The New Paradigm that emerged in economic s after WWII
from Robert Locke
As an historian, I am somewhat appalled at the inability of economists, including those on this blog to get the history of their own discipline straight. The obsession has been with neoclassical economic’s attempt to turn economics into a physico-mathematical discipline as Walras phrased it, and the economists usually discuss this attempt within the historical context of their discipline pre-1945, with references, to Walras, Marshall, Keynes, and others.
It became clear to me over thirty years ago, that the neoclassical effort to turn economics into a prescriptive science had failed before WWII. I based this on good authority, when I read the following in the foreword to John von Neumann and Oskar Morgenstern’s now classic book published at Princeton UP in 1944, Theory of Games and Economic Behavior:
“The concepts of economics are fuzzy but even in those parts of economics where the descriptive problems have been handled more satisfactorily, mathematical tools have seldom been used appropriately. Mathematical economics has not achieved very much.”
If the mathematics of preWWII neoclassical economics had not achieved very much as a prescriptive science, then why study their work? That is what Neumann and Morgenstern were asking. The mathematics in Game theory, e.g., matrix theory and probability theory were not part of the mathematical toolkit of neoclassical economists prior to WWII.
When I wrote my chapter on The New Paradigm in Management and Higher Education Since 1940, CUP, 1989, I focused on the methods of Operational Research developed during WWII and the Cold War, that neoclassical economics imbibed . I wrote, for example, about how the Rand Corporation working on OR problems for the US Air Force gave birth to George Dantzig’s linear programming algorithms in 1947. Postwar military planners and the economists who worked with them at Rand believed the new toolkit would transform neoclassical economics into a prescriptive science. At Rand in 1948, the economist Kenneth Arrow used the toolkit in his work on Rational Choice Theory. The neoclassical economists Joseph Dorfman, Paul Samuelson, and Robert Solow applied linear programming to their subject as well (in Linear Programming and Economic Analysis, 1958)
Why isn’t the source of the new paradigm in OR being discussed, instead of preWWII economists.
When I wrote the second chapter in my 1989 book, “The New Paradigm Revisited,” I questioned through the critics, how the prescriptive prowess of The New Paradigm fizzled. The people I cited were primarily OR scientists themselves. That is, I note that the people whose methodologies led to the New Paradigm, questioned the effectiveness of their own discipline. The prime example of this volte-face is Russell Ackoff, who popularized OR methods in the UK in the 1960s, only to write in a 1979 article, “The future of operational research is past,” “OR problems can never be a perfect representation of a problem. They leave out the human dimension, the motivational one. [Problem solving requires] the application not only of science with a capital S, but also, all the arts and humanities we can command.”
When we note the failing of economists to admit the shortcomings of the methods that they imbibed postwar from the OR toolkit, we should not forget that this accusations does not apply to the OR people themselves who invented the methods economists borrowed. In the late 1980s invited to give a lecture in the Management School, at Trinity College Dublin, I told my host Bill Kingston, referring to Ackoff’s article and others, that OR had had a sort of “nervous breakdown” in the late 1970s. At a luncheon the next day, Kingston asked the head of OR in the Management School, who was in the luncheon group, “Professor Locke says that OR had a sort of nervous breakdown about the effectiveness of its methods, is that true?” I was slightly embarrassed to see him called out before his colleagues, using me as an instrument. He paused, thought, and then said, “yes, that’s true.”
If we could get the same sort of honest discussion in economics as I ran into in the OR community, we would not have the dialogue of the deaf about orthodoxy and heterodoxy today.
We could begin by discussing the sources of The New Paradigm in economics in OR methodology that people either forget or of which they never heard.
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Real-World Economics Review Blog 
The current wonderful achievements of science and technology will be good for mankind only if they are integrated with laws of nature. Current economics contradicts one of these laws. Need for self-preservation should be considered a law of nature, so that both technical means and scientific methodologies of decision-making that are developed by mankind should be consistent with the concept of its self-preservation.
