The flow of economic thought – Jan Tinbergen vs Milton Friedman

Hendrik P. van Dalen and Arjo Klamer have written an excellent paper (as part of this book) on history of economic thought. In particular, how Jan Tinbergen (the first co-Nobel Prize Winner) and Milton Friedman had different ideas and approach on economics.

Jan Tinbergen and Milton Friedman were both very much inspired making economic theory work, applying it in service of society. The Tinbergen approach – the economist as Social Engineer – was exported to Chicago in the 1940s where one of Tinbergen’s students – Tjalling Koopmans – became a prominent member of the Cowles Commission, where his method and style clashed with the Economics Department dominated by Milton Friedman who was a public intellectual.

Koopmans preferred the Walrasian method of looking at economics whereas Friedman relied on a Marshallian, partial equilibrium approach. With Friedman’s departure from Chicago in 1977 his method and approach disappeared. The work of Koopmans and the Cowles Commission more generally formed the basis for New Classical Economics and came to dominate the practice of economics. The irony of these two icons of economics is that they produced disciples who carried their initiative too far. 

What is particularly interesting how the flow of economic thought reversed. A lot of economists travelled to Netherlands Univs to get or work on eco ideas/theories before 1970s. This has reversed completely with everyone lined up for US Univs now.

The paper has a very interesting quote from Robert Solow

“It is a little superfluous for any foreigner to come to Rotterdam to lecture about economics at all. I feel a bit like a 17th century New England smuggler lecturing on seamanship to Admiral Tromp. The trade in economics nowadays is as much the other way: we send our young men to Rotterdam to learn, not our middle-aged professors to teach. Indeed some of our best middle-aged professors are named Koopmans and Houthakker! I suppose the logic of the situation is that I am not import at all; I am to be processed and re-exported, like cocoa beans.”

Robert M. Solow in 1963 when visiting the Rotterdam School of Economics.

Amazing really. I never knew Netherlands was a superpower of economics at one time.  I knew UK was but not Netherlands….

The authors then look at the two schools of thought – Tinbergen and Friedman and how they shaped the economic thought in coming years.

Similarities between the 2 giants:

Both economists shared a common interest in mathematics and economics. Friedman originally intended to be a mathematician, and later an actuary. It was Arthur Burns, who later became chairman of the Federal Reserve, and Homer Jones at Rutgers University who guided Friedman to the field of economics like Friedman

Tinbergen saw economics as an instrument to solve social problems and like Friedman he believed that economics needed a strong empirical basis in order to fulfill its political role. They both began their research with work on the business cycle that appeared to characterize economic processes.

Differences

With such similarities in motives and intentions, the differences between the two economists are all the more striking. They also prove to critical for an explanation of the reversal in the trading of brain power across the Atlantic.

 Both Tinbergen and Friedman (as any other economists at that time) were set on the making of a free society, but both had distinctively different views on how to attain such a goal. Tinbergen was thinking of freedom from want and misery and to that end he was prepared to compromise on the freedom of choice. In effect, Tinbergen was very much an egalitarian avant la lettre who remained committed to defending social justice as a primary policy objective throughout his life. Friedman took quite a different stand and put freedom of the individual central; he would go to extremes in order to defend the freedom of choice.

Both Tinbergen and Friedman were visible characters in their country, not in the least because they did not shy away from policy problems. Friedman participated in policy discussions as an advisor to numerous government leaders and as columnist in Newsweek. He never got involved, however, in the Council of Economic Advisers, the American agency that comes closest to the Dutch Central Planning Bureau founded by Jan Tinbergen. For Friedman the spheres of science and policy had to be separated.

The Tinbergen approach to policy advice followed a line of conduct which Friedman thought was a waste of time. Tinbergen assumed that governments were the defenders of the public interest and merely appealing to the common good would be sufficient. Advising and educating the policy maker directly was in his view the way things are done. As a consequence Tinbergen was heavily involved in Dutch and global policy activities throughout his entire career: the Central Bureau of Statistics, the League of Nations, Central Planning Bureau, the Social Economic Council (SER), the United Nations, the OECD and numerous other advisory bodies could count on his advice. Contrary to Friedman, economic policy activity was a vocation for Tinbergen.

Hmm.. 

The authors then give an account of how econs like Koopmans, Polak, Houthakker etc  spread Tinbergen model. However it did not kick-off:

However, Koopmans’ approach to economics proved to be too mathematical to the taste of other prominent economists at the University of Chicago. At first he had to cope with Frank Knight a libertarian economist who did not think much of quantitative economics. Later, under the regime of Oscar Lange, the Chicago department became more open to the scientific approach for which Koopmans and his Cowles commission stood. Friedman did not care for Koopmans as a person—he found him cold and authoritarian—but in academia you learn to live with such sentiments. Yet, when Koopmans attacked the empirical work of his friend and mentor Arthur Burns and that of the National Bureau of Economic Research, calling it ‘measurement without theory’, Friedman’s venom came out.

