A Brief History
For a brief review of the origins of econometrics before World War II and its development in the 1940-1970 period, see Klein (1971). Klein gives an interesting account of the pioneering works of Moore (1914) on economic cycles, Working (1927) on demand curves, Cobb and Douglas (1928) on the theory of production, Schultz (1938) on the theory and measurement of demand, and Tinbergen (1939) on business cycles. As Klein (1971, p. 415) adds:
The works of these men mark the beginnings of formal econometrics. Their analysis was systematic, based on the joint foundations of statistical and economic theory, and they were aiming at meaningful substantive goals – to measure demand elasticity, marginal productivity and the degree of macroeconomic stability.
The story of the early progress in estimating economic relationships in the U. S. is given in Christ (1985). The modern era of econometrics, as we know it today, started in the 1940’s. Klein (1971) attributes the formulation of the econometrics problem in terms of the theory of statistical inference to Haavelmo (1943, 1944) and Mann and Wald (1943). This work was extended later by T. C. Koopmans, J. Marschak, L. Hurwicz, T. W. Anderson and others at the Cowles Commission in the late 1940’s and early 1950’s, see Koopmans (1950). Klein (1971, p. 416) adds:
At this time econometrics and mathematical economics had to fight for academic recognition. In retrospect, it is evident that they were growing disciplines and becoming increasingly attractive to the new generation of economic students after World War II, but only a few of the largest and most advanced universities offered formal work in these subjects. The mathematization of economics was strongly resisted.
This resistance is a thing of the past, with econometrics being an integral part of economics, taught and practiced worldwide. Econometrica, the official journal of the Econometric Society is one of the leading journals in economics, and today the Econometric Society boast a large membership worldwide. Today, it is hard to read any professional article in leading economics and econometrics journals without seeing mathematical equations. Students of economics and econometrics have to be proficient in mathematics to comprehend this research. In an Econometric Theory interview, professor J. D. Sargan of the London School of Economics looks back at his own career in econometrics and makes the following observations: “… econometric theorists have really got to be much more professional statistical theorists than they had to be when I started out in econometrics in 1948… Of course this means that the starting econometrician hoping to do a Ph. D. in this field is also finding it more difficult to digest the literature as a prerequisite for his own study, and perhaps we need to attract students of an increasing degree of mathematical and statistical sophistication into our field as time goes by,” see Phillips (1985, pp. 134-135). This is also echoed by another giant in the field, professor T. W. Anderson of Stanford, who said in an Econometric Theory interview: “These days econometricians are very highly trained in mathematics and statistics; much more so than statisticians are trained in economics; and I think that there will be more cross-fertilization, more joint activity,” see Phillips (1986, p. 280).
Research at the Cowles Commission was responsible for providing formal solutions to the problems of identification and estimation of the simultaneous equations model, see Christ (1985).2 Two important monographs summarizing much of the work of the Cowles Commission at Chicago, are Koopmans and Marschak (1950) and Koopmans and Hood (1953).3 The creation of large data banks of economic statistics, advances in computing, and the general acceptance of Keynesian theory, were responsible for a great flurry of activity in econometrics. Macroeconometric modelling started to flourish beyond the pioneering macro models of Klein (1950) and Klein and Goldberger (1955).
For the story of the founding of Econometrica and the Econometric Society, see Christ (1983). Suggested readings on the history of econometrics are Pesaran (1987), Epstein (1987) and
Morgan (1990). In the conclusion of her book on The History of Econometric Ideas, Morgan (1990; p. 264) explains:
In the first half of the twentieth century, econometricians found themselves carrying out a wide range of tasks: from the precise mathematical formulation of economic theories to the development tasks needed to build an econometric model; from the application of statistical methods in data preperation to the measurement and testing of models. Of necessity, econometricians were deeply involved in the creative development of both mathematical economic theory and statistical theory and techniques. Between the 1920s and the 1940s, the tools of mathematics and statistics were indeed used in a productive and complementary union to forge the essential ideas of the econometric approach. But the changing nature of the econometric enterprise in the 1940s caused a return to the division of labour favoured in the late nineteenth century, with mathematical economists working on theory building and econometricians concerned with statistical work. By the 1950s the founding ideal of econometrics, the union of mathematical and statistical economics into a truly synthetic economics, had collapsed.
In modern day usage, econometrics have become the application of statistical methods to economics, like biometrics and psychometrics. Although, the ideals of Frisch still live on in Econo – metrica and the Econometric Society, Maddala (1999) argues that: “In recent years the issues of Econometrica have had only a couple of papers in econometrics (statistical methods in economics) and the rest are all on game theory and mathematical economics. If you look at the list of fellows of the Econometric Society, you find one or two econometricians and the rest are game theorists and mathematical economists.” This may be a little exagerated but it does summarize the rift between modern day econometrics and mathematical economics. For a world wide ranking of econometricians as well as academic institutions in the field of econometrics, see Baltagi (2007).