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835
© e Editor(s) (if applicable) and e Author(s) 2016
R. Cord (ed.), e Palgrave Companion to Cambridge Economics,
DOI10.1057/978-1-137-41233-1_37
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1 Introduction
Richard Stone was an applied economist and econometrician of great dis-
tinction, who is regarded as the father of the international system of national
accounts (SNA). He was awarded the Nobel Prize in Economics in 1984in
recognition of his ‘fundamental contributions to the development of national
accounts’ that ‘greatly improved the basis for empirical economic analysis’.
His work combines theory and data, and he emphasised that the essential
feature of economics as a discipline is it should be grounded in both. e
national accounts in their modern systematic form are the basis of the empir-
ical modelling, testing, and understanding of Keynesian macroeconomics.
Stone is an economist in the Cambridge tradition in that his work devel-
oped the theories of John Maynard Keynes, Richard Kahn, and Nicholas
Kaldor by building and estimating macroeconomic models. He was based in
Cambridge throughout most of his professional life. He was the rst Director
of the Cambridge Department of Applied Economics (DAE), 1945–55, the
P.D Leake Professor of Finance and Accounting, 1955–80, founder of the
Cambridge Growth Project (CGP) with Alan Brown in 1960, and Honorary
President of Cambridge Econometrics,1 1979–91.
1 Cambridge Econometrics is a successor company to one founded in 1976 by members of the Cambridge
Growth Project to provide a commercial service based on the application of the Project’s economic
Richard Stone (1913–1991)
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836 T. Barker
His Life2
John Richard Nicholas Stone was born in England on 30 August 1913, and
died on 6 December 1991. He was educated at Westminster School, 1926–
30, and Gonville and Caius College, Cambridge, 1930–35, initially study-
ing law, before switching to economics in his second year, graduating with a
First in 1935. He was an undergraduate at a time when the ideas underlying
e General eory were being discussed and formulated. His supervisors were
Richard Kahn at King’s for two terms, then J.W.F.Rowe of Pembroke, and in
his last year Gerald Shove of King’s. He eventually became a Fellow of King’s
College in 1945. One of his lecturers was Keynes when he was developing
the draft of what became e General eory. He was invited by Keynes to
join the Political Economy Club and presented a paper on eective demand
versus production frictions. He remarked that, ‘Of my teachers, the two best
on the theoretical side were Richard Kahn and Joan Robinson, but without
doubt the greatest inuence on me came from Colin Clark, who at the time
was teaching statistics to economists in Cambridge’ (Stone quoted in Pesaran
1991: 88). Clark became a good friend, one of many over the years, and as
well as teaching he was working on estimates of the UK national accounts,
with his major book on the topic published in 1937.
After university, Stone started his career in the City of London work-
ing for Heath and Company, an insurance broker at Lloyds, 1936–39.
Outside the office, on the suggestion of Colin Clark, he took over, with
his first wife, Winifred Mary Jenkins, the production and editing of an
economic commentary Trends, which appeared in the monthly Industry
Illustrated [2, 4, 7].3 He divorced his first wife in 1940 and married
Feodora Leontinoff in 1941. When the Second World War started, Stone
was recruited to work in government in the Ministry for Economic
Warfare and later in the Cabinet Office. He settled in Cambridge
after the war but his second wife fell ill and died in 1956. He married
Giovanna Croft-Murray in 1961. They had earlier co-authored the book
Social Accounting and Economic Models [67] published in 1959. Giovanna
continued to support him in his work, and their home on Millington
model. It is now owned by the Cambridge Trust for New inking in Economics, founded in 2005; see
www.camecon.com
2 His life andcontributions are documented andappreciated in the many sources consulted for this
review; see Johansen (1985), Deaton (1987, 1993), Pesaran (1991), Pasinetti (1992), Pyatt (1992),
Goodwin (1995), Pesaran andHarcourt (2000), Weale(2004), andBaranzini andMarangoni (2015).
3 All references to Stone’s work are shown in square brackets, for example, as [1], where the number, here
1, refers to the chronological list in Pesaran (1991: 112–123).
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37 Richard Stone (1913–1991) 837
Road, Cambridge, was a haven for scholarship, good living, and lively
conversation. After his death, she prepared for publication his final set
of lectures, the magnificent Some British Empiricists in the Social Sciences
1650–1900, published by Cambridge University Press in 1997 [198].
One incident in 1940 would have established Stone’s reputation as a stat-
istician worth knowing. After he was given the job of recording shipping
imports of neutral countries, he recounts:
[T]he only ships worth recording were tankers. One knew their speed and
capacity and they carried a limited range of products of great importance in war
time … We lled in my tanker index day by day and it became clear that Italy,
which had not yet entered the war, was a big importer. Suddenly, in the second
half of May a dramatic change took place. e Italian tankers, which up to then
had been moving in a predictable way, changed course and began to steer north
or south. ey must be making for the nearest neutral ports, we thought … We
had to guess which port each ship was making for but we knew their speeds and
decided by the end of May that they would all have reached their chosen desti-
nation by 10 June. On that day we thought that Italy would declare war … e
Italophile section of the Foreign Oce refused to believe me and I was repri-
manded for my presumption. Unfounded suspicions, they said. Italy was a
delightful country and a rm friend. What if it imported a lot of oil; it was a
Catholic country and needed a lot of paran for altar candles. However, Italy
did declare war on the day we had foreseen. (Stone quoted in Pesaran 1991: 91)
The UK National Accounts
In 1940, at the suggestion of Austin Robinson, Stone transferred to the
Cabinet Oce to work with James Meade to produce national accounts to
underpin the wartime nances. At one point, his superior moved him from
working on the prototype National Accounts to oil statistics. Stone had the
opportunity of telling Keynes about this move, who said, ‘I’ll soon stop that’,
and subsequently took on Stone as his statistical assistant. Stone comments
that ‘this saved the national income [work] and in all respects was a very good
arrangement since Keynes showed immense interest in the development of
the work’ [167: 70–71].
