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3 IO Economics
The theory of games, which represents an application of the theory of decision-
making under uncertainty conditions, allows a new interpretation of market
mechanisms. It enriched economics with the concept of strategy, which is being
more and more used, although in a way that has little to do with the theory of
games proper. The real importance for economics of the theory of games is less
its actual applications than the fact that it trains the economist in a particular
type of reasoning.43 The probabilistic method can give a quantitative form to
relations that do not yield to the classical deterministic approach. In economics
in general, and in the theory of the functioning of the economy in particular,
mathematization depends on progress in mathematical theories which could
serve to describe structures whose characteristics are too ill-defined to be meas-
ured; hence the hopes pinned on the theory of trees, and the importance of the
stochastic approach.
No branch of economics had such strong links with ideology as the theory of
business cycles. This may account for the extreme vulnerability of business cycle
theories, their practical failures in the past, and their mulitiplicity ; they ranged
from sun-spots to the purely psychological considerations of cycles of optimism
and pessimism.
What was common to all these theories?
First, the mechanism of free competition of the capitalist market was consid-
ered as ‘normal’, independently of any historical context.
Secondly, the free-market system was considered to be valuable in itself (this
value judgement was of course ideological in nature).44
Thirdly, accepting Say’s law, they were confident of the excellence of the free-
market system. Thus, the theory of business cycles was expected to analyse the
causes of undesirable deviations from the ‘normal’ or ‘healthy’, and to warn of
forthcoming disturbances, so that countervailing measures could be taken. As a
result of this pragmatic ad hoc purpose assigned to the theory of business cycles,
taken in conjunction with the premises discussed above, most explanations were
based on pseudo-relations derived from correlations observed between elements
included in over-simplified models.45 The emphasis has of course changed since
the Keynesian revolution, and business cycle research nowadays concentrates
on factors which impede growth, and on ways and means through which the
State can effectively intervene in the economy.
These preKeynes business cycle theories show how dangerous it is for eco-
nomics to yield to the temptation of transforming observed correlations into
chains of cause and effect. This temptation increases as statistical and calculating
techniques devel0p.4~ The economist becomes the prisoner of pseudo-relations,
while the essential part of the mechanism he is analysing remains obscure, and
the model is incomplete as it fails to take account of certain significant variables
which very often affect both of the phenomena that are correlated.
The example of these business cycle theories also shows how poor an instru-
ment the verification of forecasts based on them was for the evaluation of eco-
nomic theory. As between the explanatory value of a theory and its forecasting
value, several relations are possible. A false theory from which a correct fore
cast has been improperly derived may by pure chance stand the test of confron-