G. L. S. Shackle: Review of Economic Fluctuations in the United States, 1921–1941 (1951)

G. L. S. Shackle’s review of Lawrence R. Klein’s Cowles Commission monograph presents econometrics as both a means of clarifying economic theory and an ambitious attempt to make economics scientific. Its enthusiastic appraisal rests on Klein’s ability to demonstrate the method in practice while exposing its limitations. The review moves from the general significance of econometrics to an explanation of dynamic models, then considers the empirical standing of economic theory and the problem of identifying structural parameters. Klein’s achievement, for Shackle, is to make a demanding mathematical and statistical enterprise intelligible to economists without disguising its unresolved difficulties.

Shackle’s opening image compares econometrics to a chemical reagent that brings a theory’s concealed ambiguities into view. Formalization is valuable because it replaces obscurity with operational concepts and statements that can, at least in principle, be tested against facts. But clarity alone is insufficient: econometrics also determines the relative importance of the relationships that theory proposes.

Beyond this it seeks to quantify the theories, showing which relationships really matter and which are negligible.

The combination of clarification and quantification produces models of an economy’s dynamic structure. These represent connections between variables measured at different dates, allowing the system’s behaviour through time to be deduced from an initial state. Shackle immediately qualifies this promise: inadequate statistics, identification difficulties, and the mystery of human nature all obstruct its realization. His praise therefore concerns the intellectual power of the method, not an assurance that economic behaviour can be comprehensively predicted.

The central exposition reconstructs Klein’s procedure for a non-specialist reader. Measurements of output, employment, prices, profits, and other significant features establish successive descriptions of the economy. Hypothetical functional relationships then connect these measurements, sometimes across time lags. Shackle stresses that the investigator exercises judgment in dividing variables between those treated as given and those determined within the model. Exogenous values arise outside the economic system, while past observations also enter as given data; current endogenous values must jointly satisfy the simultaneous equations. Economic theory helps specify this structure, and econometric estimation supplies parameters whose resulting calculations can be compared with observations.

This account leads to a reciprocal criticism of theory and empirical method. Econometric scrutiny may expose the weakness of fashionable theoretical constructions without destroying their validity as internally coherent deductive systems. Internal coherence, however, does not itself establish empirical adequacy. Conversely, Klein’s objectivity enables the theoretical economist to recognize limitations that econometrics may never overcome. Shackle values the book because it makes both forms of criticism possible, rather than demanding unconditional allegiance to either.

One fundamental and perhaps logically unsolvable problem which confronts the econometrician is that of identifying statistically estimated co-efficients with basic parameters of the system.

Shackle explains identification through a simple Keynesian model in which consumption and investment are each linear functions of income, and income equals their sum. Substituting the consumption equation into the income identity yields another equation expressing investment as a function of income. There are consequently two distinct sets of parameters associated with apparently similar investment–income relationships. The difficulty is knowing which set statistical estimation has recovered. Estimating a relationship does not automatically identify the structural economic relation it is meant to measure. Shackle regards Klein’s accessible presentation of this problem as a major virtue of the book.

This book is the record of one phase of an arduous and profoundly important intellectual adventure: the attempt to make economics scientific.

The closing judgment combines admiration with provisionality. Klein’s book records a phase in an unfinished undertaking, requiring an unusual conjunction of mathematical, statistical, and theoretical competence. Its broader relevance lies in showing economists how their theories can become more precise and empirically accountable, while clarifying why successful estimation cannot simply be equated with secure structural knowledge. For Shackle, this disciplined encounter between theory and evidence makes the book both intellectually stimulating and exemplary.