By the end of 1940, Stone and Meade had prepared estimates for 1938 and
the four quarters of 1940. Keynes at the Treasury became interested because
earlier in the year he had included estimates of national income for 1938/39in
his 1940 report on How to Pay for the War. It was during this period that Stone
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838 T. Barker
got to know Keynes well, working with him through the rest of the wartime
period and he was with him in the USA during the American loan negotia-
tions. e Meade–Stone estimates became the rst UK National Accounts
and were published alongside the 1941 Budget, with a paper on them in the
Economic Journal in 1941 [8]. e Central Statistical Oce was established in
1940 and Stone continued there to develop the accounts. He soon linked up
with statisticians in the USA, who had a longer history of compiling national
accounts, and he reconstructed the US data to compare with the UK accounts
and denitions that he and Meade had established.
The Foundation oftheDAE
Stone was appointed the Director of the newly founded DAE in the University
of Cambridge in 1945. e DAE had been established by statute in 1939
with a budget of £2500, after the University accepted a proposal put forward
by a committee consisting of Keynes, Piero Straa, Joan Robinson, Austin
Robinson, Gerald Shove, and David Champernowne. e purpose of the new
department was ‘to foster economic research, particularly in the descriptive
and statistical elds’. However, the start of the war led the University to delay
the appointment of a Director and sta until the end of hostilities.
e University’s General Board established the DAE in a report dated 9
May 1945, with the objective of the Director being ‘to advance knowledge in
his subject, to promote and direct research in it and to supervise the work of
the Department under the general control of the Committee of Management’.
e Faculty Board proposed Stone as Director with the strong support of
Keynes and that ‘in view of his special qualications, the appointment should
be until the retiring age’. e General Board accepted this and made the
appointment. e post had the status of a University Ocer, with the salary of
a Lecturer, and the residential and teaching conditions of a Reader or Professor.
Stone was 32 years old but he was appointed until retirement with no explicit
restriction on him becoming a Professor at a later stage, as was normal with
sucient academic distinction for a University Lecturer. e ambiguity inher-
ent in the status of the post and these conditions was to lead to problems later.
He brought to the new DAE some of the projects he had started at the
National Institute of Economic and Social Research (NIESR), founded in
London in 1938, and so began the Cambridge work on national accounting
and econometrics, as discussed below. e funding for new research came from
the Rockefeller Foundation, which had been approached by Keynes in 1942.4
4 Keynes to Kittredge, Rockefeller Foundation, New York, 1 May 1942, E.A.G. Robinson Papers,
Marshall Library, Cambridge University: Box 36.
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37 Richard Stone (1913–1991) 839
e Foundation oered to ‘give prompt and preferred examination to a pro-
posal sponsored by professor [sic] Keynes and to be submitted by Cambridge
University upon the approximate termination of the war’.5 As it became clear
that the Axis powers were being defeated, negotiations were reopened and
funding was forthcoming.
Stone’s recruitment policy was to build up sta slowly and carefully and to
cast the net widely. He spent 3 months at the Institute of Advanced Studies in
Princeton in 1945 just before taking up the DAE post, working on national
accounting problems and establishing links with others interested in the issue.
In July 1948, he visited the East Coast of the USA6 to arrange the rst General
Conference of the International Association for Research in Income and Wealth
(IARIW), founded in September 1947,7 which was to be held in Cambridge
in 1949. Stone took the opportunity to meet many economists who were or
became highly distinguished in the discipline. On his 1948 visit, he interviewed
Tom Schelling at Harvard, met Paul Samuelson at the Massachusetts Institute
of Technology (MIT), Simon Kuznets and Morris Copeland in NewYork, and
visited Arthur Smithies in Washington, DC.By 1948, he had built up the size
of the DAE to six senior and four junior research sta and seven assistants.
As Director, Stone made the new DAE a renowned international centre,
attracting young statisticians and economists as sta8 or visitors.9 e intel-
lectual atmosphere of the edging Department was innovative and vigor-
ous. e venture was a new beginning after the war, with plans to establish
applied economics as a scientic undertaking. Stone was able to recruit some
of the most able, energetic, and talented of the new generation of economists
and statisticians. However, the Department was physically separated from
the rest of the Faculty of Economics and Politics and there was not much
interaction between the dierent groups.10 Typically, Stone did not take sides
5 Willits to Keynes, Rockefeller Foundation, NewYork, 18 June 1942, E.A.G.Robinson Papers, Marshall
Library, Cambridge University: Box 36.
6 Richard Stone Papers, King’s College Archive Centre, Cambridge University: Box JRNS 4/11.
7 Stone was a founding member of the Council of the IARIW and the rst Chairman, 1949–51 (see
Carson 1999).
8 Sta in the DAE during Stone’s tenure as Director included Sydney Afriat, Mike Farrell, T.W.Anderson,
J.S.Cramer, Phyllis Deane, James Duesenberry, Roy Geary, Alan Prest, Richard Brumberg, Sig Prais,
Hendrik Houthakker, James Durbin, Geo Watson, Don Cochrane, and Guy Orcutt.
9 Visitors included James Tobin, T.W. Anderson, Larry Klein, Wassily Leontief, Tjalling Koopmans,
Ragnar Frisch, Gerhard Tintner, and Geo Watson (of Durbin–Watson fame), an Australian writing a
thesis as a student of the University of North Carolina.
10 Geo Watson remembers: ‘ere were no departmental boundaries where I was concerned, but the
joke used to be that this was an applied economics group. We weren’t allowed in the door of Economics.
All the economists were anti-mathematical. ey believed you had to do it with words, which was bloody
hard. You have to be very clever to say all these things, for example marginal utilities—quite hard to
dene in words but mathematically trivial. In fact, the economists thought that Richard Stone was so
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840 T. Barke r
or engage with controversies that continued to divide the economists of the
Cambridge Faculty.11
When there was an oer of funds for Stone to occupy the P.D.Leake Chair
in 1952, this was taken as an opportunity by some in the Faculty Board to
impose a new condition on the Director, that he or she could not also hold
a Chair. Stone strongly objected, arguing that he would not have accepted
the post under this condition. He was forced to choose between remaining
Director and taking the Chair. He took the Chair, resigning as Director, but
continued to work with a team in the DAE until he retired in 1980.
