Keynes and Tinbergen

In 1939 there was a debate, mainly between Keynes and Tinbergen, ostensibly about econometrics but with broader ramifications for the applications of mathematics and notions of uncertainty.

Louca’s summary

The debate is described and contextualised by:

F. Louca, The Econometric Challenge to Keynes: Arguments and contradictions in the early debates about a late issue European Journal of the History of Economic Thought, Second draft, October 1997.

From Louca’s abstract:

Keynes was deeply hostile at least to use of the current mathematical formalism, and made no secret of that.

[T]he acceptance of the epistemological primacy of a very peculiar brand of a simple mathematical formalism for the macro-theories led to the wiping out of the major theoretical alternatives of the first half of the century.

Keynes was more hostile and certainly more aware of the dangers of the mechanistic and dominant simplistic mode of mathematical expression of the economic models.

The final result was a Phyrric victory – or defeat – of both the Keynesian program and the original intentions of the founders of econometrics, as most of them recognised with sorrow.

This lingering debate is of relevance to the debate about the 2007/8 crash. When people blame mathematics, it is the ‘very peculiar brand of a simple mathematical formalism’ that seems at fault, not Keynes’ more nuanced approach to uncertainty, as in his mathematical Fellowship Treatise.

[T]he econometricians did not care too much about Keynes‘s critique: it was anticipated and summarized as the mere implication of a nasty …  and permanently sceptic attitude against mathematics.

This seems odd. Keynes’ critique was a defense of the logically-founded mathematics of Russell and Whitehead (as reflected in his Treatise) against the more traditional views of Tinbergen, an economist with leanings towards the methods of classical Physics. Wasn’t Keynes defending mathematics?

Loucas quotes a letter from Keynes to Lange:

Does not every case to which Tinbergen has applied his method assume that the same formula is valid over a long period of years? [T]his is not merely a casual assumption but one which is intrinsic to the whole way of proceeding.

The same objection could be applied to the (mis) use of econometrics prior to the 2007/8 crash. In effect, such econometricians assume that nothing surprising can happen. And yet it does. Loucas quotes a 1958 response by Frisch:

I have believed that the analytical work will give higher yields … if they become applied in macroeconomic decision models where the line of thought is the following: ‘If this or that policy is made, and these conditions are met in the period under consideration, probably a tendency to go in this or that direction is created’.

This seems to take on board Keynes’ main objections by verbally recognizing the conditionality and residual uncertainty inherent in any predictions. It would surely been an improvement if, prior to 2007/8, econometricians had recognized this and striven to identify the conditions necessary to the continuance of the status quo. But Loucas goes on:

Keynes addressed the problem in a rather different way, since he restrained himself to the short term and to the use of known behavioural relations, even if not completely quantified.

This seems an odd interpretation of Keynes. If a regularity is conditional and may fail probabilistically, then it is true that one can only expect it to hold ‘in the short term’, as emphasised by notions of ‘Black Swans’. But while Keynes regards simplistic econometric thinking as limited to the short-term, he was clearly not averse to using empirical data (including econometrics) to inform theoretical thinking about conditionality, to inform longer-term institutionalizing and policy-making.

Loucas says of the econometricians:

They did not accept … the non-mathematical alternative formulation Keynes was defending, since they deeply shared the conviction that exactness was desirable, possible, attainable, and even indispensable considering the task of economics.

Again, an odd-seeming comment. As a mathematician who came to economics via statistics, Keynes advocated a mathematical approach that recognized the inherent uncertainties, as Frisch (later) did (above). Keynes did seem to prefer not using mathematics to using mathematics inappropriately, heedless of the appropriate theory. But post the 2007/8 crash this may seem reasonable, even for a mathematician. Perhaps the problem was Keynes’ opponents ‘deeply held conviction’ that exactness was possible, in contrast to the arguments in Keynes’ Treatise. Thus econometrics seemed to be based on ideas from Physics that were already outmoded.

Keynes’ attack 

From a historical perspective, Keynes’ attack on what became conventional econometrics is more important for what people thought he said than what he actually said. But what he said is also of interest.

Professor Tinbergen’s Method The Economic Journal, Vol. 49, No. 195 (Sep., 1939), pp. 558-577.

[The method] is a means of providing quantitative precision to what … we already know … where the other considerations given below are already satisfied.

This seems similar to Frisch’s 1958 position, save that it makes use of Keynes’ Treatise in identifying conditions under which induction from a description to something more like a prediction is justified, and with what caveats. At the heart is that Tinbergen assumes that economies are only driven by measureable phenomena, something which Keynes contradicted in his General Theory. The econometric approach implicitly assumed that there would be a fixed policy, reacting to the econometrics in a formulaic manner, thus making ‘thinkers’ like Keynes redundant. Keynes doubted if this were risk-free, and following the 2007/8 crash, so might we.

Conclusion

Technically, the debate seems to have been misrepresented and misunderstood. A consensus seems to have emerged on the general approach, but Keynes’ work on uncertainty seems to have gone unrecognized, until recently – and even then only partially. Econometrics can be used to refine, but does not – in itself – identify uncertainty or its causes.

One might think that it would be better to have a fixed, perhaps global, intervention policy, responding to econometrics in a formulaic manner, rather than trust politicians or central bankers, but that would be another issue. Perhaps the issues got mixed up?

See Also

Other comments on Keynes’ Treatise and the debate on mathematics in finance and economics.

My notes on rationality and uncertainty, economics as Physics  and mathematics.

