Five Second Nobel ... Frisch 1

Ragnar Frisch shared in the first award of the Nobel prize in Economics. He not only helped found the first econometric society and its top journal, Econometrica, but even gave us the term econometrics. Following are excerpts and summaries from the first half of his Nobel address where he identifies why economics moved to quantitative analysis in a manner that has a great deal of application to today and warns about not trusting our computers and minds too thoroughly:

"FROM UTOPIAN THEORY TO PRACTICAL APPLICATIONS: THE CASE OF ECONOMETRICS"
Deep in the human nature there is an almost irresistible tendency to concentrate physical and mental energy on attempts at solving problems that seem to be unsolvable. [As examples, he points to mountain climbers, physicists, and astronauts.] scientists who are absorbed in the study of “unsolvable” problems ... pass through ups and downs. Sometimes hopeful and optimistic. And sometimes in deep pessimism. ...

[He demonstrates with a simple linear algebra example that we can produce as strong a correlation as we wish on chaotically unrelated variables.]

It is quite clear that the chances of survival of man will be all the greater the more man finds regularities in what seems to him to be the “outer world”. The survival of the fittest will simply eliminate that kind of man that does not live in a world of regularities. This development over time would work partly unconsciously through the biological evolution of the sense organs, but it would also work consciously through the development of our experimental techniques. The latter is only an extension of the former. In principle there is no difference between the two. Science considers it a triumph whenever it has been able by some partial transformation here or there, to discover new and stronger regularities. If such partial transformations are piled one upon the other, science will help the biological evolution towards the survival of that kind of man that in the course of the millenniums is more successful in producing regularities. If “the ultimate reality” is chaotic, the sum total of the evolution over time - biological and scientific - would tend in the direction of producing a mammoth singular transformation which would in the end place man in a world of regularities. How can we possibly on a scientific basis exclude the possibility that this is really what has happened ? This is a crucial question that confronts us when we speak about an “ultimate reality”. Have we created the laws of nature, instead of discovering them? ...

Understanding is not enough, you must have compassion. This search for regularities may well be thought of as the essence of what we traditionally mean by the word “understanding”. This “understanding” is one aspect of man’s activity. Another - and equally important - is a vision of the purpose of the understanding. Is the purpose just to produce an intellectually entertaining game for those relatively few who have been fortunate enough through intrinsic abilities and an opportunity of top education to be able to follow this game? I, for one, would be definitely opposed to such a view. I cannot be happy if I can’t believe that in the end the results of our endevaours may be utilized in some way for the betterment of the little man’s fate. ...

As long as economic theory still works on a purely qualitative basis without attempting to measure the numerical importance of the various factors, practically any “conclusion” can be drawn and defended. For instance in a depression some may say: A wage reduction is needed because that will increase the profits of the enterprises and thus stimulate the activity. Others will say: A wage increase is needed because that will stimulate the demand of the consumers and thus stimulate activity. Some may say: A reduction of the interest rate is needed because this will stimulate the creation of new enterprises. Others may say: An increase of the interest rate is needed because that will increase the deposits in the banks and thus give the banks increased
capacity of lending money. Taken separately each of these advocated measures contains some particle of truth, taken in a very partial sense when we only consider some of the obvious direct effects, without bothering about indirect effects and without comparing the relative strengths of the various effects and countereffects. ... This perhaps is the most general and most salient formulation of the need for econometrics. ...

It goes without saying that econometrics as thus conceived does not exhaust all the contents of economics. We still need - and shall always need - also broad philosophical discussions, intuitive suggestions of fruitful directions of research, and so on. But this is another story with which I will not be concerned here. Let me only say that what econometrics - aided by electronic computers - can do, is only to push forward by leaps and bounds the line of demarcation from where we have to rely on our intuition and sense of smell. ...