An Outline ofThis Chapter
is chapter continues with a discussion of Stone’s approach to theory and
data in Sect.2, including his contribution to national accounting for which
he won the Nobel Prize. A short review of his contribution to the econom-
ics of consumer demand follows in Sect.3 and to macroeconomic model
building in Sect.4. Section5 is an assessment of his specic contribution to
economics at Cambridge and Sect.6 concludes.
2 Economic Theory andData
The Role ofTheory andData
Stone’s approach was that economics is an empirical science:
It seems to me that the development of a science requires attention to both facts
and theories and I agree with Marshall that economic theory is as mischievous
subversive they made this little extra Department to keep him out of theirs. ere were two or three
people in Stone’s group who subsequently got Nobel Prizes and every one of the rst 15 Nobel Prize win-
ners in economics visited Applied Economics’ (Watson quoted in Beran and Fisher 1998: 77).
11 Alan Prest was Lecturer in the Faculty and Fellow of Christ’s College after joining the Faculty in 1945
as a founding researcher in the DAE.His brother Wilfred Prest, visiting him in 1953, wrote in a memo-
randum: ‘I was rather shocked to nd the Faculty there deeply divided on doctrinal, political and, indeed,
racial grounds. On the one hand there is the Robertson party comprising, in addition to Sir Dennis
himself such diverse characters as Guillebaud, Richard Stone, R.F.Henderson and S.R.Dennison. is
group has never quite accepted Keynes without reservation and its members are inclined to be conserva-
tive, politically and socially. On the other hand, there is the Kahn party comprising, in addition to
Professor Kahn, Sraa, Kaldor, Dobb, Rostas, Joan Robinson, Ruth Cohen and Harry Johnson. is
group is neo-keynesian [sic] in outlook and is well to the left politically…e conict between the two
parties is deep and bitter’ (report of visit to Britain, January–March 1953, Wilfred Prest Papers, University
of Melbourne Archives, quoted in http://www.vu.edu.au/sites/default/les/cses/pdfs/millmow-paper.pdf:
3).
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37 Richard Stone (1913–1991) 841
an imposter when it claims to be economics proper as is mere crude unanalysed
history. I cannot imagine why anyone should think otherwise or why econo-
mists should tend to put theorists on a pedestal. e real diculty is to combine
the two so that theory can be used to interpret facts and facts can show what has
to be interpreted. (Stone quoted in Pesaran 1991: 89)
Stone made his own approach to data and theory clear in his proposals
for the research to be undertaken under his direction at the foundation of
the DAE.He proposed that the research should concentrate on the ‘three
tasks of applied economics: the work of observation i.e. the discovery and
preparation of data; the theoretical appraisal of problems i.e. the framing
of hypotheses in a form suitable for quantitative testing; and the develop-
ment of statistical methods appropriate to the special problems of economic
data’. He added: ‘I do not believe that applied economics can be fruitfully
developed without a synthesis of all the three types of study… e most suc-
cessful observational work is done under the guidance of theoretical ideas’.
However, ‘the reformulation of theory to provide hypotheses for quantita-
tive testing is in a very rudimentary state’.12 e great achievement of the
Department, and Stone’s own work on the behaviour of consumer demand,
was in such a reformulation and testing.
Later he stated his own position in relation to others in the eld:
Practitioners [of economics] can be grouped into three types: the speculative, the
active and the inquisitive. e speculative look at the machine and try to interpret
its workings from the signals it emits; the active do not like the way it appears to
work, and devise improvements; the inquisitive try to take it to bits and see how
it actually works… If I were inclined to speculation, I would talk about advances
in theory. If I were an activist I might talk about welfare economics or taxation
policy or Keynes or perhaps even Marx. Being merely one of the inquisitive ones,
I shall talk about the areas I have enquired into and the tools I have used for the
purpose: more specically about quantitative analysis, economic dynamics and
what, for want of a better term, I shall call social econometrics. [179: 723]
Econometrics andKeynesian Economics
Stone had many interactions with Keynes during the war when he was work-
ing on successive budgets and national accounts at the newly formed Central
12 Note by Stone dated 13 June 1945, in the E.A.G.Robinson Papers, Marshall Library, Cambridge
University: Box 36.
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842 T. Barker
Statistical Oce, which sprung out of the Cabinet Oce in 1943. Unlike many
other economists in government at the time and in Cambridge later, he was
concerned with measurement and model building rather than short-term eco-
nomic advice on the issues of the day. In this, he was very unlike Keynes and was
much more interested in providing the basis for policy formation rather than
the advice itself. Indeed, his work in government and later on national accounts
provided the statistical foundations of Keynesian macroeconomic policy.
He was very reluctant to get involved with the theoretical debates and battles of
the day, preferring to work on positive economic issues such as the determina-
tion of consumers’ expenditure or the large-scale modelling of national econo-
mies. Stone was one of the founders of econometrics, in sharp contrast to the
prevailing dismissal of the subject in Cambridge, most famously by Keynes in
his critique of Tinbergen in 1939. Unfortunately, this hostility continued as a
position for many Cambridge Keynesians of Stone’s generation.