In the early seventies the pendulum began to swing in Friedman’s pro-market and anti government position. Economists continued to follow the formal direction of Koopmans and Tinbergen, but – disappointed with Keynesian policies – gradually began to warm up to Friedman’s free market ideas. An additional problem was that the new theories failed to account for the effectiveness of Keynesian macroeconomic policies. As a consequence, The Chicago department displaced the East Coast departments of MIT, Yale and Harvard from the center stage.

The authors then point to this very interesting observation on the migration of economic superpower  to US:

Has the practice of economics changed due to intellectual migration? Undoubtedly it has. The rise of Hitler and the outbreak of WW II has brought about a fundamental shift in the geographical location of the research frontier. The United States became the dominant site where economic research takes place, and continues to be so. However, the most striking element of the economics profession of today is that in spite of the internationalization, fractionalization and an explosion of publications the social world of economists seems to have become not only more integrated but also smaller.

What may have helped to become a smaller world is the dominant use of the neoclassical language in economics. In the heydays of Tinbergen and Friedman the world could be divided into schools who hardly communicated with each other due to the burden of language. Post-Keynesians, Marxists, Austrians, New Keynesians, (Neo) Institutionalists, Monetarists, and New Classicals competed with each other for the hearts and minds of students and policy makers. The diversity was large and cohesion within the group was  trong but unproductive.

The key to making diversity work is the actual exchange of ideas. The use of one language – neoclassical economics – has helped to make intellectual trade possible and with the demise of all types of schools of thought the science of economics has gained a rich diversity of specializations with a core which boils down to what essentially is the economics of Chicago and deep down the economics of Friedman. The flip side of the integration of different fields of economics is that a diversity of perspective and an engine of creativity have been lost. Perhaps the smaller world of economists also explains why the so-called Washington consensus – a market oriented view of how to solve all the major policy problems- has dominated economic policy circles around the world and is only recently coming under attack as the practical consequences of deregulation and privatization appear on the radar of politicians.

Super stuff this. The advent and acceptance on Neoclassical economics may have unified economics but has led to a loss of creativity. In a way, this also explains partly the current crisis. With the broad idea that markets are always right, no one looked at the growing problems.

Finally,

So we see how ideas that emerged in a small country overtook intellectual life of a large country, and how intellectual life of the small country subsequently succumbs to the overpowering ideology of the large country. We also see how great the influence of two individuals can be on the development of ideas, economic ideas in this case. The irony of our two icons of economics is that they produced disciples who carried their initiative too far and generated great expectations; expectations which did not materialize in the 1980s and 1990s.

Koopmans carried forward the Tinbergen approach but lost contact with the real world and turned economics into an exercise of optimal resource allocation. Lucas – with the help of Koopmans – carried forward the Friedman approach to assume rationality in economic behavior, but he also lost touch with reality and grounded his models on super-rational  individuals. Both Tinbergen and Friedman regretted this development and with hindsight they may be right. The Koopmans approach was constructed in a time of optimism, and thinking that all problems can be solved on a blackboard was understandable but deep down not plausible.

The Lucas approach was constructed in a time of pessimism and thinking that every policy act is a waste of money was a logical thought in times of stagflation and opportunistic politicians but it ignores the power of institutions and the insights that people are boundedly rational. In our age of diminished expectations it may turn out that the hi-tech economics of Koopmans and Lucas is ill-suited for thinking about today’s economies and that a return to the pragmatism and rationality of Tinbergen and Friedman may offer more value for the penny of an economist’s thoughts.

Very useful and different stuff. Gives you insights on the flow of economic thought. And that too from Rotterdam to US.

Addendum:

I had recently posted about similar kinds of papers: What do German economists think, Why Nobel Winners chose economics.

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5 Responses to “The flow of economic thought – Jan Tinbergen vs Milton Friedman”

  1. Why europe based economists prefer to study/work in US? « Mostly Economics Says:

    […] showed in this superb paper flow of economic thought moved from Netherlands/Europe to US in quick time. US dominates everything […]

  2. Hayek’s influence on nobel prize winners « Mostly Economics Says:

    […] uses nobel lectures’ autobiographical accounts to understand why they chose economics. See this paper for an example which shows the flow of thought from Tinbergen to […]

  3. Much Ado about Pigou ….and other defunct economists « Mostly Economics Says:

    […] down the line, it all boils down to the followers of a particulr economic thought. As pointed in this paper, followers of both Tinbergen and Friedman took their economic thoughts to a different level which […]

  4. Markets vs Government: The oldest and evergreen debate in economics « Mostly Economics Says:

    […] flow of economic thought is kind of pendulum swing with extreme ends becoming mainstream more often that not. Even now, we […]

  5. Celebrating 75 years of Keynes’ General Theory « Mostly Economics Says:

    […] forward. So whether you look at Keynes or Friedman, their ideas were extended much beyond. In this paper, authors show how Tinbergen and Friedman’s ideas were taken to an extreme by their […]

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