Presentation Speech by Professor Erik Lundberg of the Royal Academy of Sciences
Your Majesty, Your Royal Highnesses, Ladies and Gentlemen,
In the past forty years, economic science has developed increasingly in the direction of a mathematical specification and statistical quantification of economic contexts. Scientific analysis along these lines is used to explain such complicated economic processes as economic growth, cyclical fluctuations, and reallocations of economic resources for different purposes. In economic life there is an elusive mixture of relatively systematic interrelations, for which one can find a more or less regular repetitive pattern and historically unique events and disruptions. To the layman, it may seem somewhat reckless to seek, without support from experiment, for laws of development within these extremely complicated processes of economic change, and to apply for this purpose the techniques of mathematical and statistical analysis. However, the attempts of economists to construct mathematical models relating to strategic economic relations, and then to specify these quantitatively with the help of statistical analysis of time series, have, in fact, proved successful. It is precisely this line of economic research, mathematical economics and econometrics, that has characterised the development of this discipline in recent decades. It is therefore only natural that when the Bank of Sweden’s Prize in Economic Science dedicated to the memory of Alfred Nobel is awarded for the first time, it should be to the two pioneers in this field of research: Ragnar Frisch of Norway, and Jan Tinbergen of Holland.
Since the late twenties, Professor Frisch and Professor Tinbergen have been working along essentially the same lines. Their aim has been to lend economic theory mathematical stringency, and to render it in a form that permits empirical quantification and a statistical testing of hypotheses. One essential object has been to get away from the vague, more “literary” type of economics. The arbitrary “naming” of causes of cyclical fluctuations, for instance, and the concentration upon certain simple chains of causal connection, has given way, in the work of both Frisch and Tinbergen, to mathematical systems that state the mutual relationships between economic variables.
Let me take, as an example, Professor Frisch’s pioneer work in the early thirties involving a dynamic formulation of the theory of cycles. He demonstrated how a dynamic system with difference and differential equations for investments and consumption expenditure, with certain monetary restrictions, produced a damped wave movement with wavelengths of 4 and 8 years. By exposing the system to random disruptions, he could demonstrate also how these wave movements became permanent and uneven in a rather realistic manner. Frisch was before his time in the building of mathematical models, and he has many successors. The same is true of his contribution to methods for the statistical testing of hypotheses.
Professor Tinbergen was concerned primarily to confront dynamic economic theory with statistical application. His great pioneer work in this field is an econometric study of cyclical fluctuations in the United States. An important aim in this impressive investigation was to test the explanatory value of the existing flora of business cycle theories by trying to specify, quantitatively, the importance of different factors. Tinbergen built up an econometric system involving some 50 equations, and determined reaction coefficients and “leads and lags” with the help of statistical analysis. Several of his conclusions excited great attention, and are still the subject of debate. Professor Tinbergen’s pioneer work in econometrics has been of major importance for subsequent methodological development.
It has been natural for both Professor Frisch and Professor Tinbergen, with the support of macroeconomic analysis, to construct theories for stabilization policy and long-term economic planning. Both our laureates have made fundamental analysis of the theoretical basis of rational decision-making in the field of economic policy. By the end of the thirties, Frisch was presenting new ideas on a detailed system of national accounts (økosirksystem) for the entire national economy as a support for the rational planning of economic policy in Norway. The structure of the Swedish national accounts and national budget since the mid-forties stems largely from Professor Frisch’s pioneer work at the Sosial-Økonomisk Institutt in Oslo. Professor Tinbergen, with the support of theories previously put forward by Frisch, has developed a simplified system for economic policy that has been applied in Holland. Tinbergen lets the economic policy of the state function within a model of the economic system with a number of variables and an identical number of equations. Within the framework of a determinate system, the state must, as a rule, have as many means of economic policy as the number of aims. As head of the Central Planning Bureau in the Hague, Professor Tinbergen and his co-workers have constructed an econometric model for forecasting and planning economic policy in Holland.
During the past ten years, both Professor Frisch and Professor Tinbergen have devoted themselves primarily to long-term economic policy and planning, with a view particularly to the problems of the developing countries. Both have served as advisers in different contexts. In the rapid development of methods for long-term planning, our two laureates have made major contributions. Professor Tinbergen, for instance, with regard to systems of priorities in investments, and the use of “shadow prices”. Professor Frisch has developed decision models for economic planning, devising mathematical programming methods with a view to exploiting modern computer techniques.
Professor Frisch (not present because of illness), Professor Tinbergen,
You have both been pioneers in the development of economics into a mathematically-specified and quantitatively-determined science. Your contributions in creating a rational foundation for economic policy and planning with the help of well-developed theory and statistical analysis have involved a major scientific breakthrough. You are both, at present, intensively occupied with continued research, designed above all to assist the poor countries of the world.
It is a great honour for me to convey to you the congratulations of the Royal Swedish Academy of Sciences, and to ask you, Professor Tinbergen, to accept from the hand of His Majesty, the King, the 1969 Prize in Economic Science dedicated to the memory of Alfred Nobel.