RetroEconomics QOTD: Klein on Exogenous Variables

I’ve begun dissertation reading in earnest, and am currently buried in McDowall’s thorough The Sum of the Satisfactions: Canada in the Age of National Accounting which (unsurprisingly) traces the history of national income accounting in Canada. McDowall references the Cowles’ commission’s models of post-WWII economic activities, which attempted to use Keynesian ideas and new national income data to predict GNP and unemployment after the end of the war. I decided to see if I could find some of the original texts on the models used by the Cowles commission, and ended up at this fascinating paper by Lawrence Klein: A Post-Mortem on Transition Predictions of National Product (Journal of Political Economy, 1946). I am still working my way through the paper (which discusses some apparently inaccurate predictions of some government economists that unemployment would surge in the immediate post-war period*), but I came across a footnote that so captured the spirit of post-war economics that I had to post it. Klein discusses the basics of Keynesian macroeconomic models and states: “The customary model for prediction can be called the simplest Keynesian model: Savings as a function of income equals autonomous investment.3” Footnote 3 is the real gem:

3 The terms “autonomous” and “exogenous,” and their respective opposites, “induced” and “endogenous,” will be used synonymously in this paper. They are all commonly found in the recent economic literature. Autonomous variables are those economic quantities that are determined outside the system of narrow economic forces. They are the result of political, sociological, institutional, technological, or natural forces only. Eventually we may hope to develop a complete social theory in which there are no autonomous variables except those like weather.

The emergence of “the system of narrow economic forces” distinct from “political, sociological, institutional, technological or natural forces” is precisely the phenomenon I am interested in studying (along with how that system of narrow economic forces became associated with a particular set of metrics, i.e. national income/GNP/GDP). But what I love here is this dream of “a complete social theory” in which everything that could possible be accounted for, is, along with the assumption that one can as a reasonable first approximation distinguish economic forces from social, political, natural**, and institutional forces. Institutional economics had been a powerful rival to neoclassical economics just 20 years earlier (cf. Yonay 1998). By 1946, Lawrence Klein can model an economic system independent of “institutional forces”, and simultaneously dream of a complete theory that bridges these newly-formed divides.

* Though, August 1946 seems quite early for such discussions – the U.S. took a long time to really demobilize, as I understand it. But that’s neither here nor there.
** The science studies scholar in me can’t resist noting that natural forces are pretty hard to treat as exogenous, with (anthropogenic) global climate change as the most obvious and high-profile example. More generally, see Latour’s Science in Action.

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1 Comment

  1. Lovely stuff. Looking forward to seeing how you weave this all together 🙂
    Gotta go find that article!