FIRST LAUREATS OF NOBEL PRIZE IN ECONOMY: R. FRISCH (1895-1973) AND J. TINBERGEN (1903-1994)

Acad. Avtandil Silagadze

Ragnar Frisch was a professor of economics at the University of Oslo in Norway.

First Nobel Prizewinner: R. Frisch (1895-1972) and J. Tonbergen (1903-1994).
Two famous scientists – Ragnar Frisch and Jan Tinbergen – were awarded with Nobel Prize for the analysis of economic processes in the development of mathematical methods. The two scientists first devoted their research to the sphere of economic cycles and econometrics, and later to the planning of economic policy and study of economic development.
R. Frisch is a leading economist of the first half of the last century who technically determined D. Keinz’s statistic theory before his contribution to macrodynamics was published.
R. Frisch was born in 1895 in Norway. After finishing secondary school, he entered the University of Oslo to study economic science. He graduated from the University in 1919.
After receiving higher education, Frisch studied mathematics and statistics in France (1921-1923), Great Britain (1923), USA and Italy. In 1925, he was granted doctorate in the sphere of statistics. Later he became a lecturer. After returning from Yale in 1931-1955, he worked as a professor in the University in Oslo. At the same time, he was head of economic institute at University (1932-1965).
To R.Frisch’s mind, economic science was similar to physical sciences. He considered methodology to be a main thing for the development of economic sciences. He also determined the essence of macro-micro analysis and decision taking. He is a “pioneer” of econometrics. Thus, the research subjects for the intersection of such disciplines as economy, mathematics and statistics have been united in one science. In 1930, Frisch became one of the founders of economic society. Two years later he became an editor of the society’s magazine – “Econometrics”.
Frisch treated the idea of “invisible hand” with distrust. His interests concerned, mainly, planning under the influence of “Great Depression”. He started introduction and development of national revenue registration system with the purpose of planning. In post-war period, he was engaged with the issues of the development of national and afterwards international planning and, finally, with the development of the planning of developing countries. He was even a councillor of the Egyptian and Indian Governments. In Frisch’s opinion, the most important way of saving the humanity was economy planning. Later, his views became more radical.
Frisch has more than 150 publications. We should say that only a small part of his manuscripts was printed, among them two uncompleted books – “Production Theory” (1965) and “Maximum and Minimum” (1966). At first, he considered the problem of utility and tried to develop methods of measuring marginal utility. Afterwards he became interested in index theory. Despite it, we would refrain from saying that his research in the sphere of value theory has left a deep trace in modern economic science. He made a great contribution to the study of production, demand and macroeconomics.
After a hard work in the sphere of statistics, Frisch concerned a problem that became a major one in the new discipline of economy. Later, it was called equilibration problem. He created a common model of “expenses and issue” before Leontyev. He gave us formulation of this problem by criticizing Leontyev’s demand curves. According to this formulation, indices obtained in the result of observing prices and goods are created by the simultaneous move of demand and supply curves. These considerations served as a stimulus for the works of other researchers, though they have become a bit outdated. After the end of World War II, Frisch was no longer a leading figure in the world economy. He also concerned dynamic problems and tried to use statistic and dynamic terms in 1936. Relationship is considered statistic provided all its variables concern the same period of time, but it is considered dynamic if it contains variables that are referred to another period of time. It turns out that a theory is considered dynamic if it contains at least one dynamic relation. This terminology was shared by others.
Frisch filled oligopoly theory with elements of dynamics. According to A. Kurno’s, V. Lankhardit’s and H. Khoterling’s theory, an oligopolist does not react to the actions of his opponents. Frisch introduced the notion of “presumptive variation” (change). According to it, each oligopolist expects his opponent’s reaction. Therefore, it can be said that he “laid a bridge” between the past statistic oligopoly theory and dynamic theory of the future.