erefore, he was in an ideal position to make a judgement on Keynes’s
attitudes towards economic statistics and econometrics; see Pesaran and
Smith (1985). In his Keynes Lecture in 1978 [167], Stone assessed the attack
on econometrics in Keynes’s review of Tinbergen, the attack that became the
received wisdom of some of Keynes’s followers after the war. Stone puts for-
ward three suggestions for the virulence of the critique. First, ‘Keynes suered
from an irresistible urge to overstate…Both by temperament and by training
he was heir to the great rhetoricians of the nineteenth century.’ Second, ‘[B]y
the thirties Keynes’s mathematics had become pretty rusty… Keynes never
seems to have relied much on his mathematics and when it came to econo-
metrics he can hardly be said to have been conscious of doing any.’ And third,
In my experience Keynes’s reaction to anything new was to look for the weak
spots and shoot them full of holes. is was not the end of the matter but only
a way of gaining time, as he usually thought things over and either came up with
some really good arguments or changed his mind.’ [167: 62–63]
In fact, Keynes was a founding member of e Econometric Society in
1930 and became its President through 1944 and 1945. When he was invited
to become President by Alfred Cowles, in mid-1943, he replied, ‘[W]hilst I
am interested in econometric work and have done something at it at dierent
times in my life, I have not recently written anything signicant or impor-
tant along these lines, which would make me feel a little bit of an imposter’
(Pesaran 1991: 99). In his last letter to the Cowles Commission, dated 23 July
1945, Keynes expressed his great regard for Tinbergen, who had visited him
in Cambridge: ‘I felt once more as I had felt before, that there is no-one more
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gifted or delightful or for whose work one could be more anxious to give every
possible scope and opportunity’ (ibid.). What a contrast these remarks are to
Keynes’s ill-tempered and rude review of Tinbergen’s econometrics contribu-
tions to the League of Nations’ report in 1937. As Stone remarks: ‘Nothing
could show better the dierence between Keynes’ rst impersonal impressions
and his considered view based on personal experience’ [167: 64]. ere was
also the practical eect when Keynes had to grapple with the interpretation
of data to understand behaviour: ‘What Keynes wrote when he contemplated
the literature as a non-participant and his reactions when he himself was on
the breach were quite dierent’ [ibid.: 72].
Leif Johansen (1985: 8) comments:
Stone was obviously quite aware of Jan Tinbergen’s, Lawrence Klein’s and others’
constructions of macroeconomic models and the potential signicance of
national accounts in this context. In another early article co-authored with E.F.
Jackson [22], Stone discussed the use of macroeconomic models as an aid in the
analysis of economic policy issues. He illustrated this by constructing a model
reecting the ideas and numerical relations found in Nicholas Kaldor’s
well- known appendix to W.H. Beveridge’s report Full Employment in a Free
Society. (1944)13
e Cambridge economists closely associated with Keynes in the 1930s
were fully behind the initiatives that led to the creation of the DEA, and the
appointment of Stone as its rst Director. e initiatives rst took the form
of the Cambridge Research Scheme, sponsored by the NIESR, which had as
one of its original functions ‘to act as a channel between foundations which
supplied nance for research, and individuals, universities and other institu-
tions needing such support’ [167: 85]. e Cambridge Research Scheme was
chaired by Keynes and had as its members Kahn, Sraa, Champernowne,
Joan Robinson, Austin Robinson (as Secretary), and Michał Kalecki (as stat-
istician). e Scheme was awarded a grant of £600 for the year 1938–39 on
the general research topic of ‘the process of economic change in the United
Kingdom’. However, the Scheme came to be seen as too loose and informal,
and its research programme was subsumed in the proposals for the DAE in
1939. Stone was working as Keynes’s assistant during the war, but also had
projects in the new NIESR, projects which eventually moved to Cambridge
after the war. He also had a personal connection since Feodora Leontino,
who became his second wife in 1941, was Secretary of the Institute.
13 See Kaldor (1944).
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844 T. Barker
Although the war intervened and delayed the process of establishing the
DAE, the direction of Stone’s interests were clearly in using and develop-
ing econometric techniques for applied economic work. His rst paper,
with W.A. Tweddle, was published in 1936in Econometrica [1]. e paper
published in 1938 [3] with his rst wife, W.A. Stone, was on estimates of
the marginal propensity to consume and the multiplier. e paper used and
developed econometric techniques to analyse data and provide the estimates.
e paper references the pioneers of econometrics, Tinbergen and Frisch, and
adopts correlation and regression techniques. Stone was later to say, ‘I think
it can be fairly said that if econometrics struck rm roots in post war Britain
and has grown in spite of adverse winds into a sturdy tree, our thanks should
go in large measure to Maynard Keynes’ [167: 87].
The System ofNational Accounts (SNA)
Richard Stone is regarded as the father of the United Nations’ (UN) SNA that
has become the basis for national accounting across the world today. It was
for this contribution that he was awarded the Nobel Prize in Economics in
1984. His outstanding and path-breaking work was made possible in part by
his personal characteristics. He was reluctant to be drawn into economic debate
and controversy, preferring to devote himself to open up new areas of enquiry,
especially on the boundaries between economic theory and data, making him
ideally suited to international collaboration and the essential development of
consensus. He was meticulous in his scholarship; he had a systematic logical
theory underlying accounting for the national economy; he read widely; he had
a gift for writing clear, cogent, and easily understandable English. In addition,
he had worked with Keynes, the most famous economist in the world at the
time, he developed an extensive network of economists interested in measure-
ment, and he was prepared to lead by example, preparing drafts for discussion,
obeying the rules, and achieving agreement.
e international acceptance of the concepts, classications, and account-
ing rules in the 20 years after the war was closely related to the Keynesian
understanding of how the economy operates. is was the golden age for
Keynesian policy. e accounts laid the basis for government intervention
to achieve full employment, with the linking of public spending, industry,
and private consumers and the distinction between investment and consump-
tion. e adoption of standards across countries allowed for the development
of international models and the calculation of cross-border macroeconomic
eects. With the National Accounts, those who argue against Say’s Law, that
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37 Richard Stone (1913–1991) 845
supply creates its own demand, have a quantitative basis for assessing the
potential loss in marketed resources after a nancial crash and the scal stimu-
lus necessary to prevent a downturn or depression.