Mankind is now under threat of perishing from many directions. The new paradigm should be not maximization of utility but self-preservation of mankind.
Math programming models – sure, but multiscenario and multicriterial, with the main criterion of catastrophe avoidance. Before choosing between cherries and cranberries for breakfast, check that nobody wants you for his breakfast.
Maybe we need to surface/examine/get-honest-about the institutionalization of the ‘economists’ profession’ first? If the profession has been wholly taken over by the project to produce ‘a science’, then historians are automatically characterized as The Other, using methods that do not contribute to ‘the project’. If the economists’ profession was looking for critical thinking that might help it/them push out into new more fertile territory they would be keen to read history – if only to better understand how the profession got into its present condition. I am reminded of the lame excuse one made to one’s parents after doing something REALLY stupid – “It seemed a good idea at the time”.
On which I should add reading Mirowski & Nik-Khah (2017) has been thoroughly worthwhile.
Thanks JC, as always analysis on point, bibliographical reference instructive.
Critics of economics always focus on Neo-classical economic theory. There are many economists who reject that theory. Next, the critics either want pluralism or they attack equilibrium analysis, but they fail to mention that economics is a non-linear dynamic process which happens to be dissipative. If so, the concept of equilibrium where behavior can be studied is proper. Many readers of this post might agree with me, but I persist in believing that the tool kit for economists is set theory. The process begins in ordinal space, to analyze it the ordinal space must be mapped into real space. In fact, I believe that most if not all so-called ‘Social Sciences face the same problem. There exists a monotone bijection between the two spaces. Once that bijection is found, mathematical operations can be performed, and the question about the scientificity of……will no longer be pertinent.
Great post, Robert Locke.
MRW, I think the comment you made to the reposting of this posting on Mike Norman Economics, would provoke interest here, since it adds to my information on the doubts OR scientists had the effectiveness of OR methods:
Your comment:
“There is an interesting quote or comment on Wikipedia’s entry for Russell Ackoff. https://en.wikipedia.org/wiki/Russell_L._Ackoff
It’s by Peter Drucker.
From Wikipedia:
“Russell Ackoff was friends with Peter Drucker from the earliest days of their careers. Mr. Drucker acknowledged the early, critical contribution Ackoff made to his work – and the world of management in general – in the following letter, which was delivered to Ackoff by former General Motors V.P. Vince Barabba on the occasion of the 3rd International Conference on Systems Thinking in Management (ICSTM) held at the University of Pennsylvania, May 19–24, 2004:
[Peter Drucker was dead by 2004. Here’s the letter.]
“I (Peter Drucker) was then, as you may recall, one of the early ones who applied Operations Research and the new methods of Quantitative Analysis to specific BUSINESS PROBLEMS—rather than, as they had been originally developed for, to military or scientific problems. I had led teams applying the new methodology in two of the world’s largest companies—GE and AT&T. We had successfully solved several major production and technical problems for these companies—and my clients were highly satisfied. But I was not—we had solved TECHNICAL problems but our work had no impact on the organizations and on their mindsets. On the contrary: we had all but convinced the managements of these two big companies that QUANTITATIVE MANIPULATION was a substitute for THINKING. And then your work and your example showed us—or at least, it showed me—that the QUANTITATIVE ANALYSIS comes AFTER the THINKING—it validates the thinking; it shows up intellectual sloppiness and uncritical reliance on precedent, on untested assumptions and on the seemingly “obvious.” But it does not substitute for hard, rigorous, intellectually challenging THINKING. It demands it, though—but does not replace it. This is, of course, what YOU mean BY system. And your work in those far-away days thus saved me—as it saved countless others—from either descending into mindless “model building” – the disease that all but destroyed so many of the Business Schools in the last decades—or from sloppiness parading as ‘insight.’”
Just a detail : allmost all the mathematics before, and during, the war was concern by (war) PLANIFICATION. Specially, Arrow Debreu result about general equilibrium is relative to a CENTRALISED economy – not a “market economy”. Without centralisation, there is no “optimality”.