R. Frisch formed a macroeconomic theory of economic cycles. In his opinion, the acceleration principle of economic cycle is not enough for explaining the turning point. In case of emergency, inclusion of requirements for the goods meant for production was necessary (durables or capital stock). In other words, models with characteristic dependence are necessary for the full explanation. Kaletski’s “Macroeconomic Model of Economic Cycles” (1935) contained a system of differential equilibrium. Capitalists invest extra funds while workers are not able to save some money. As a result of it, the more a capitalist invests the more income he receives. Interinfluence of consumption and investment affects economic development that can be uniform and fluctuating, digressive and explosive. To Kaletski’s mind, economic cycles can be neither digressive nor explosive. He limited his subsequent analysis by the marginal cases of permanent amplitude and received a cycle of 10 years’ duration. Frisch’s model is, principally, similar to Kaletski’s model, but he went even further and received three interweaved and sharply digressive cycles (appropriately: duration for 8,6,3,5, and 2 years). Unlike Kaletski’s model, Frisch’s conception of economic cycles went beyond the limits of the essence of the mechanism of these cycles. Fluctuations that he described by means of dynamic model are classified as problem of expansion: fluctuations cease by themselves. Impulsive jerks permanently influencing the system make for their existence. He compared economy with a horse that responds to external jerks with digressive internal ones. He considered different kinds of impulses some part of each is accidental. He referred to Eugene Slutski who studied separate processes caused by any reason, though he did not establish mechanisms determining its expansion. Frisch thought that existence of empirical cycles in the event of any jerks was acceptable, which influences a system with determining reaction.
To Frisch’s mind, technological and production novelties can become sources of impulse. According to Schumpeter, Frisch clarified a virtually incessant stream of inventions that are transformed into large scientific and technical achievements by a mechanism of dynamic control. Later on, this analytical point of view was developed by neither him nor Frisch. Frisch (probably, under the influence of equilibrium problems) started an empirical creation of his macro model and surrendered leading position in this sphere to Tinbergen. In fact, in the very star of World War II, Frisch gave up common research and started research of applied economy.
In post-war time, Frisch spends all his energy on the issues of planning. His earlier article “Planning” (1934) was devoted to this subject. It explains economic crisis caused by past limitations by those of current purchases that he later called early symptoms of economic equilibrium. That is why he demanded change of the system that was based on the warrants of monetary economy and multilateral barter system. In a certain sense, it reminds of R. Owen’s “Fair Exchange”. Later on, Frisch offered a similar system in the sphere of international trade. His early views have gradually concerned planning system that is based on issued production and linear programming, and is provided with detailed investment sector. Frisch’s research is, mainly, focused on the improvement of computational algorithms and specifics of practical advantages of social functions that become maximal in the result of planning. To his mind, reasons are determined by democracy, and economist-planners must find ways of its realisation. Yet democracy is, mainly, limited by existing possibilities that give people freedom in realising their own purposes. This wide spectre has again testified to Frisch’s shrewdness. He has remained a flagship of applied economy, but his fundamental works became more rare ever since Frisch-economist was defeated by Frisch-plan-economist.
J.Tinbergen.
A double in the form of Tinbergen’s scientific activities appeared in Frisch’s scientific career. The difference of age was several years. Tinbergen was born in 1903 in Gaaga. He studied physics in the University of Leiden but, gradually, he became more interested in economy. His thesis mostly concerned problems of physics and economy (1929). In fact, he became mathematician-economist and tried to solve practical problems in his models by means of the analysis of a great number of factual materials. After graduating from the University, he started to work in the centre of Economic Cycle Research. He was its founder till 1945. At the same time, he was a professor of Rotterdam Economic Institute and an expert of the League of Nations in Geneva for two years’ time. From scientific point of view, these were very prolific years for him. They encouraged him to start economic research in the beginning of 40-th. In 1945, Tinbergen became a director of the main bureau of economic planning of Denmark and made a great contribution to the methodology of planning of economic policy. After giving a course of lectures in Harvard, he became a professor in Economic Institute of Netherlands (now University of Erasm).
In 1969, he and economist Ragnar Frisch received the first Nobel Prize in Economics for the development and use of dynamic analysis models of economic processes. He thinks that people’s state can be improved by means of reason and good intentions.
His works were published in the form of articles, brochures and small-size books. “Selected articles” (1959) represent only a very small part of Tinbergen’s important works.
In 30-th, Tinbergen’s attention was focused on the research of economic cycles. His model “About the cycles of shipbuilding” is the first example of linear differential equation. He went from the multiple correlation of individual time sequences to the creation of dynamic macroeconomic model of economy of Denmark that consisted of 21 equations.
