Institutional Economics and Neoclassicism in the Early Twentieth Century: The Role of Physics
Ganley, William T., Journal of Economic Issues
Theoretical physics was in revolutionary fervor during the first quarter of the twentieth century: quantum physics, the special and general theories of relativity, a theory of the inner workings of the atom, Heisenberg's uncertainty principle, quantum mechanics, and the beginning of quantum electrodynamics were creations of this era. Shortly thereafter, the foundations of the current standard model of physics were made explicit. A major aspect of the period was the break between classical physics and the new physics. Nothing served more to underscore the gap between the new and the old than views on methodology by representative theorists of the new and the old. Hermann von Helmholtz was very much a nineteenth century theorist, and his view of physics in the early twentieth century embodied the classical approach:
In the  lectures he emphasized that our "ideas" and "wishes,"
our "consciousness" and "will," cannot influence the phenomena we
know through experience. They exist independently of us. We seek
their laws [Jungnickel and McCormmach 1986, 135]. In contrast, Albert Einstein spoke for the new physics in saying:
physical concepts are free creations of the human mind, and are
not, however, it may seem, uniquely determined by the external
world [Einstein 1961, 31].
Why should economists be concerned with turn-of-the-century methodological concerns in theoretical physics? Recent research in the history of economic thought has focused on the relationship between past models in physics and the development of economic theory. In particular, there has been great interest in the Mirowski thesis that neoclassical economics cannot be understood without first understanding the relationship it has to nineteenth century physics.
The Mirowski Thesis
Philip Mirowski's attack on neoclassical economic theory has spawned an intellectual growth industry in the history of economic thought.(1) Mirowski's viewpoint is more than radical because in one sweeping blow, he attempted to pull down the intellectual foundations of the neoclassical paradigm. He claimed that neoclassical economics was born out of a misunderstood model of mid-nineteenth century physics. Furthermore, refinements of neoclassical economics in the twentieth century have never really corrected the original problem. Instead, modern theorists act as if the past does not need to be acknowledged or corrected. Mirowski suggested that the mathematically sophisticated techniques "borrowed" from physics created a blind spot about the legacy of the outdated physics model at the core neoclassical economics. According to this interpretation of history, the early neoclassical thinkers wanted economics to be not simply a science, but a mathematically rigorous discipline like theoretical physics.
What Joseph Schumpeter once described as bold intellectual prowess, Mirowski reinterprets as misbegotten emulation. This hypothesis viewed the organization of neoclassical economics as a direct development from physics; economic theorists tried to take the language of the physics of energy and use it to create new economic theory. The justification for such an exercise was to transform economics into a science exactly like physics.
The problem with the use of outdated nineteenth century physics as a basis for neoclassicism continues to be a major flaw in mainstream economics:
Since the 1930's it has been a source of irritation for the neoclassical
program that while it could prove the mathematical existence of
a Walrasian general equilibrium, it seemed incapable of providing a
satisfactory account of the process by which those equilibrium
prices are arrived at [Mirowski 1994, 475].
Critics have not left this thesis unchallenged. They have gone from pointing out mathematical misstatements in Mirowski's review of neoclassicism [Varian 1991] to accusations of misrepresenting the history of economic theory [Coats 1993; Jolink 1993]. …