It’s why the so called “neoclassicla paradigm” is a mess. Unhappily, “heterodox” economist, and “historians” like you don’t seem to understand that.
Bernard,
the problem historians have with neoclassical economics is that it claims to be a formal science. Eric Schneider, who counted himself in the neoclassical school, wrote in 1980:
“Theoretical propositions are always conditional propositions of the form: If A, then B. If this or that assumption is fulfilled, then this or that relationship is valid. The theoretical proposition always has the character of logical necessity and is according to the assumption made either right or wrong. A theoretical proposition, like a dogma, cannot be denied. The most that can be said is that a theoretically correct proposition is not relevant because its assumptions do not apply to the present situation. That does not mean that the proposition is wrong. It only means that the proposition does not apply to present circumstances. “
If the neoclassical economists asks how price is determined by markets, the answer cannot be found in any historical or nonhistorical form of empirical investigation, for as Schneider explained, “One forgets that the sea of facts is dumb and can only be forced to reveal interconnections when properly queried. Intelligent questions can only be derived from theoretical (formal) analysis.”
But what if von Neumann says that this formal science has not accomplished much, prescriptively in policy formulation. Then people turn to practical operational disciplines for answers. That is what neoclassical economists did after the war to make their own subject relevant.
. And that is what historians do to make sense of the specificies of historical experience.
The Chandlerian school of business historians, who charted the rise of the visible hand of management in us corporate governance (central planning ) paid scant attention to neoclassical economics in their work; they studied the strategy and structure, to use Chandler’s words, of the modern corporation, and the transference of the corporate management people with their knowledge into wartime planning and postwar reconstruction and Cold War operational tactics. Most historians do not study neoclassical economics, because it is not relevant to what is going on in the world they study.
Eric Schneider? Cite please Robert.
Winfried Vogt, “Erich Schneider und die Wirtschaftstheorie,” in Erich Schneider,1900-1970: Gedenkband und Bibliographie, ed. Gottfried Bombach and Michael Tacke (Kiel, 1980), quote on p.371, my translation.
Bernard, one more comment,
When I looked at French education in economics during the 1970s and 1980s, I learned that it was taught primarily after the war in law faculties and science-po, where people learned precious little about neo-classical economics. Professor G. H. Bouquet noted in 1957. “I did all my studies at the Paris law faculty and the School of Political Science, without anybody ever citing the name Walras to me.” Gaetan et l’Ecole de Lausanne, Revue d’economie politique, 57, 689-701, 691. They concentrated on the social institutionial framework of French economic activity.
So where could French university students learn neoclassical economics? Not in the ecoles superieure de commerce, until they underwent reform in the late 1960s and 1970s under the tutelage of FNEGE, who sent French students and professors off to North American business schools for an education.
Then there were the schools of engineering, Polytechnique, Centrale, Mines, Ponts-et-chaussee? Could people learn neoclassical economics in them. The answer is yes, but they were, as you say, schools preoccupied with central planning. The ingenieur-economists were experts in Operations Research that carried through the postwar renovation of la grande industrie and the grands corps d’etat during the trente glorieuses. Maurice Allais, the mentor, claims that OR in France was superior in the 1950s to OR in the USA; certainly they did not, like neo classical economists in America, need to imbibe mathematical methods from them (i. e. OR USA)
French ingenieur-economists involved in Planification were not interested much in markets in a framework of neo-liberalism. Were they wrong? Americans with neoliberal inclinations would say yes; they never did like the etatism of France.
The failure of conventional mathematical economics has been in it’s “model building”,
which might be expressed as – this is my guess as to how the economy behaves, dressed
up in terms intended to add “a touch of artistic verisimilitude”. Quite clearly this has
failed utterly.
However the world turns. In the current RWER, p.135, my paper “Transient Development” introduces a physically rigorous mathematical analysis incorporating time. It
makes predictions as to how manufacturing projects develop in a competitive environment. It does not introduce models but is based on an analysis from first principles –
the scientific understanding of the term not the rather loose concept generally found in
economics.