Ward (2004: 72–83) documents the development of the UN’s accounts and
the role of Stone and the CGP.e ideas and theory originated in the work by
Stone and James Meade on the UK accounts during the Second World War
[8, 16]. It was continued by Stone in a paper on the National Accounts for
the League of Nations written in 1945 and subsequently adopted by the UN
in 1947 [24]. Stone can be seen as the pioneer of systematic aggregation in
the national accounts. Transactions are treated as in double-entry accounting,
made explicit from both sides of a transaction. e purchase by a consumer
is also the sale by the retailer; the wage received by the worker is also the
payment made by the employer. Here we nd Stone’s distinctive contribu-
tions. National income is explicitly shown as being derived by dierent com-
binations of elementary transactions. e interdependences between groups
of transactions are made clear [26]. Instead of single estimates, a framework
for social accounting is provided. Also, institutional sectors are distinguished
and dened. Unifying principles are proposed concerning the invariance of
concepts such as national income to dierent aggregations in the underly-
ing accounts [30]. For example, the Material Products System as developed
and used by the Soviet Union had a gross estimation of material produc-
tion, which changed depending on the vertical integration of production,
whereas the SNA has a net concept of production that excludes intermediate
production and so it is invariant to industrial integration. Stone went on to
chair several UN committees developing the accounts, culminating in the
1968 UN’s SNA.
Leif Johansen14 (1985: 6–13) has the most comprehensive description and
review of Stone’s contributions to national accounting. He emphasises that
‘from the outset, Richard Stone clearly perceived accounts systems in the con-
text of a more abstract and general “model.” He did not choose his concepts,
classications, relations and propositions in a routine manner, on the basis
of generally accepted accounting methods’ (ibid.: 7). In other words, Stone
regarded the national accounts as the fundamental data set required to build
and estimate an economic model, rather than as a set of accounts follow-
ing rules more suitable for managing and auditing a commercial company or
government institution. He recognised the importance of sampling [41], the
reconciliation of the inevitable discrepancies between dierent measures of
14 Johansen can be considered as the rst to have developed a general equilibrium model in his PhD thesis
partly written whilst he was visiting Cambridge in 1959.
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key variables such as GDP [10], and the need for repeated revisions to past
estimates of the accounts as new data or methods became available.
3 Consumer Demand
Consumption is the largest component of GDP, and the consumption function
is one of the key structural relationships in the Keynesian model. As noted,
one of Stone’s earliest publications in 1938, with his rst wife Winifred, was
estimating the marginal propensity to consume and the multiplier [3]. eir
work was a direct econometric estimate of the postulated stable relationship
in three chapters of Book III of e General eory. Keynes had made some
back-of-the-envelope calculations, but the Stones sought to estimate the func-
tion and the multiplier for more countries over longer time periods. ey t-
ted aggregate consumption functions with a graphical analysis using data on
consumers’ expenditure and income with time trends for interwar periods for
Germany (two periods), the UK, Sweden (two periods), the Netherlands, and
the USA.ey concluded that the functions were reasonably stable over time,
but varied across countries. ey calculated leakages with implied multipliers of
between 1.7 and 4.9, depending on the openness of the economy [3: 15].
However, when Stone returned to modelling consumers’ behaviour after
the war, it was to explore detailed spending for the UK and it was this work
for which he is celebrated by the profession, for its meticulous attention to
statistical detail, for its integration of theory and data, and for its use of econo-
metric techniques. Two of his most cited works were in this area, published in
1954. e most cited with 155 citations over the period 1966–84 (Gareld
1985: 473) is the article in the Economic Journal on the Linear Expenditure
System [53], which is path breaking in that it was derived from utility theory,
imposing the critical theoretical constraints of adding-up, homogeneity, and
symmetry algebraically and adopting a method of simultaneous equations to
estimate the system. Note that the dependent variables are nominal expen-
ditures, and one of the independent variables is total expenditure, so that
the adding-up property is imposed by linear regression. e next most cited
work (97 citations) was Stone’s book published in two parts in 1954 and
1966 [56, 123] (with Derek Rowe and others) called e Measurement of
Consumers’ Expenditure and Behaviour in the United Kingdom, 1920–1938.
Angus Deaton states of the rst volume: ‘ere is a masterly exposition of the
theory of demand and of revealed preference, and there is a chapter on econo-
metric methodology that reads like a text until one realizes that this is where
the texts originated’ (Deaton 1987: 510).
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4 Macroeconomic Modelling andPolicy
Stone’s interest in macroeconomic modelling and policy owed naturally
from his interest in measuring national income and estimating the mul-
tiplier. His aim was to understand the workings of the economic system,
integrating observations of economic behaviour and economic theory. His
views about the use of the national accounts in formulating economic
policy are made clear in a paper published in 1951 [45]. Here, he put
forward three ‘social ideals’ that should be pursued in national economic
planning, avoiding both extremes of the free market ‘laissez-faire’ ideology
and totalitarian central planning. First and foremost was economic stabi-
lisation, meaning the avoidance of unemployment and ination. e sec-
ond ideal was the equalisation of the distribution of incomes. ird, there
is the intervention in the market economy to plan for social objectives.
In his work, Stone repeatedly emphasised the need for policymakers to
supplement market mechanisms by allowing for values not priced on any
market, such as uncongested streets, peace and quiet, and an unpolluted
environment. His fundamental objection to laissez-faire is that it works
with limited values, those of the market place, and limited information,
that of current prices and a small number of forward markets.
The Foundation oftheCambridge Growth Project (CGP)
e new Labour government that came to power in Britain after the
Second World War had full employment as its main economic objective
and the policy was successfully continued by Conservative governments in
the 1950s. e overall economy grew at about 2 per cent a year between
1950 and 1960, with ination generally below 3 per cent a year. Economic
policies were a mixture of scal and monetary management. is was the
golden age of Keynesian policymaking, remarkable in hindsight for its
stability and prosperity.