As an expert of the League of Nations, he was responsible for the analysis of the theory of Gottfried Haberler’s economic cycles. Instead of fulfilling this assignment, he created the first tractate about macroeconomic model (1939) and in 1942, in his article he built a “neo-classic model” of economic development that counted on the lasting period of time and was based on the functions of Koba and Douglas. Judging by modern standards, Tinbergen’s research in the League of Nations is not very strong, but he laid a foundation of large scale model of economic fluctuations. One part of this research deals with the explanation of multiple regressive situations. For some countries and periods each investment experiences regression (construction of houses and railroads) in several determinants (prices of production costs, profits, assortment norms, pure profit and production development). Ratios of inverse proportionality are used for the establishment of the degree of influence of each accidental variables, and the degree of “determination” is estimated by a preliminary information about features, ratios, serial correlation of balances and reduction ratios. As far as we see, Tinbergen understood the definite limitation of his method that is why he put explanations in brackets. He tried to explain the USA economic cycle of 1919-1932 by means of the following approach.
Contrasted with the statisticity of Keinz’s “General Theory”, Tinbergen’s model is dynamic. It can be considered an empirical incarnation of Frisch’s analytical model in which jerks in the form of external factors influence the system by means of dynamic qualities. Tinbergen started to reveal these qualities in the corporations’ profits. In the long run, profit as a function of external jerks is represented in a “tailed form”. By means of speculations in stock market and abstraction of accrued capital, Tinbergen discovers a 4,8-year cycle. Strong fluctuations in shares bode explosiveness of the system meaning that “the bubble will soon burst”.
Tinbergen’s views were estimated unambiguously. Keinz —– published a review of his views. We should point out to the fact that Tinbergens’ model has borrowed almost nothing from Keinz’s “General theory”: creation of econometric models would in any case, find its direction even if Keinz did not write anything. One of the properties of Tinbergen’s model that has later made Keinz’s one useless consisted in the performance of a special role of stock exchange speculations.
Later on, Tinbergen studied a theoretic aspect of economic policy. As usual, disputes about policy are characterised by disputes about purposes. For instance, full employment is not compatible with price stability and tax balance equilibrium. Such conflicts are often called a magic “triangle”. Tinbergen’s contribution to economic science consists in the revelation of such conflicts. In fact, he laid the foundation of the theory of modern policy. The following of his works are devoted to the mentioned issues: “About the Theory of Economic Policy” (1955, together with R.Frisch), “Centralisation and Decentralisation in Economic Policy (1954) and “Economic Policy; Principles and Plans”(1956).
Tinbergen dealt with the planning of economic development on the further stage of his work. He looked for the ways of overcoming the gap between rich and poor countries ? created a model of education and regional planning. At the same time, he helpled international organisations and developing countries, especially, governments of Asian countries. Tinbergen’s views on global planning are reflected in his works: “Report of the 20-th Century Fund”(1962) and “Lessons of the Past” (1963). Perhaps, disappointment with the planning of economic development was stipulated by concentration of Tinbergen’s attention on the distribution of revenues in industrial economy, which was first reflected in his article “About the Theory of Revenues Distribution” (1959) and, subsequently, in his article “Distribution of Profits, Analysis and Policy”(1975). At that time, revenues were dominated. Studying this sphere, Tinbergen compares life with lottery, where people draw out accidental figures. In this case, the existing distribution of revenues is assessed by the results of the processes. Contrasted with it, Tinbergen started to propagate determinable approach based on the macroeconomic theory.
To Tinbergen’s mind, each person in the market has particular potentials. This person has his own subjective approach to the issues of employment, income, free time, risks and other professions. The real demand for each person depends on his future incomes. Service demand of businesses is formed by taking into account technologies and market conditions. Salary, employment and incomes in general depend on supply and service demand. Businesses gain high incomes if service supply is small and service demand is great, and, vice versa, businesses gain low incomes when service supply exceeds service demand. According to Tinbergen’s conclusion, the general tendency of economic development that is aimed at equalling industrial society depends, mainly, on competition in the sphere of education.
This served to decrease technological inequality that is disposed to inequality due to the increase of demand on highly qualified labour. It is clear to him that a full explanation of personal distribution of revenues would become a reason for the unification of all elements. However, economic analysis of supply and demand was more important to him. Tinbergen became more known as a specialist of economic development planning, though it is not quite like this. He became known in economy due to the creation of the first empirical model of economic fluctuations. This model turned out to be a decisive scientific achievement. His theory of economic policy as well as macrodynamic model was inspired by R. Frisch’s ideas. Tinbergen’s processing of these ideas was original. It aroused other specialists’ intensive interest in this branch.