Econometrics and Keynesian Economics
Stone had many interactions with Keynes during the war when he was working on successive budgets and national accounts at the newly formed CSO, which sprung out of the Cabinet Office in 1943. Unlike many other economists in government at the time and in Cambridge later, he was concerned with measurement and model building rather than short-term economic advice on the issues of the day. In this, he was very unlike Keynes and was much more interested in providing the basis for policy formation rather than the advice itself. Indeed, his work in government and later on national accounts provided the statistical foundations of Keynesian macroeconomic policy. He was very reluctant to get involved with the theoretical debates and battles of the day, preferring to work on positive economic issues such as the determination of consumers’ expenditure or the large-scale modelling of national economies. Stone was one of the founders of econometrics, in sharp contrast to the prevailing dismissal of the subject in Cambridge, most famously by Keynes in his critique of Tinbergen in 1939. Unfortunately, this hostility continued as a position for many Cambridge Keynesians of Stone’s generation.
Therefore, he was in an ideal position to make a judgement on Keynes’s attitudes towards economic statistics and econometrics; see Pesaran and Smith (1985). In his Keynes Lecture in 1978 [167], Stone assessed the attack on econometrics in Keynes’s review of Tinbergen, the attack that became the received wisdom of some of Keynes’s followers after the war. Stone puts forward three suggestions for the virulence of the critique. First, ‘Keynes suffered from an irresistible urge to overstate ... Both by temperament and by training he was heir to the great rhetoricians of the nineteenth century’. Second, ‘[B]y the thirties Keynes’s mathematics had become pretty rusty ... Keynes never seems to have relied much on his mathematics and when it came to econometrics he can hardly be said to have been conscious of doing any’. And third,
In my experience Keynes’s reaction to anything new was to look for the weak spots and shoot them full of holes. This was not the end of the matter but only a way of gaining time, as he usually thought things over and either came up with some really good arguments or changed his mind [167: 62—63].
In fact, Keynes was a founding member of The Econometric Society in 1930 and became its President through 1944 and 1945. When he was invited to become President by Alfred Cowles, in mid-1943, he replied, ‘[W]hilst I am interested in econometric work and have done something at it at different times in my life, I have not recently written anything significant or important along these lines, which would make me feel a little bit of an imposter’ (Keynes quoted in Pesaran 1991: 99). In his last letter to the Cowles Commission, dated 23 July 1945, Keynes expressed his great regard for Tinbergen, who had visited him in Cambridge: ‘I felt once more as I had felt before, that there is no-one more gifted or delightful or for whose work one could be more anxious to give every possible scope and opportunity’ (ibid.). What a contrast these remarks are to Keynes’s ill-tempered and rude review of Tinbergen’s econometrics contributions to the League of Nations’ report in 1937. As Stone remarks: ‘Nothing could show better the difference between Keynes’s first impersonal impressions and his considered view based on personal experience’ [167: 64]. There was also the practical effect when Keynes had to grapple with the interpretation of data to understand behaviour: ‘What Keynes wrote when he contemplated the literature as a non-participant and his reactions when he himself was on the breach were quite different’ [ibid.: 72]. Leif Johansen (1985: 8) comments:
Stone was obviously quite aware of Jan Tinbergen’s, Lawrence Klein’s and others’ constructions of macroeconomic models and the potential significance of national accounts in this context. In another early article co-authored with E. F. Jackson [22], Stone discussed the use of macroeconomic models as an aid in the analysis of economic policy issues. He illustrated this by constructing a model reflecting the ideas and numerical relations found in Nicholas Kaldor’s well-known appendix to W. H. Beveridge’s report Full Employment in a Free Society (1944).[1]
The Cambridge economists closely associated with Keynes in the 1930s were fully behind the initiatives that led to the creation of the Department of Applied Economics (DAE), and the appointment of Stone as its first Director. The initiatives first took the form of the Cambridge Research Scheme, sponsored by the NIESR, which had as one of its original functions ‘to act as a channel between foundations which supplied finance for research, and individuals, universities and other institutions needing such support’ [167: 85]. The Cambridge Research Scheme was chaired by Keynes and had as its members Kahn, Sraffa, Champernowne, Joan Robinson, Austin Robinson (as Secretary), and Michai Kalecki (as statistician). The Scheme was awarded a grant of ?600 for the year 1938-1939 on the general research topic of ‘the process of economic change in the United Kingdom’. However, the Scheme came to be seen as too loose and informal, and its research programme was subsumed in the proposals for the DAE in 1939. Stone was working as Keynes’s assistant during the war, but also had projects in the new NIESR, projects which eventually moved to Cambridge after the war. He also had a personal connection since Feodora Leontinoff, who became his second wife in 1941, was Secretary of the Institute.
Although the war intervened and delayed the process of establishing the DAE, the direction of Stone’s interests were clearly in using and developing econometric techniques for applied economic work. His first paper, with W.A. Tweddle, was published in 1936 in Econometrica [1]. The paper published in 1938 [3] with his first wife, W.A. Stone, was on estimates of the marginal propensity to consume and the multiplier. The paper used and developed econometric techniques to analyse data and provide the estimates. The paper references the pioneers of econometrics, Tinbergen and Frisch, and adopts correlation and regression techniques. Stone was later to say, ‘I think it can be fairly said that if econometrics struck firm roots in post war Britain and has grown in spite of adverse winds into a sturdy tree, our thanks should go in large measure to Maynard Keynes’ [167: 87].
- [1] See Kaldor (1944).