However, there was a concern that the UK was lagging behind with lower
long-term growth compared to other large European economies. e CGP
was founded by Stone and Alan Brown in 1960in part as a response to these
concerns. e project was intended to study quantitatively the structure and
future prospects of the British economy, the possibilities of stimulating its
rate of growth, and the problems to which this would give rise [70, 73, 80].
e original suggestion came from Brown to combine three strands of the
work that the DAE had been engaged on in the 1950s. ese were (1) the
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national accounts, (2) input–output tables, which became embedded in the
matrix of social accounts and which provided the framework for double-entry
accounting, and (3) on the demand side, the data and modelling of consumers’
expenditure. Stone [194: 194] has commented on Brown’s contribution: ‘[T]
he successful launching of our venture and the productiveness of the group in
those early years were in large measure due to his drive, enthusiasm and devo-
tion to work, qualities made even more eective by his sweetness of temper and
his sense of humour’.
e CGP publications were initially in the form of ‘Green Books’, designed
for rapid publication of material that was awkward for a publisher, in the
sense that many large tables were included as well as complex mathematical
equations within the text. In the rst volume, by Stone and Brown in 1962
[85], they noted that the peacetime British economy had grown by an aver-
age of 1.8 per cent a year between 1910 and 1960, and at 2.0 per cent a year
between 1950 and 1960, which they contrasted with much higher rates in the
1950s for France, Italy, and West Germany, but lower rates for the USA and
Canada. Why was this so? Could the rate be raised?
e approach was to argue that action could be taken to improve the stan-
dard of living by economic policy, but that this would involve understanding
the economic system, then diagnosing the problems, and nally suggesting
solutions by way of changes in policies. e rst Green Book, ‘A Programme
for Growth’, was co-authored by Stone and Brown as ‘A Computable
Model of Economic Growth’ and was based on a course of lectures given in
Cambridge in 1962 [85]. It set out the structure of the model to be estimated
for the British economy, combining the input–output tables with a system of
demand equations for consumers’ expenditures. e objective was to explore
the eects of raising the growth rate of the British economy, essentially to
nd out if a higher rate of long-term growth was feasible and to discover the
obstacles to raising it. e method was to build a Social Accounting Matrix
(SAM) of the economy in a base year and then to make projections under
dierent assumptions about the economy, measured in terms of the SAM for
a future year. e problem of the economic cycle was set aside by assuming
that consumers’ expenditures in a future year grow at constant rates, so that
the overall solution is said to be ‘steady state’. e model is solved for dierent
assumptions about these rates of growth, given the xed labour force and the
requirement that investment must be sucient to maintain the growth rates
of consumption. A second model, to represent the transition to the steady
state, was proposed but never implemented.
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The CGP Model
e theoretical basis of the CGP model was eclectic: e economy is seen as
a complex system and the role of economic theory was to suggest relation-
ships between variables in the system, but under assumptions, such as xed
consumer preferences and industrial technologies, that are recognised as unre-
alistic but which simplify the problem. Both extremes of free market and cen-
tral planning are rejected in favour of consumer sovereignty and planning by
government and industry to achieve social and political objectives. A context
of Keynesian scal policy to maintain full employment and low ination from
year to year is assumed, but additional policies are seen as necessary to inu-
ence the long-term growth rate. e model is Keynesian with some neoclassi-
cal components but distinguished by being structural. e model was highly
disaggregated, compared to the macroeconomic models being developed at
the same time.15 e rst version had 253 accounts arranged as a matrix to
embody the double-entry characteristic of the accounts, with outgoings down
the columns and incomings along the rows [86]. An aggregate consumption
function is replaced by an assumption about the growth of total private con-
sumers’ expenditure, with detailed consumer spending given by the Linear
Expenditure System. Aggregate income is replaced by neoclassical production
functions for 31 industries, with a modied Cobb–Douglas functional form,
an assumed average wage rate, and a common rate of marginal physical prod-
uct for labour and capital across all industries. Clearly, the solutions could be
unbalanced in that they could show unemployment of labour or insucient
labour to meet the demands of industry.
Indicative Planning
One interesting aspect of the project and the model was that it supported
indicative planning. is is the idea that the provision of consistent detailed
information on outcomes for industrial output, investment, and employment
to governments and industry was sucient in itself to identify constraints to
growth, such as insucient investment, labour, or foreign exchange reserves.
Government and industry could then react by corrective action and hence
this would lead to faster growth.
This was certainly in accord with the political thinking of the time.
e Conservative government set up the National Economic Development
15 See for example the work of the Brookings Institution reported in Duesenberry etal. (1965).
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Oce (NEDO) in 1962 to support a council bringing together the govern-
ment, employers, and trade unions to develop consensus economic poli-
cies. Both the main parties in the 1964 General Election campaigned with
promises to raise the rate of growth by some form of economic planning.
In the event, Labour won and Harold Wilson became Prime Minister, with
James Callaghan as Chancellor of the Exchequer and George Brown as
Deputy Prime Minister. An earlier Labour government had Staord Cripps
as Minister of Economic Aairs and Wilson wanted to hive o into a new
department the long-term planning functions of the Treasury from its short-
term management of the economy and government nances. So came about
the outstanding example of indicative planning in the UK with the creation
of the Department of Economic Aairs in 1964 under George Brown. It was,
however, to be short-lived.
e theory of the CGP model, and its application in the form of the 1965
publication Exploring 1970 by Alan Brown, correctly identied an increase in
imports and a consequent decit in the current account of the balance of pay-
ments as one of the constraints to faster growth (ibid.: 59–60). Devaluation is
mentioned as a short-term solution and improving price, design, and quality
competitiveness as long-run solutions. However, the model did not include
price eects, so the restriction on imports (exports were exogenous) had to
be imposed in the solution that met the balance-of-payments constraint. e
failure to fully recognise this constraint was fatal to the policy experiment of
e National Plan of 1965, with the failure exacerbated by political inghting
at the Treasury. e Plan lacked strong and long-term policies, such as import
controls or devaluation of sterling to oset the increase in imports that accom-
panied faster domestic growth. e new government emphasised the impor-
tance of the balance-of-payments current-account decit, which it blamed on
its predecessor, but decided not to devalue sterling. Instead, the response was to
introduce the Temporary Surcharge on Imports in October 1964 as an emer-
gency measure. Economic policy became focused on defending the pound,
irrespective of the depressing eects on investment and growth. e Plan was
eectively discarded when deationary measures were introduced in July 1966.
But these too failed to save the pound, which was devalued in 1967.
Indicative planning was discredited because the crucial message it gave in
1964, that balance-of-payments decits would increase as a consequence, was
politically unacceptable. e academic work of the CGP, however, ourished.