The analysis demonstrates that transient analysis provides a parsimonious quantitative description of manufacturing projects and industries. It therefore provides all the
descriptive power which neoclassical analysis does not and it can be seen as an example
of one full cycle of the scientific method in action. This changes the nature of the
mathematical debate.
“..the tool kit for economists is set theory. … in ordinal space… ordinal space must be mapped into real space. …There exists a monotone bijection between the two spaces. Once that bijection is found, mathematical operations can be performed.”
From what I can follow, I believe that Prof. Locke’s opponents would still dispute that the above can be done, such that, we know which mapping is “true”. Since we cannot map all reality – the future isn’t here yet, we only always have just a part of the whole – we just never know. And I think they maintain that position even absorbing the post WWII tools referenced above. For the life of me, I don’t know how that line of thinking carried to the limit isn’t a skepticism breeding nihilism. On the other hand, who can dispute that what details one omits from an abstraction or a model sure can make it irrelevant? On those points, I think Prof. Locke’s opponents are spot on.
“From what I can follow, I believe that Prof. Locke’s opponents would still dispute that the above can be done, such that, we know which mapping is “true”. Since we cannot map all reality – the future isn’t here yet, we only always have just a part of the whole”.
The real set must of course be isomorphically related to the preference set. It is easy to do; I have done it for a pure exchange economy. (please see below).
exhttps://mpra.ub.uni-muenchen.de/id/eprint/80408change market (see below).
Following on from the earlier discussion of economists’ conversion to OR mathematics after https://rwer.wordpress.com/2017/10/10/richard-thaler-gets-the-2017-nobel-prize/#comments, I’ve been looking through my old UK textbooks for evidence of what Robert etc say happened in the US. Samuelson (1966) merely referred to the Dorfman book Robert mentioned, but Lipsey (7th edition, 1989, “extensively revised in both form and substance”) had this to say:
“Some readers of the manuscript have asked ‘why mathematics in the macro part but not in the micro part’? The answer is that microeconomics, being based on behavioural relations that are essentially non-linear, is involved with the calculus almost from the onset and, being based on maximising models, soon requires the techniques of constrained maximisation. Not only are these techniques beyond the O-Level syllabus, some of them are beyond the A-Level. Even more important, there is nothing fundamentally non-linear about the relations. We can, therefore, linearize all behavioural relationships at the onset, as I do, and use very elementary algebra. It is, of course, possible to use general functional form for all behavioural relations. The models are then solved by substituting definitional and behavioural equations into the equilibrium conditions, totally differentiating these, setting the results up in matrix form and solving using Cramer’s rule”. This note in the 1989 preface goes on to discuss pointless non-linearity assumptions in more advanced work.
On p.56 Lipsey summarises the economic system in a monetary flow diagram superficially similar to the one I have developed. However, by conflating consumers with households and distribution with markets he leaves out the profits from firms (which include his factor markets) going to his household category, so conceals the fact that households have trifurcated into those with profit incomes rising with population in geometrical progression, those whose income is a cost factor declining with decreasing need for per capita productivity, and factor markets whose managers can “print” their own incomes. How the factor markets create credit and insure their own incomes is nowhere suggested by the diagram taken out of the contexts of the shadow economy and the real world of solar power, material and biological resources. If this sounds critical of Lipsey, it isn’t: it is a criticism of an evident lack of understanding of flow systems and logarithmic (spatial, %) units even among the best in the economic profession.
Robert, wonderful posting. I concur. But I want to add a couple of observations.
First, some of the comments on the posting seem to want to set history in opposition to science. That’s not possible. Humans are historical creatures. They are born and live through and by history. Even science is an historical process. Which means human efforts to find universal and timeless laws are themselves historical processes; and cannot be otherwise.
