170
See also: Measuring wealth 36–37 ■ Inflation and unemployment 202–03 ■
Financial engineering 262–65 ■ Complexity and chaos 278–79I
n the 1930s Norwegian
economist Ragnar Frisch
developed a new discipline
that he called “econometrics.” His
aim was to develop methods to
explain and predict the movements
of the economy. Econometrics is
the application of mathematical
testing methods to economic
theories, providing a statistical
basis on which to prove or disprove
a theory. Economic beliefs, such as“a better education leads to a
higher salary,” may be correct,
but can only be proven through
an equation that takes data on
educational attainment levels
and compares it with salary
levels. Econometrics also enables
economists to analyze past
market trends and predict future
performance by extracting
patterns from economic data.Statistical pitfalls
Although econometrics is an
important tool of empirical
explanation, there are pitfalls. For
instance, past market trends are
no real guarantee of future market
performance. It is also difficult to
take all variables into account. In
the education example educational
attainment is not the only factor
that affects the wage—other,
unmeasurable skills might also
play a role. These kinds of problems
can weaken the validity of the
results of economic models.
It is also important not to
confuse statistical significance
with economic significance. ■THE ECONOMY IS
A PREDICTABLE
MACHINE
TESTING ECONOMIC THEORIES
IN CONTEXT
FOCUS
Economic methodsKEY THINKER
Ragnar Frisch (1895 –1973)BEFORE
1696 English economist
Gregory King publishes
Natural and Political
Observations, containing the
first quantitative (measurable)
analysis of economics.1914 US economist Henry
Moore publishes Economic
Cycles: Their Law and Cause,
laying the foundations for
statistical economics, the
forerunner of econometrics.AFTER
1940 Austrian economist
Ludwig von Mises argues that
empirical methods cannot be
applied to social sciences.2003 British economist
Clive Granger wins the Nobel
Prize for his analyses of the
relationship between economic
variables over time.Intermediate between
mathematics, statistics,
and economics we find
a new discipline
which... may be called
econometrics.
Ragnar Frisch