Stone continued to chair the weekly seminars in term time; he supported
new areas of research into the nancial and energy sectors, and foreign trade;
and he edited most of the Green Books. e CGP responded to this fail-
ure of indicative planning by extending the modelling to allow for a better
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understanding of how the constraints on growth might be relaxed through
changes in economic policy. Econometric equations for exports and imports
were introduced to allow for price responses in the model, so the eects of tar-
is and exchange rate changes could be simulated. Eventually, in the 1970s,
the idea of transient and steady-state versions was abandoned and one version
was estimated as an annual dynamic simulation model, with various options
for closure. A consumption function was introduced to allow the incomes for
industries and government to aect total consumer expenditure.
Input–Output Modelling
Stone made a substantial contribution to input–output analysis beginning
in 1951 (see Marangoni and Rossignoli 2014). e input–output approach
had been pioneered by Leontief over a decade earlier. e CGP developed
and extended the input–output representation of industrial structure in two
ways, both of which were adopted in subsequent literature and in practice.
First, commodities were distinguished from industries to allow each industrial
group to produce a number of products or commodities. is is important
for integrating the input–output tables and the national accounts because
it makes the institutional accounts more logical and transparent. Industries
produce not only their own characteristic products but also the products of
other industries and thiss can be represented in the accounts. is treatment
is later followed in the UN’s revised SNA published in 1968. Second, the
‘RaS’ method (see Bacharach 1970) was developed to extrapolate input–out-
put tables when data on the inter-industry ows were not available, but row
and column totals of the ows could be calculated from national accounting
data. is method has proved to be very useful and has been adopted exten-
sively as a means of updating input–output tables ever since.
5 Richard Stone’s Inuence onCambridge
Economics
Stone’s specic contribution to Cambridge economics came from his time as
the rst Director of the DAE and his subsequent time as Director of the CGP
in the DAE.His inuence can be seen in three areas that ourished through-
out the life of the DAE: the historical research into UK national income sta-
tistics, the development of econometrics as a discipline, and the modelling
work of the CGP.
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e historical research16 started by Stone in the National Institute and
continued in the collection of statistics on consumers’ expenditures in the
DAE [56] was later supported by his invitation to Phyllis Deane to join the
DAE in 1950. She worked on UK regional statistics, and went on to publish
two landmark texts in 1962, on British Economic Growth 1688–1959 with
W.A.Cole and the Abstract of British Historical Statistics with B.R.Mitchell.
e work on historical national accounts was continued by Charles Feinstein
who joined the DAE in 1958 and who was largely responsible for National
Income, Expenditure and Output of the United Kingdom, 1855–1965, pub-
lished in 1972, which became the standard reference work on the period.
Stone’s inuence on econometrics was profound. e DAE under his
Directorship soon became a leading international centre for econometrics in
the 1940s and 1950s. e Durbin–Watson test for serial correlation in the
residuals of regression equations was devised when he was Director of the DAE,
as was the Cochrane–Orcutt method for reducing the risk of spurious corre-
lations between variables. e development of econometrics in Cambridge
stemmed from this time (see Smith 1998: 88–103). Members of the CGP
went on to become internationally acclaimed in applied econometrics, most
notably Angus Deaton for demand and inequality analysis and Hashem
Pesaran for panel data analysis.
In model building, with the formation of the CGP, Stone and Brown began
a distinctive approach that continues to the present day, with ve charac-
teristics: (1) structural detail allowing for institutional aspects of behaviour
to be represented, (2) consistent aggregation in basing the model on a sys-
tem of accounts in the form of the SAM, (3) a combination of optimisa-
tion and simulation by integrating limited optimisation in production, for
example, minimisation of costs, with time-series estimation of the model’s
parameters, (4) computable solutions, and (5) both balanced and unbal-
anced solutions of the models. Although disaggregation is costly in terms
of data collection, data processing, computing, and model builders’ time
in checking solutions and results, it has the great advantage of representing
institutional structures, such as the particular features of agriculture or the
electricity industry. e advantage of a computable model is that the results
are reproducible and the eects of alternative assumptions can be readily cal-
culated consistently and in great detail.
e original CGP two-model structure of a transient and static model was
eventually replaced by a single dynamic model, the Multisectoral Dynamic
Model (MDM), developed in the DAE in the late 1970s. e MDM did not
16 See Pesaran (1991: 99–101) for Stone’s own account of the work.
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37 Richard Stone (1913–1991) 853
rely on the concept of equilibrium (see Barker 1977); rather it relied on simu-
lating the economy based on sets of equations estimated using time-series
data. After the CGP closed in 1987, one version of the model became, after
many theoretical and econometric improvements (including an extension to
20 world regions), the Energy–Environment–Economy Model at the Global
level (E3MG). is was developed and used by the Cambridge Centre for
Climate Change Mitigation Research (4CMR)17 group in Land Economy at
Cambridge to generate scenarios for mitigating climate change (see Barker
and Crawford-Brown 2015). E3MG is a Post-Keynesian model with endog-
enous technological change.
e work of the CGP also developed into the two Post-Keynesian models
(MDM and E3ME) at the UK and global scales maintained by Cambridge
Econometrics and continuing to the present day. Stone agreed with this
evolution: ‘I think growth models should be at least capable of being stable
but should not be based on the assumption that equilibrium conditions are
always fullled’.18 In their use of formal econometrics techniques to estimate
the model, and assumptions of variable degrees of competition and econo-
mies of scale across industries, the Cambridge models oer an alternative to
the prevalent Computable General Equilibrium methodology based on neo-
classical economics.
6 Conclusion
Richard Stone was charismatic and inspiring as an example of scholarship and
intellectual leadership. He avoided the political and theoretical disputes that
characterised the Cambridge Faculty of Economics and Politics during most
of the period after the Second World War, instead preferring to continue
with his own approach to economic theory and data, using mathematics
and statistics where appropriate. His inuence on Cambridge economics is
to be found in the tradition of model building and use that developed in the
DAE and continues to this day in the company Cambridge Econometrics.
It is a distinctive approach that is Post-Keynesian but highly structural, based
on economic time-series and cross-section data and simulating the economy
rather than optimising a social welfare function.
17 e 4CMR was formed after the DAE was merged into the Faculty of Economics in 2005 and those
working on energy–environment–economy modelling moved to the Department of Land Economy.
