Thinking about the world economy as a scientific object

By Max Ehrenfreund

This post is part of the HISRECO 2018 series. Participants of the 2018 HISRECO conference were asked to write short blogposts to highlight their contribution to the conference for a general audience.  The idea of this blogged conference comes from the « Learning by the book » conference in Princeton, published as a series on the History of Knowledge Blog. This post is number 3 of 7.

For the doomsayer and folk prognosticator Samuel Turner Benner, pig iron governed Americans’ fortunes with a kind of spiritual power. In his eccentric, self-published almanac, Benner’s Prophecies of Ups and Downs in Prices, printed from 1876 to 1905, he personified and apostrophized pig iron as though it were an economic deity. “AROUSE, PIG IRON!” began Benner’s invocation, quoted on pages 24 and 25 of Walter Friedman’s 2013 book Fortune Tellers. “Monarch of business! Come forth from the chambers of thy slumbering silence, the dawn of a new era is at hand!”

Some readers took Benner’s Prophecies seriously, while others, thinking themselves more sophisticated, mocked them. But later forecasters as well as academic economists also relied on pig iron, used as raw material in factories, equipment, and machines. From 1936 to 1938, the Dutch economist Jan Tinbergen was analyzing business cycles at the League of Nations in Geneva. In some cases, he found no better proxy than pig iron to quantify investment, the essential variable in his model.

The research I am presenting at HISRECO this year concentrates on Tinbergen’s work in Geneva, where he developed a paradigmatic mathematical model of the U.S. business cycle that was unprecedented in its detail and ambition. The League had brought Tinbergen to Geneva in response to diplomats’ demands for a scientific theory that could account for the Great Depression and prevent another crisis. What distinguishes rustic forecasters such as Benner, with their quasi-astrological and numerological analyses of booms and busts, from the scientific econometrics that developed starting in the early 20th century? Or, as some skeptics argue today, is there really no difference at all?

Tinbergen’s contemporaries had similar concerns about the scientific status of economic research. In my paper, I point out a couple of properties of the econometric models of the period, including Tinbergen’s, that allowed economists and policymakers to understand the business cycle as an object of scientific inquiry. I argue that Tinbergen’s success in defining the cycle as a scientific object helps to account for why the League chose to employ him and to publish his research.

From prophecy to prediction

First, the models described the business cycle as a fundamentally regular and therefore predictable phenomenon. Many economists at the time – Ragnar Frisch, Tjalling Koopmans, and Gottfried Haberler, just to name a few who worked and communicated with Tinbergen – believed that economic activity fluctuated according to a sine curve, like a pendulum, a rocking chair, or the tides. Tinbergen’s first model, which he developed before his project at the League, produced a sinusoidal function that he thought was reasonably similar to the actual historical data he had available. In retrospect, that data might look too chaotic to be usefully approximated with a nice, smooth sine curve, but Tinbergen was confident that economic life exhibited what he called an orderly “natural tendency.” It is hard to see today what he might have seen in a chart like the one shown.

Ehrenfreund_image_2
From Economic Stability in the Post War World: The Conditions of Prosperity after the Transition from War to Peace. Source: Geneva: League of Nations, 1945.

If the economy were predictable, like the tides or the oscillations of a pendulum in a laboratory, then economists could formulate hypotheses and test them against data. So for researchers in Geneva, Tinbergen’s approach seemed to offer the hope of a firm scientific basis for economics.

And for the diplomats at the League, predictability offered an intellectual basis for interventionist policies to alleviate the depression. If crises could be anticipated, then governments had some hope of preventing them. Out of desperation, policymakers around the world were taking action to promote recovery, but these controversial measures were based on intuition rather than on credible theories. Although Tinbergen did his research in Geneva after Keynes published The General Theory of Employment, Interest, and Money, Keynes’s ideas were still not generally accepted or even very well understood. On the other hand, Austrian over-investment theories, monetarist accounts, and other conventional explanations described depressions as unpredictable, or as a form of discipline that would check and correct bad economic decisions and ultimately prove beneficial.

In either case, the government could only do more harm than good by getting in the way of a depression. Tinbergen’s models seemed to offer an alternative to both Keynesianism and orthodoxy that would justify controlling, or at least making sense of, the economic system.

But states that were invested in the gold standard and the rest of the status quo in international economic policy were suspicious of the whole project. France, in particular, benefited from its sizable reserves of gold at the beginning of the depression, and French representatives in Geneva tried to stop the League’s research on business cycle from getting off the ground.

Leaving politics out of it

There is a second reason that Tinbergen’s models might have been seen as scientific. They showed how at least in theory, the business cycle could be described without reference to political factors, such as tariffs, labor unions, or international debts (including the reparations Germany owed the victors after the First World War). Tinbergen did not include these factors in his models, and he showed they were not necessary for an economic system to produce a regular sine curve.

He understood business activity as a self-contained, mechanical system. This proposed dust-jacket for his book on the U.S. business cycle illustrated “rather clearly, I believe, the idea of Tinbergen’s work,” wrote Jacques Polak, who was then Tinbergen’s assistant.

