 1998).