18 Stone to Tinbergen, 12 February 1981, Richard Stone Papers, King’s College Archive Centre,
Cambridge University: Box JRNS 4/10.
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References
Richard Stone’s Publications Most Relevant
toCambridgeEconomics
e numbers, as in [18] immediately below, refer to those in the list in Pesaran (1991:
112–123).
Stone, J.R.N. 1946. John Maynard Keynes (obituary). Economisch-Statische Berichten,
Amsterdam, July 17: 1523. [18].
Stone, J.R.N. 1980a. Keynes, political arithmetic and econometrics. Proceedings of
the British Academy 64: 55–92 and separately.[167].
Stone, J.R.N. 1980b. Political economy, economics and beyond. Economic Journal
90(360): 719–736 [179].
Stone, J.R.N. 1984. An autobiographical sketch. Les Prix Nobel 1984. Stockholm:
Almquist and Wicksell International. http://www.nobelprize.org/nobel_prizes/
economic-sciences/laureates/1984/stone-bio.html. [192].
Stone, J.R.N., and A.Brown. 1962. A long-term growth model for the British economy.
Paper presented at the IARIW Conference, Tutzing, 1961. Chapter 9. In Europe’s
future in gures, ed. R.C.Geary, 287–310. Amsterdam: North Holland. [80].
Bibliography of References Discussing Richard Stone
andHis Work
Bacharach, M. 1970. Biproportional matrices and input–output change. Cambridge:
Cambridge University Press.
Baranzini, M., and G.D.Marangoni. 2015. Richard Stone: An annotated bibliography.
http://doc.rero.ch/record/235834/les/Stone-Annotated-Bibliography-03-2015.
pdf
Barker, T. 1977. Making the Cambridge Growth Project model dynamic. Chapter 4.
In Medium-term dynamic forecasting, ed. W.F.Gossling, 96–109. London: Input–
Output Publishing Company.
Barker, T., and D. Crawford-Brown. 2015. Decarbonising the world’s economy.
London: Imperial College Press.
Beran, R.J., and N.I. Fisher. 1998. A conversation with Geo Watson. Statistical
Science 13(1): 75–93.
Carson, C.S. 1999. 50-Year retrospective of the IARIW: e early years. Review of
Income and Wealth 45(3): 380–382.
Deaton, A. 1987. Stone, Richard John Nicholas. In e new Palgrave: A dictionary of
economics, vol. 4, ed. J.Eatwell, M.Milgate, and P.Newman, 509–512. London:
Macmillan.
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Deaton, A. 1993. John Richard Nicholas Stone, 1913–1991. Proceedings of the British
Academy 82: 475–492.
Duesenberry, J.S., G.Fromm, L.R.Klein, and E.Kuh (eds.). 1965. e Brookings
quarterly econometric model of the United States. Chicago: Rand McNally.
Gareld, E. 1985. Essays of an information scientist, vol. 8, 469–479. Philadelphia:
Institute for Scientic Information.
Goodwin, R.M. 1995.In memory of Sir Richard Stone. Introduction. In Social statis-
tics, national accounts and economic analysis: International conference in memory of
Sir Richard Stone. Annali di Statistica, X, vol. 6, ed. E.Giovannini, 17–20. Rome:
Istituto Nazionale di Statistica. http://lipari.istat.it/digibib/Annali/TO00175363_
Serie10Vol06Ed1995.pdf
Johansen, L. 1985. Richard Stone’s contributions to economics. Scandinavian Journal
of Economics 87(1): 4–32.
Kaldor, N. 1944. e quantitative aspects of the full employment problem in Britain.
Appendix. In Full employment in a free society, ed. W.H. Beveridge, 344–401.
London: George Allen and Unwin.
Marangoni, G., and D.Rossignoli. 2014 Richard Stone’s contributions to input–out-
put analysis. Paper number 295. https://www.iioa.org/conferences/22nd/papers.
html
Pasinetti, L.L. 1992. Professor Sir Richard Stone (1913–1991).Caian: e Annual
Record of Gonville & Caius College, Cambridge: 112–118.
Pesaran, M.H. 1991. e ET interview: Professor Sir Richard Stone. Economic eory
7(1): 85–123.
Pesaran, M.H., and G.C.Harcourt. 2000. Life and work of John Richard Nicholas
Stone 1913–1991. Economic Journal 110(461): 146–165.
Pesaran, M.H., and R.P.Smith. 1985. Keynes on econometrics. Chapter 8. In Keynes’
economics: Methodological issues, ed. T. Lawson and M.H. Pesaran, 134–150.
London: Croom Helm.
Pyatt, G. 1992. In memoriam, Sir Richard Stone, KT, CBE, ScD, FBA (1913–1991).
Review of Income and Wealth 38(2): 245–248.
Smith, R.P. 1998. e development of econometric methods at the DAE.Chapter 5.
In Applied economics and public policy, ed. I.Begg and S.G.B.Henry, 88–104.
Cambridge: Cambridge University Press.
Ward, M. 2004. Quantifying the World: UN ideas and statistics. Indiana: Indiana
University Press.
Weale, M. 2004. Stone, Sir (John) Richard Nicholas (1913–1991). Oxford Dictionary
of National Biography. http://www.oxforddnb.com/view/article/49989
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Author Queries
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AU2 Please confirm if the insertion of expansion of MIT is OK.
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AU4 Please provide the opening quotes in the sentence starting “first
impersonal impressions......”.
AU5 Should DEA be ‘DAE’? If not, please provide the expansion.
AU6 Publisher’s style is to use either written-out forms or abbreviations
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Kindly edit the heading The System of National Accounts
(SNA) accordingly.
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AU8 Perhaps delete NEDO as the abbreviation is not used again?
AU9 Barker and Brown (2015) has been changed to Barker and
Crawford-Brown (2015) as per the reference list. Please check if
okay.
AU10 Please cite Stone (1946, 1984), Stone and Brown (1962),
Baranzini and Marangoni (2015) in text.
AU11 Please provide volume Id for Pasinetti (1992).