Second, you’re correct that operations research created the opposite influences on society as post-World II economics. Operations researchers did not defend a position or ideology but simply shifted among various bases for decision making. To look at what is going on, and to make a judgment about all the ramifications of the system as far as they can see. The focus is untangling messy situations to see more clearly and reach decisions that work better. C. West Churchman, another of the creators of operations research gave this basic advice, “when one is considering systems it’s always wise to raise questions about the most obvious and simple assumptions.” Which is what made operations research effective. Two events nurtured this untangling and questioning, the RAND Corporation and the digital computer. This came to be called the “systems approach.” But as Churchman makes clear it was almost immediately oversold. The Systems Approach cannot untangle and determine how the central problems of society can be solved. Churchman began and ended his work with the Systems Approach (operations research) with the same recommendation.
“Given the limited scope of our capability to solve the social problems we face, we have every right to question whether any approach — systems approach, humanist approach, artist’s approach, engineering approach, religious approach, psychoanalytic approach — is the correct approach to the understanding of our society. But a great deal can be learned by allowing a clear statement of an approach to be made in order that its opponents may therefore state their opposition in as cogent a fashion as possible.
….
the systems approach really consists of a continuing debate between various attitudes of mind with respect to society.”
Post-World War II economics borrowed the most simplistic version of the systems approach, and to add insult to injury ignored all of Churchman’s and Ackoff’s advice (good advice) about what it really means and its limitations. Economics, already infected with social Darwinism, then added the freedom is markets ideology, growthism, US manifest destiny, and corporatism. Voila, our situation today.
“Some of the comments on the posting seem to want to set history in opposition to science.”
Speaking for myself, Ken, and from the evidence of Vladimir’s original response, I think we are at cross purposes here. Robert was talking about the the “New Paradigm … since 1940”, whereas we were thinking of the New Paradigm in terms of the one which is needed now and some of us are trying to develop. I don’t disagree with – and I’ve tried to learn from – what Robert has said.
Again, when you invoke the mathematician Churchman in support of your claim that “The Systems Approach cannot untangle and determine how the central problems of society can be solved”, you are committing yourself to a mathematical understanding of the word ‘system’ and thereby excluding all the causal and feedback characteristics of how what an engineer at least would think of as a “real” system compensates for the uncertainties of the “real world”.
Dave, my comments are about the economic paradigms that developed after World War II. I am more than mildly critical of those paradigms. As for what’s needed in economics today, I’ll stick with my original position – abolish all the current economic paradigms and don’t replace them. In other words, abandon efforts to create an economics discipline.
The Wikipedia entry for Churchman is this,
“Charles West Churchman (29 August 1913 – 21 March 2004) was an American philosopher and systems scientist, who was Professor at the School of Business Administration and Professor of Peace and Conflict Studies at the University of California, Berkeley. He was internationally known for his pioneering work in operations research, system analysis and ethics.”
Churchman was not a mathematician. This was clear when I enrolled in his classes in the 1970’s. Although he helped invent the “systems approach” he never oversold it as the answer to all the questions about complexity and interconnected societal problems. The advice he gave was this — “the systems approach is not a bad idea.” It is not the final solution for anything, but it is useful. In the same way, he never considered mathematics anything other than a tool. At times useful, but not a final answer for any question.
Wikipedia on CWC: “During World War II, Churchman headed the mathematical section of the U.S. Ordnance Laboratory at the Frankford Arsenal in Philadelphia”. Good to see “he never considered mathematics anything other than a tool”; with his background he was obviously an intelligent rather than merely clever mathematician.
Dave, I repeat, Churchman was not a mathematician. Certainly he understood and used mathematics. That he shares with engineers, pharmacists, medical doctors, geologists, etc. Who also are not mathematicians. But you are correct that Churchman used mathematics intelligently. After all it was part of the invention of Operations Research.
The OR folks’ push to apply their methods to business was matched by business folks’ long search (especially the French) for more systematic methods. This 1923 HBR paper is illuminating: Shaw, A. W. 1923. ‘Simplification: A Philosophy of Business Management.’ Harvard Business Review, 1:4, July, 417-27.