Robert Leonard has mined the Oskar Morgenstern papers at Duke University and the archives of Vienna, Chicago and New York to produce a richly sourced paper on “The Collapse of Interwar Vienna: Oskar Morgenstern’s Community, 1925-1950”. The paper is strong on the personal side of this dramatic historical period, much weaker when it come to the substance of the background problem situation facing outstanding theorists trying to make sense of the foundations of mathematics, and the relation between formal constructions and the explanatory project of economics. Two sections involving Friedrich Hayek are of particular interest (although again, rather shallow when it comes to characterizing the background context of emerging alternative perceptions of the explanatory problems of economics.) The first is the relation between Morgenstern’s 1935 paper on foresight and Hayek’s breakthrough 1936 article on “Economics and Knowledge”:
The influence of this expanded analytical community was reflected in Morgenstern’s writings of the mid-Thirties. Catalysed by his contact with the mathematicians, he became trenchant in his emphasis on logical precision, and continued to seek to reconcile psychological themes with rigorous, formal treatment. One example is his 1935 paper, “Perfect Foresight and Economic Equilibrium”, which he presented also to a meeting of the Vienna Circle.41 Here, Walras and Pareto are criticised for failing to make explicit their assumptions about what subjects can foresee, and Hicks (1933) for assuming that perfect foresight is a precondition for equilibrium.42 We must ask, says Morgenstern, “the foresight of whom? of what kind of matters or events? for what local relationships? for what period of time?” (p. 171-2). Without this, the concept of general equilibrium is jeopardised. As it stands, the assumption of complete foresight implies that individuals have perfect insight into all economic processes concerning prices, production, and income. Given the interdependence and complexity of the economic system, this implies “incredible powers on the part of the economic agent”, who must not only know exactly the influence of his own transactions on prices but also the influence of every other individual, and of his own future behavior on that of the others”.43 Such agents are not mortals, he says, but “demi-gods” (p. 173): “Unlimited foresight and economic equilibrium are thus irreconcilable with one another”.
These theoretical matters, he continues, “are so extremely complicated that only far-reaching employment of mathematics could help to suggest the reciprocal dependencies. The relationship between human behaviors dependent on one another, even without the assumption of foresight, is almost inconceivably complicated, and it requires cogent examination” (p. 174). To date, “the only examination of a strictly formal nature about social groups, even though it is carried out in another field and is limited to the co-existent individuals independent of one another, is a work by K. Menger, [Morality, Decision and Social Organization, 1934] which it is hoped, will become known to economists and to sociologists because of its importance in laying the foundation for further work” [p. 174-5].
As Morgenstern’s diary makes clear, the paper captured the interest of Menger and Wald, in turn, reinforcing his bond with them. Hayek, too, liked the paper. From London, he wrote to say that they had discussed it in his seminar, and that he might actually publish the results in Morgenstern’s review.46 No such report appeared in the Zeitschrift, but when one re-reads Hayek’s well-known exploration of equilibrium theory of two years later, his “Economics and Knowledge” in Economica, many of the themes broached by Morgenstern surface again, and even Menger’s work on ethics is cited for its promise. The emphases in the two papers were quite different though. Whereas Hayek took as evident the stylised fact of economic coordination, and sought to understand the knowledge mechanisms that must somehow underlie it, Morgenstern downplayed the existence of any such order in the absence of a logically coherent understanding of knowledge and beliefs.
The second is Hayek’s reaction to Morgenstern’s “rambling” attack on his fellow Viennese economists in his book Limits of Economics.
On reading the book, Hayek became testy: “If one is supposed to be grateful for being sent a book, and one does not agree with it at all, and one knows the author too well to handle the matter in one phrase, the only way is to make the letter a counter conclusion. But for that I haven’t had enough time. And you make the discussion very hard for me. To be honest, your book is a collection of, often brilliant, aphorisms, but it lacks the consistent argumentation with which one can start a discussion. Furthermore, that you were rude to some of my friends makes it even more difficult. . . . . . . [We] can only hope that, through the years, with many applications of the principles to specificproblems, we can convince each other”.54