Morgenstern Dismissed Harvard's ABC Curves Saying Economic Forecasting Is Inherently Impossible

Morgenstern used his time at Harvard to write a book-length appraisal of economic forecasting that he published in Austria in 1928 as Wirtschaftsprognose: Eine Untersuchung ihrer Voraussetzungen und Möglichkeiten (Economic Forecasting: An Investigation of Their Prerequisites and Possibilities). In it, he dismissed the Harvard Economic Service’s ABC curves on the grounds that an economy was too complex for regular patterns to be discerned, as forecasters were attempting to do. But he also offered what he later called an “epistemological” critique, writing that he found the entire enterprise of business forecasting, as currently practiced, inherently impossible. “[A]ny widely accepted forecast,” Morgenstern contended, “itself sets up reactions which doom it to failure.” To illustrate his point, Morgenstern made an analogy to the pursuit by Sherlock Holmes of the criminal mastermind Professor Moriarty in the popular series of detective novels by Arthur Conan Doyle. The narrative premise of the struggle is that both men, intellectually closely matched, attempt to guess what their rival was likely to do. “One may be easily convinced,” Morgenstern wrote, “that here lies an insoluble paradox.” The analogy, he suggested, was direct: economic forecasting was in essence little more than a futile effort on the part of one party to out-think another. “And the situation is not improved,” he continued, “but, rather, greatly aggravated if we assume [the presence of] more than two individuals,” as there necessarily would be in a real-world example. “Always, there is exhibited an endless chain of reciprocally conjectural reactions and counter-reactions.”

Morgenstern continued to pursue the line of thought raised by his criticisms of forecasting through what would become a hugely influential career. He became professor at the University of Vienna and director of the Austrian Institute for Business Cycle Research from 1931 to 1938. He returned to the Holmes-Moriarty example in a 1935 article on foresight and economic equilibrium. When the Nazis declared him “politically unbearable” and dismissed him from his posts in 1938, he accepted an offer from the Princeton Institute for Advanced Studies, where he struck up a close working relationship with the mathematician J. von Neumann, who had been pursuing related ideas in his own research since the late 1920s. Their subsequent collaboration resulted in the publication of their major work, The Theory of Games and Economic Behavior (1944). Morgenstern regarded this book—which also made use of the Holmes-Moriarty example—as a natural outgrowth of his 1928 Wirtschaftsprognose.
—Walter A. Friedman, Fortune Tellers: The Story of America's First Economic Forecasters (Princeton, NJ: Princeton University Press, 2014), 153-154.