10 - Tinbergen’s Theory of Economic Policymaking

Summary

Chapter 10 argues that the central contribution of Tinbergen is his decision models, which conceive of economic policy as the relation between instruments and goals. The chapter analyzes the way in which the original econometric models of the 1930s were transformed by Tinbergen (and Ragnar Frisch) into models for policymaking, in response to their new state positions. Tinbergen was director at the Central Planning Bureau in the Netherlands, which developed into the premier economic policy institute there. The transformation of econometric models into decision models no longer treated policy as a given, but instead treated behavioral economic relations as given, and the policy variables as decision variables, placing the economic expert inside the model. The chapter explores this fundamental transformation, and how it impacted Tinbergen’s own view of economics. He no longer believed that the primary goal was to describe the economic structure, but rather to design of (optimal) decision models to pursue targets. This was true at the firm and state levels. He sought to redefine crucial concepts such as unemployment and business cycles in policy terms. Finally, he used that transformation to analyze the optimal level of decision-making in the economy, a crucial insight for his later work.