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Dust-jacket design proposed in 1939 for Tinbergen’s Business Cycles in the United States of America, 1919-1932. Tinbergen published a version of this diagram in the Archiv für mathematische Wirtschafts-und Sozialforschung in 1937. Source: League of Nations Archives, United Nations Office at Geneva, Palais des Nations, Geneva, Switzerland.

With a model like Tinbergen’s, you could have a conversation about the depression without bringing up politics – just as you wouldn’t need to talk about politics to have a conversation about the tides or a rocking chair. So, as I suggest in the paper, his approach was particularly appealing to the League of Nations, where political and diplomatic conflicts were incessant.

Historians have tended to gloss over the fact that Tinbergen carried out some of his most important research on the business cycle while serving in the League’s permanent staff, or secretariat. Yet it was no coincidence that he developed these models in Geneva.

An “international mind”

The League is best remembered as a failed peacekeeping organization, but it sponsored important social science, too, and not just in economics, but also in nutrition and epidemiology. All of these efforts were informed by a specific attitude about science. Scientific researchers were expected to be nonpartisan, disinterested and – above all – neutral with respect to competing diplomatic interests. They had to participate in what people at the time called the “international mind,” which meant overcoming the biases and prejudices supposedly resulting from national allegiances.

This internationalist spirit was admirable in some respects, but abhorrent in others. As Nazi oppression intensified, Jewish scientists fleeing to safety found they were unable to work for the League. Hiring Jews would have alienated the Nazi regime, which some at the League still hoped would rejoin the international community based in Geneva.

By delineating between the economic system and the political environment, Tinbergen’s models seemed to transform the business cycle from a political problem into a scientific one, the kind of problem that the international mind could solve. For social scientists in the secretariat, this approach offered a way of participating in the debate on economic policy without seeming to broach potentially problematic political issues, or exposing themselves to accusations of bias.

There might have been other, practical reasons for employing Tinbergen as well. He was relatively young, so the League could offer him a temporary contract for the project at a lower salary than other, more established economists might have demanded. At the same time, and in contrast to some of his colleagues who might have gotten the job instead, Tinbergen insisted that the causes of the cycle had to be accounted for by the model itself – that is, in strictly economic terms.

For instance, George Udny Yule imagined the business cycle as a pendulum being pelted with peas, which represented circumstances external to the economic system. Tinbergen would have regarded this type of model, which explains cyclical fluctuations as result of external factors, as a failure. His methods were especially compatible with the political constraints of the League.

The international mind of Geneva saw the business cycle as a fundamentally global problem – a worldwide phenomenon that could only be addressed through international scientific collaboration and multilateral coordination of economic policies. So, my research provides a counterpoint to historians’ usual interpretation of interwar economic research as national rather than as international in orientation.

The economy, the state, and the world

The idea of “the economy,” which was still very new during this period, was closely related to the idea of the modern nation-state. Economists conducted research using data for particular countries collected by national statistical agencies, as Adam Tooze, Timothy Mitchell, Timothy Shenk, and other historians have shown. These statistics, in turn, allowed politicians to talk about national success and failure in economic terms. Today, the phrase “the economy” still usually refers to some particular nation’s economy.

Tinbergen himself did not use the phrase “the economy,” instead using terms such as “the system” or “the mechanism.” But it’s clear that the concept of the business cycle encompassed much of what people would later informally call “the economy” – the big shifts and sudden crises of unemployment or inflation that always make it to the front page.

Tinbergen and others in Geneva argued against this limited, national view of economic life. They contended that trade and the gold standard bound together economic activity throughout the world, for better but mostly, in the Great Depression, for worse.

“It is of course a commonplace nowadays that in recent times the world has become an economic and financial unity in some sense,” wrote the British historian Arnold Toynbee in 1932. This unity was easy enough to perceive even though there were very few international economic statistics. That brings us back to Benner’s Prophecies of Ups and Downs.

            The data required to fill out Tinbergen’s models was often unavailable, and he had to make do with primitive substitutes. Modern statistics were often crucial to conceptualizations of the economy, but even where those statistics didn’t exist, economists and policymakers could theorize about what they would have said.

When people around the world started to think about “the economy” during the Great Depression, they probably did so in national terms – but the view from Geneva was different, and more global. The evidence on Tinbergen’s research and its political context is a reminder that the economy was not invented or discovered once and for all. Rather, how people thought about the economy varied from place to place and from year to year. For historians, there is plenty of work to do in studying and imagining these diverse and, from a modern point of view, alien conceptions of economic life.

What happened to the League’s old idea of an international economy? As the Depression wore on, hostile states increased tariffs and devalued their currencies or imposed controls on foreign exchange. The demise of free trade and a freely operating gold standard impeded the movement of capital from one country to another. The world order disintegrated, and so did the world economy.

In conclusion, the paper I’m presenting at HISRECO examines the significance of Tinbergen’s research in the context of the League, the institution that published some of his most important contributions to econometrics. The League needed a model of the business cycle that would allow economic ups and downs to be predicted – and not on the basis of thorny political factors. Tinbergen provided that model. In other words, he showed how the business cycle could be understood as a scientific object.

Max Ehrenfreund is a Ph.D. student in history of science at Harvard University.

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