After the 1920s, the theoretical and methodological approach to economics deeply changed. Based on a criticism of Marshall’s work and legacy, a new generation of American and European economists developed Walras’ and Pareto’s mathematical economics. As a result of this trend, the Econometric Society was founded in 1930.
The constitutional assembly was held in Cleveland, Ohio, during the annual joint meeting of the American Economic Association and the American Statistical Association. The Norwegian economist Ragnar Frisch played an important role in the Econometric Society that was founded to enhance studies based on the theoretical-quantitative and the empirical-quantitative approach to economic problems. In this way, the founding fathers believed that economic thinking could be as rigorous as the one that dominates the natural sciences.
At the 5th European Meeting of the Econometric Society, in 1935, Jan Tinbergen presented a paper on ‘A mathematical theory of business cycle policy’ that followed the Econometric Society’s guidelines. His causal explanation of the business cycle began with a priori economic-theoretical considerations about explanatory variables and then he proceeded to test a model.
In the late 1930s, John Maynard Keynes and other economists objected to this recent “mathematizing” approach. Keynes, as editor of the Economic Journal, wrote a negative review of Tinbergen’s 1939 book A Method and its Application to Investment Activity. This book presented an statistical testing of business cycle theories based on the application of the method of multiple regression and mathematical framing in the form of a specified model. At the core of Keynes’ concern lied the question of methodology. Recalling his own words:
Am I right in thinking that the method of multiple correlation analysis essentially depends on the economist having furnished, not merely a list of the significant causes, which is correct so far as it goes, but a complete list? For example, suppose three factors are taken into account, it is not enough that these should be in fact veræ causæ; there must be no other significant factor. If there is a further factor, not taken account of, then the method is not able to discover the relative quantitative importance of the first three. If so, this means that the method is only applicable where the economist is able to provide beforehand a correct and indubitably complete analysis of the significant factors. The method is one neither of discovery nor of criticism. It is a means of giving quantitative precision to what, in qualitative terms, we know already as the result of a complete theoretical analysis. (Keynes 1939: 560)
In this paragraph, it is clear that Keynes doubted the use of inductive methods of generalization and statistiicial inference to build economic theories because of the peculiarity of the economic systems characterized by:
- a low degree of homogeneity,
- a high degree of complexity
- the lack of stability through time.
Indeed, on behalf of the peculiarities of the economic systems, Keynes highlighted that econometrics turns out to be a method not of testing or of discovery, but of measurement of selected variables.
Keynes, J. M., Professor Tinbergen’s Method, The Economic Journal, Vol. 49, No. 195 (Sep., 1939), pp. 558-577. Published by: Blackwell Publishing for the Royal Economic Society. Stable URL: http://www.jstor.org/stable/2224838
Tinbergen, J. A Method and its Application to Investment Activity. Geneva: League of Nations, 1939.