Ragnar Frisch: A Love Affair Between Economics and Statistics

On March 24, 2017, the American Health Care Act (AHCA) was pulled from the floor of the House because it lacked the necessary votes to get it passed. Many have claimed to know the reasons for this failure: from Paul Ryan’s inability to handle Congress, to the Freedom Caucus’ avid opposition to the bill. Though, much of the blame is laid at the feet of the Congressional Budget Office’s analysis of the bill. The CBO examined the lasting impact the bill would have on Americans, if passed, such as the number of insured people, the higher cost of premiums, and the negative effect on the federal budget.

How were they able to determine those relationships? They had an advanced econometric model that owes in part it’s existence to Dr. Ragnar Frisch.

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Although Ragnar Frisch was a doctor in mathematical statistics, he changed the game in economics. A list of his accolades: the father of econometrics, the father of the current methods of macroeconomic studies, and one of the first two Nobel Prize winners in Economics. He and Jan Tinbergen won the first year the Economics Nobel in 1969 “for having developed and applied dynamic models for the analysis for economic processes.”

So that’s a little vague. What they’re referring to here is Frisch’s contributions to both econometrics and macroeconomics. Frisch essentially founded econometrics, even coining the term “econometrics” itself. We can all thank him for making statisticians out of economists. He also helped found the contemporary ideas of macroeconomics and studying the movement of the economy as a whole. This was most popular in his discussion of the business cycle.

Picture from RomEconomics: “How economists like Frisch see the economy.”

When Frisch was writing his famous paper, contemporary business cycle theory had explanatory variables for the booms and busts of our economy such as consumption, savings, and production. Frisch saw these variables in his time, but there weren’t enough equations in the model to calculate the business cycle. So, Frisch brought his mathematics background to bear and created a model that could better predict the ups and downs of business cycles.

Though he made some big moves in the field of economics, he was overshadowed by one of the more famous economists, John Maynard Keynes. Keynes came out with his macroeconomic model at around the same time and grasped the public imagination much more effectively than Frisch. Frisch had dense mathematical models that spoke on relationships between variables and factors that could inhibit or grow the size of the economy’s booms and busts. Keynes, on the other hand, was a much better writer whose ideas were easier to grasp. In the end, ideas from both of these economists were terribly rough around the edges, but it’s all about selling them. Keynes won the economist popularity contest because he was into “probing what men believe they ought to believe, rather than proving what is true according to abstract methods.”

“Shoot for the moon. If you miss, you’re still in fucking space.” That’s the quote that came to mind after reading through Ragnar Frisch’s ambitions and work. Frisch began his writings in the 1930s as a strong proponent of free markets as the solution to all allocation problems. However, as a result of witnessing the Great Depression and the subsequent rise of the Soviet Union, he became increasingly disillusioned with unregulated markets. The hands-free approach in the U.S. brought the economy to its knees while the Soviet’s hands-on method helped it become the acclaimed economic superpower in the mid-20th century.

These events and his support for the Soviet Union spurred his lifelong ambition of finding every single relationship and variable in the economy to reach the holiest of grails in economics: economic calculation. In his eyes, if we could just perfect the math of economic calculation we could bring markets out of their undesigned, dog-eat-dog, hellscape that constantly fail. Or, as he called it “planlessness.” Even when governments would fail, he would stand true to economic calculation by claiming that the government was practicing “a thoroughly naive and unimaginative form of economic planning.” Or in other words, it’s not that economic planning doesn’t work, it’s just that you didn’t do it right!

Frisch’s contribution to the field of economics was so revolutionary and pervasive that we simply see it today as part of the everyday fabric of economic study. We use econometrics and mathematical modeling in the AHCA, but we also use it in practically every subdiscipline of economics. This plays a major role in regulatory analysis, stock exchange analysis, and nearly all empirical work. Although Frisch pursued the pipe dream of economic calculation, his ideas are still with us today. And, though the saying goes, “We are all Keynesians,” it’s safe to say we are also all Frischians.

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