Oskar Morgenstern, Thirteen Critical Points in Contemporary Economic Theory: An Interpretation

First published in 1972 and reprinted in 1976, Morgenstern’s article advances a research agenda through thirteen criticisms of contemporary economic theory. Addressing economists whose textbooks obscure unresolved problems, he invokes Hilbert’s mathematical problems as a model for inquiry. His central objection concerns the substitution of isolated optimization for explanations of social interaction. Strategic dependence, expectations, bargaining, political allocation, and the temporal structure of decisions must become constitutive elements of economic analysis.

Morgenstern distinguishes empirical irrelevance, inadequate assumptions, and immanent criticism: showing that conclusions fail even under a theory’s own assumptions. Explicit formalization enables such criticism.

The axiomatic method is the most powerful and demanding way of stating a theory.

Axiomatization does not, however, make logical consistency sufficient evidence of explanatory success.

Yet the ultimate criterion is whether what the theorem asserts is what is found in reality.

The first critical point supplies the organizing distinction. Ordinary maximization presupposes control over the variables determining an outcome; exchange involves other decision-makers pursuing potentially conflicting purposes. Game theory therefore changes the conceptual problem rather than merely improving calculation. Optimization remains useful within an appropriately specified decision structure:

This makes linear programming more realistic in application, provided the basic condition is met, which is that there must be a central authority on whose acts alone the outcome depends.

Points two through five extend this argument to revealed preference, Pareto optimality, tâtonnement, and the Walras–Pareto framework. Purchases of durable goods cannot straightforwardly disclose preference rankings without information about income streams and time horizons. Welfare assessments encounter strategic misrepresentation, uncertain consequences, and the power conferred by additional resources. Recontracting cannot adequately describe irreversible services, while perfect foresight would make it unnecessary. Price-taking equilibrium excludes much of the rivalry and bargaining ordinarily understood as competition; random disturbances cannot restore purposeful interaction.

This critique makes small-number strategic relations a starting point and perfect competition a limiting case. The sixth point turns to allocation through voting. Governments and corporate boards shape demand, incomes, and prices. Economic analysis must connect political decisions with market exchanges rather than treating markets as self-contained systems.

Points seven through nine challenge substitution, demand and supply, and indifference-curve analysis. A cooperative-game counterexample disputes the universal inference from substitutability to equal value: valuation depends on productive coalitions and relations among participants. Aggregate curves conceal the number and interdependence of buyers and sellers. Individual demand curves concern alternative bids within specified periods, not successive purchases automatically induced by falling prices. Conventional elasticity requires a reconstructed account of demand.

Time likewise transforms utility analysis. Disposal costs, satiation, expected exchange, and anticipated complementary goods affect comparisons represented by static indifference maps. Expected utility advances analysis by incorporating uncertain future outcomes. Morgenstern also considers partially ordered preferences and heterogeneous forms of ordering, drawing attention to the authority, voting procedures, and laws that can establish orderings conventional theory assumes.

The final four points broaden the institutional and empirical argument. A theory of enterprise must encompass service organizations and explain strategic decisions about products and output before cost optimization becomes relevant. Drawing on Cantillon, Morgenstern stresses that monetary changes depend on their entry points, channels, and speed of transmission. Undifferentiated aggregates suppress these differences. His criticism of GNP likewise concerns concealed distributional changes and the treatment of disruption-related expenditures as growth.

Distribution theory cannot explain prices through factor remuneration while leaving personal incomes unexplained: consumer demand depends on household incomes shaped by property, bargaining, taxation, voting, and chance. Finally, an unfinished table proposes comparing the prevalence of market structures with the theoretical attention they receive. Questions about data quality extend the agenda beyond physical output to plans, information, and expectations. The article joins logical criticism to empirical redirection: economics must investigate the institutions and decisions that its preferred abstractions exclude.