Dave Marsay 

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6 Responses to Keynes and Tinbergen

  1. Blue Aurora says:

    Whilst this comment is belated, Dr. Marsay…

    Have you gone back to the primary sources, where John Maynard Keynes engages with Jan Tinbergen and other econometricians in the late 1930ies to early 1940ies? The debate didn’t just take place in issues of The Economic Journal. Keynes also corresponded with other econometricians who sided with Tinbergen on this matter via the old-fashioned postal service. The correspondence that Keynes had with the econometricians can be found in the CWJMK…unfortunately, I don’t remember which volumes or which pages where the correspondence can be found.

    That stated, I know that you have a lot of work to do, but in the future, can you allocate time to read this excellent book – Probability, Econometrics and Truth: The Methodology of Econometrics by a Dutchman named Hugo A. Keuzenkamp?

    http://www.amazon.com/Probability-Econometrics-Truth-The-Methodology/dp/0521553598

    It covers the intellectual history of this subfield in economics, and as the book’s title indicates, it deals with methodology extensively. The primary sources are of course, cited, but other scholars cited by Keuzenkamp include writings by Sir Ronald A. Fisher, Richard von Mises, Sir Karl Pearson, Sir Harold Jeffreys, Irving John Good, and Rudolf Carnap.

    Speaking of the last two…

    You said to me before that your views on the role of mathematics in knowledge, and the use of probability theory and logic, were heavily influenced by people who had worked with Alan Turing and Irving John Good. Presumably then, you must have had taken the time to read writings done by Turing and done by Good. But did you ever meet either of them in person?

    Also, have you read any of Rudolf Carnap’s writings on probability and logic? The reason I ask is because I am aware (if only on a very superficial level) of some sort of connection between John Maynard Keynes and Rudolf Carnap. (I know that Carnap does cite Keynes’s 1921 book on probability in his Logical Foundations of Probability, but how Keynes influenced Carnap and how different Carnap’s thought is from Keynes, I can’t say.)

    • Dave Marsay says:

      Thanks for this further reading! I have not read anything by Tinbergen, and only comment on others’ interpretations. Based on prior experience I should expect his own writings to be more nuanced than might appear from the above.

      Keuzenkamp looks ‘on the money’, judging by the selection on Amazon. In terms of his interpretation of Hume, I think the ‘best’ model of scientism is that most practitioners are conventionalists, regarding their conventions as pragmatic. The difference between this and the ‘old school’ British approach (at least, of Boffins) is:
      1. It used to be thought important to try to structure conventions and judge their elements in terms of reliability (e.g., are they logical or merely conventional), and then to seek actions that ‘lean more’ on the more ‘reliable’ conventions. (Keynes’ various approaches to uncertainty support this.)
      2. It used to be thought important to be able to assess situations and judge which conventions were appropriate. (Keynes’ economics is incomprehensible or worse unless you ‘get’ this.)

      I have speculated that much of the worlds’ problems are due to abuse of reason. Based on Keuzenkamp I hypothesize that in practice conventions are commonly regarded as ‘pragmatic’ if they are accepted by those who pay the bills, and especially if you think that you wont be blamed or otherwise significantly suffer if they should fail. (As Taleb would say: ‘if you have no skin in the game.’) How would Keuzenkamp assess this theory? Do you have a better one?

      • Blue Aurora says:

        By “on the money”, do you mean that from what you could gather from the Amazon.com preview, you think that Keuzenkamp is on the right track?

        Unfortunately, I lack a deep familiarity with the literature that you are talking about (i.e., the history of British philosophy), sir. Could you please be a bit clearer with regard to what you mean by “convention” in this context?

        I remember that you have discussed Keynes’s treatments of logic and the “weight of evidence” before. Are the “conventions” you mention connected to that? If so, then yes, I can see where you’re coming from with regard to the abuse of reason in this world. But – please forgive any misunderstandings of your message or of the material we discuss on my part, sir – as you should know, not all knowledge can be derived from reason alone…evidence (i. e., a certain degree of empiricism) and reason both need to be used in the quest for knowledge.

        As for this statement: “Based on Keuzenkamp I hypothesize that in practice conventions are commonly regarded as ‘pragmatic’ if they are accepted by those who pay the bills, and especially if you think that you wont be blamed or otherwise significantly suffer if they should fail. (As Taleb would say: ‘if you have no skin in the game.’)

        While this is significant, I feel that you are talking more about the sociological and political aspects of networking in academia. Like you and Taleb, I don’t deny that accountability is important, nor do I support “free-riding” on the part of people who seek to rig things where they gain and are virtually impervious to the consequences of their actions should be permitted (or in shorter terms, the principal-agent dilemma and the moral hazard issue).

        But I’m not sure how a good grasp of knowledge on the history of the philosophy of science and the history of mathematics are supposed to remedy the issue you are talking about.

    • Dave Marsay says:

      On the last two paragraphs.

      I have never met anyone really famous in this area, just worked with people who have worked with them, etc.

      I read some of Carnap’s writings quite a while back, but I was still trying to identify the ‘hidden assumptions’ and so may have completely misunderstood it. It seems to me that one important contribution of Keynes, whether you agree with him or not (and he obviously got some details wrong), is that he provides a rich resource that you can use to make sense of other work in his areas.

      Regards.

  2. Daniel says:

    Although I think the article is interesting, it seems to me to be purely anecdotal in nature. It doesn’t really address the arguments at stake. In this respect, I think Taleb’s arguments in his Black Swan are what economists should be paying attention to. There is a lot of meat to chew on and it would perhaps broaden your audience as for most people names alone mean very little.

    • Dave Marsay says:

      My reading of ‘Black Swan’ is that Taleb regards them as ‘improbable’, and by default allows us to suppose that this can be represented by P(Black Swan)=p, where p is a very small number. (Search on my blog for ‘Taleb’ for more detail.) If Taleb is correct then Keynes is unnecessarily radical and arguably quite wrong. But is Taleb correct? Or have I misunderstood him?

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