Economics and Mathematics in Interwar Vienna
The Viennese with an active interest in economics can be grouped into three partially overlapping communities. First and foremost were “the economists”, who gravitated variously around the Vienna Economics Association and the seminars of Ludwig von Mises and Hans Mayer, and who included, among others, Friedrich Hayek, Fritz Machlup, Gottfried Haberler, Paul Rosenstein-Rodan and Alexander Gerschenkron.
Second was that small group of mathematicians, including Abraham Wald and Franz Alt, who developed an interest in economic theory in the early 1930s, and met at the mathematical colloquium organized by Karl Menger, son of the founder of the Austrian School of Economics. Third were the philosophically inclined members of the Vienna circle, surrounding Moritz Schlick, and including Hans Hahn, Philip Frank and Otto Neurath, with the latter being the one most actively involved in economic debates.Although he was an occasional observer at the Menger Colloquium and had some familiarity with the Schlick Kreis, Oskar Morgenstern (1906-1976) was, above all, part of the first group. After his 1928 Habilitation at the University of Vienna, he in time succeeded Hayek as director of the Rockefeller-financed Institut fur Konjunkturforschung (Business Cycle Institute), and remained an influential figure in the city until his departure from Austria in late 1937. It is worth mentioning that while von Neumann would visit Vienna during the 1930s when sailing back to Hungary for the summer, and knew the work in mathematical economics of Menger and Abraham Wald, there is no evidence that he had any significant relationship with the economics community of which Morgenstern was part.
At the outset, Morgenstern was, in many respects, an economist in the “Austrian” mould, and his early work reflected the critical stance of his Viennese mentors, especially Ludwig von Mises and Hans Mayer.
The former was sceptical of the contribution of mathematics to economic analysis, believing that theoretical insights were always achieved through reasoned reflection, without recourse to formalism. To present a theory in mathematical terms, said Mises, was, at best, a kind of decorative embellishment; at worst, a mechanical presentation of a distinctly non-mechanical field (see von Mises 1960). Because of his belief that economic truths were discoverable a priori, Mises also placed limited value on empirical work, and he was particularly critical of quantitative attempts to predict the economic future. So great was the flux of valuations and information in the economic sphere, he claimed, that it rendered impossible any attempt at numerical prediction. Although less guided by a faith in economic liberalism than Mises, and although somewhat forgotten today, Hans Mayer too provided an important critique of the mathematical economics of equilibrium, again with a typically “Austrian” emphasis on time and flux (see Mayer 1932). Thus he insisted that the effect of assuming stable utility functions was to rule out essential characteristics of real economic life, namely, the complete satisfaction and disappearance of certain wants and the emergence of new ones. This critical refrain of Mises and Mayer is echoed in Morgenstern’s Habilitation thesis of 1928, which concerned the impossibility of prediction of economic events, and in his philosophical papers of the 1930s on time, knowledge, beliefs and expectations (see Morgenstern 1934b, 1935).At the same time, over the course of the 1930s, Morgenstern began to distinguish himself from his Austrian economist peers in two regards; first, in the interest he showed in mathematics and mathematicians; secondly, in the emphasis he placed upon cleansing economic “science” of all political or normative influence. In this, he was very much influenced by his contact with the above mentioned Karl Menger, and it was largely under the latter’s influence that he was steered away from his Viennese economist mentors and ultimately became someone open to collaboration with von Neumann.
The citizens of “Red Vienna” were exposed to a great deal of social and political upheaval. In 1927, the city became the theatre of political violence between the Austrian Right and the Socialists in charge of the city. In 1934, there was essentially civil war, when the conservative Chancellor Dollfuss, with the encouragement of Mussolini, resorted to artillery barrage to crush the municipal regime. It was in this difficult setting that Menger retreated from his normal mathematical work and wrote his 1934 book, Moral, Wille und Weltgestaltung. Grundlegung zur Logik der Sitten (Morality, Decision and Social Organization. Towards a Logic of Ethics): an exploratory mathematical analysis of the social compatibility of individuals, based on their stance with regard to various norms.
Morgenstern, for his part, was particularly concerned with what was assumed about the knowledge and predictive capacities of the agent in neoclassical economics. Here, he was also motivated by his reading on paradox and antimony in the work of Bertrand Russell and other logicians. Thus, for example, the assumption in general equilibrium theory that the agent had “perfect foresight” could, if interpreted literally, lead to paradoxical situations in which such agents could all outguess each other, thereby destroying any possibility for equilibrium. Morgenstern was thus particularly interested in Menger’s embryonic analysis, in so far as it seemed to begin, at least, to address the question of knowledge specification and interaction between economic agents.
Another effect of Menger on Morgenstern was the general stimulus he provided by emphasizing the need for theoretical rigour. Following his experience in the debates on the foundations of mathematics, and particularly his negative experience in Amsterdam with Intuitionist mathematician, L.E.J. Brouwer, Menger became allergically sensitive to any intrusion into the scientific domain of the “normative”, that is, expressions of political or personal preference.
In time, he developed the same critical attitude towards von Mises, whom he regarded as not fully capable of separating his politics from his economic theory. He already thought the same of Otto Neurath, to the political left. At Menger’s side, Morgenstern learned to share this attitude so that, by the mid-1930s, for both of them, the use of mathematics had become a way to ensure logical argument, and to prevent the smuggling into economics of political biases. In short, it provided a method of “purification” (see Morgenstern 1934a). Thanks to his alliance with Menger, Morgenstern soon learned to see Mises, and, in time, Hayek as propagandists, rather than true economic “scientists”. This meeting of minds reflected itself too in their institutional relationship, with Menger’s students Wald and Alt providing mathematics tutorials to Morgenstern at his institute, in return for much needed financial support.The political upheaval of the decade reached its zenith in 1938, when Hitler annexed the country, thereby ensuring the demise of one of interwar Europe’s most intellectually and culturally active centres. Many, including Menger, had already left, and Morgenstern found himself ousted from his institute. Leaving Austria, he took a position at the Department of Economics at Princeton, where he soon got to know many of the European emigres, at both the university and the Institute for Advanced Study.