The Nobel Series: Tinbergen, Frisch & public policy

The first winners of the Sveriges Bank Prize in Economic Sciences (we will call this the Nobel in Economics for ease of reference) were Ragnar Frisch and Jan Tinbergen. While Frisch was Tinbergen's senior by eight years, it was Tinbergen who popularised the prominent ideas and developed much more of a public persona. In fact, many of Frisch's most important contributions appeared as memoranda from his research institute or other institutions but remained otherwise unpublished. Tinbergen's works, on the other hand, often became standard reference works and were widely published.

In his presentation speech in 1969, Erik Lundberg of the Royal Swedish Academy of Sciences spoke thus about Tinbergen and Frisch, the two winners of the Nobel in Economics:

"Both our laureates have made a fundamental analysis of the theoretical basis of rational decision-making in the field of economic policy. (…) Professor Tinbergen, with the support of theories previously put forward by Frisch, has developed a simplified system for economic policy that has been applied in Holland. (…) As head of the Central Planning Bureau in the Hague, Professor Tinbergen and his co-workers have constructed an econometric model for forecasting and planning economic policy in Holland."

The Tinbergen rule

As a student of physics in Leiden, Netherlands, Tinbergen tried to apply the tools of mathematics and physics to economic problems. He continued to do so in his student life and later as a Policy Expert in the Central Planning Bureau in the Netherlands and an academic.

Tinbergen's contributions to the theory of economic policy and to the art of building and applying econometric models to public policy are well known and undisputed.

Tinbergen distinguishes three types of variables: data, target variables, and instruments. Data are those variables that we cannot influence but appear to us as givens. They are frequently referred to as parameters. These include world market prices, import tariffs and regulations of other countries, and international industrial norms (e.g., ISO standards). Tinbergen listed output or GDP, employment level, the balance of payments, and the real wage rate as examples of target variables. Instruments are basically policies that are used to influence the target variables using the data available. Tinbergen's rule says that to successfully achieve independent policy targets, at least the same number of independent policy instruments are required.

The Tinbergen rule should not be confused with a related principle that has become known in monetary economics as the Tinbergen principle which states that monetary policy should be limited to address economic stability and other policies should be used to address the stability of the financial system. While the Tinbergen principle addresses a specific set of policy issues, the rule is general.

Frisch's main research

Frisch is known for his pioneering work in econometric modelling and measurement; indeed, Frisch invented the word 'econometrics' to refer to the use of mathematical and statistical techniques to test economic hypotheses.

Frisch's research on economic theory and statistics was reflected in the 1926 paper on consumer theory which led to consumer demand being studied as a set of Axioms. The paper also claimed that marginal utility could be measured empirically. The term 'econometric' was also first used in this paper. His dissertation (1927) on time series and statistics is also well known. In 1927, on a Rockefeller Foundation trip to the United States, he met Irving Fisher and, together with Charles Roos, they began planning the formation of the Econometric Society, which he founded in 1930. This Society also began the publication of the journal Econometrica, which Frisch edited for 22 years.

All in all, Ragnar Frisch thought of himself as "the heavy artillery" and his pupils as "the infantry". Frisch's idea was to influence policy through his pupils. He contributed a great deal to the national accounts, the national budget and the macroeconomic planning models which are used in Norway even today. In addition to his duty as an academic, he also had political ambitions and was involved with the Labour Party since the 1930s. He also advised his government on macroeconomic policy at various times. Frisch was a socialist in his thinking and wanted to achieve a combination of social justice and a high rate of economic growth through economic policies.

On similar tracks

During the 1930s, both focused on two broad economic areas; the nature of the business cycle and value theory. Tinbergen's report for the League of Nations, with its macro-econometric model of the United States, was designed in close conversation with Frisch. After the Second World War, both led important economic policy institutes in their countries.

Both Tinbergen and Frisch used econometrics in the scientific measurement of welfare and the development of quantitative models of economic dynamics. Frisch acted more like a mentor to the younger Tinbergen in these first years. In the early years, econometrics was not yet clearly defined and both were actively trying to shape what it entailed. Frisch did so by arriving at a standard notation system in the new field.

However, while Frisch was the ideas person, it was Tinbergen who implemented many of the ideas and became better known for these ideas. For example, it was Frisch who made a breakthrough when he 'inverted' the logic of econometric modelling into the logic of economic planning (Andvig 1988; Dupont-Kieffer 2003). But it was Tinbergen's name which became associated with the new methodology of economic policymaking through his seminal book 'On the Theory of Economic Policy' (Tinbergen 1952). The language of policy targets and instruments is generally attributed to Tinbergen and has become standard terminology in economics.

Conclusion

Later in their careers, both Tinbergen and Frisch expanded their works to the problems in the world and were actively involved in development planning. They were involved with the planning efforts in India, and later Egypt and were strong believers in a prominent place of economic expertise in the modern state. In 1956 Tinbergen helped in the 2nd Five Year Plan being formulated in India. And later he did the same in Turkey.

In the 1960s, both had different ideas and hopes for the future. Tinbergen got involved with the UN and the Club of Rome in matters related to European integration. Frisch on the other hand believed that by perfecting and extending his decision-models he could be of more value.

IG Patel, the former Governor of Reserve Bank of India recalls in his memoir how a series of economists — Gunnar Myrdal, Ragnar Frisch, Jan Tinbergen, Oskar Lange and Richard Goodwin — came to India in the late 1950s with a definite view that development could be planned centrally to the last village. Tinbergen was also the Doctoral advisor of the well-known Indian economist Sukhamoy Chakraborty (who taught me development planning at Delhi School of Economics.

He was also the Chairman of the PM's Economic Advisory Council and a member of the Indian Planning Commission in the 1970s) at Erasmus University, Rotterdam.

Clearly, the econometric tools suggested by Tinbergen and Frisch have been used widely in public policy, not only in their respective countries but also worldwide. In particular, the tools were used in development planning in many developing countries. While there is little doubt about their contribution in econometrics, the extent to which the development planning model succeeded in India and many developing countries is debatable.

Views expressed are personal