It Is “In Principle” Impossible to Use Economic Theory and Statistics to Make Economic Forecasts

Morgenstern set out to show the impossibility of making any complete forecast of the state of the economy given the complexity of the mechanisms that shape economic events. He came against economic prediction from several angles, even contradicting himself in the process.

Thus was it “in principle” impossible to use economic theory and statistics to make economic forecasts. He based this claim on arguments concerning economic data, processes, and actors. The lack of homogeneity and the small size of samples made data wholly inadequate for statistical induction. Contrary to in the natural sciences, the data problems of economics were so significant as to render futile any attempt to apply probability methods. As for economic processes, Morgenstern held that attempts to understand the business cycle based on statistical considerations alone could never facilitate economic forecasting. For that, one needed to look to the underlying processes, of which prices were the surface phenomena. These mechanisms, however, lacked the regularity necessary to make them useful for any kind of prediction: only loose and inexact laws could be discovered. Finally, even when predictions were made, their effect was to create anticipations on the part of consumers, the reactions of whom would only serve to make the original forecast false. Unlike astronomy or medicine, the social sciences had the peculiarity of being able to affect their object of study. The prediction of the astronomer could have no effect on the movement of the stars, but that of the economist could change economic events. Morgenstern’s criticism of static theory is thoroughly Misesian: “In the static economy, nobody acts economically any more, and that means that they no longer ascribe value, and that no more acts of choice are made, and no decisions are made, because everything stands still.”

—Robert Leonard, Von Neumann, Morgenstern, and the Creation of Game Theory: From Chess to Social Science, 1900-1960, Historical Perspectives on Modern Economics (New York: Cambridge University Press, 2010), 101.

To Overthrow General Equilibrium Theory, Hans Mayer Attacked Indifference Curve Analysis

Mayer said mental facts, or self-observation, sufficed to establish two things. First, want satisfactions of different kinds were interdependent and, second, they were linked, not in the simultaneous manner suggested by indifference curves, but in a dynamic, causal, fashion: the relationship between wants and their satisfaction was not one of general, mutual dependence as suggested by indifference mapping, but one in which new wants emerged in time, depending on the degree to which existing desires had been satisfied. It was thus invalid to assume that all wants were present at the beginning of the “problem.” The “postulate of the law of equal marginal utility . . . becomes impossible in the real world of the psyche.” Given that it was the basis on which the theory of general equilibrium depended, if “this fundamental law of the equalization of the level of marginal utility did not hold, the whole theoretical system of equilibrium prices would lose its main support.”

—Robert Leonard, Von Neumann, Morgenstern, and the Creation of Game Theory: From Chess to Social Science, 1900-1960, Historical Perspectives on Modern Economics (New York: Cambridge University Press, 2010), 85.

Hans Mayer, a Neglected Figure in Austrian Economics, Put the Concept of Static Equilibrium on Trial

Because of the disgrace he later brought upon himself, in 1938, Hans Mayer is the neglected figure in the history of Austrian economics in the interwar period. . . .

A theorist in the tradition of Menger and von Wieser, Mayer was interested in the imputation problem. However, amongst the issues regarding which considerable discussion was devoted in his seminar in the late 1920s were those of the incorporation of time into equilibrium theory, the psychological bases of marginalist economics, and the place of mathematics in economic analysis. . . .

Mayer saw himself as an Austrian bulwark against Marginalist orthodoxy. As early as 1911, in a review of Schumpeter's Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie, he criticized the use of the differential calculus in economics. He said that although the possibility of infinitesimal change was plausible in the measurement of time and space, it was inapplicable in the consideration of economic quantities: what sense did it make to speak of the satisfaction yielded by an infinitesimal portion of, say, a shoe? He stated that in the economic realm, reasoning in mathematical terms, made possible through the adoption of methods that had proven themselves in the natural sciences, marked a surrender to pure “form.” By the mid-1920s, the supposed sterility of the use of mathematics and the excessive simplification involved in reducing subjective action in time to a static, mathematical description had become essential motifs in Mayer's work. In his seminar meetings, he took his students through the early work of Cournot, the Lausanne School, and Jevons. One might say he was putting the concept of static equilibrium on trial.

—Robert Leonard, Von Neumann, Morgenstern, and the Creation of Game Theory: From Chess to Social Science, 1900-1960, Historical Perspectives on Modern Economics (New York: Cambridge University Press, 2010), 83-84.