Postwar developments

The 25-year period following World War II can be viewed as an era in which the nature of economics as
a discipline was transformed. First of all, mathematics came to permeate virtually every branch of the
field. As economists moved from a limited use of differential and integral calculus, matrix algebra
represented an attempt to add a quantitative dimension to a general equilibrium model of the economy.
Matrix algebra was also associated with the advent of input-output analysis, an empirical method of
reducing the technical relations between industries to a manageable system of simultaneous equations.
A closely related phenomenon was the development of linear programming and activity analysis, which
opened up the possibility of applying numerical solutions to industrial problems. This advance also
introduced economists to the mathematics of inequalities (as opposed to exact equation). Likewise, the
emergence of growth economics promoted the use of difference and differential equations.

The wider application of mathematical economics was joined by an increasing sophistication of empirical
work under the rubric of “econometrics,” a field comprising economic theory, mathematical model
building, and statistical testing of economic predictions. The development of econometrics had an
impact on economics in general, since those who formulated new theories began to cast them in terms
that allowed empirical testing.

New developments in economics were not limited to methodological approaches. Interest in the less-
developed countries returned in the later decades of the 20th century, especially as economists
recognized their long neglect of Adam Smith’s “inquiry into the causes of the wealth of nations.” There
was also a conviction that economic planning was needed to lessen the gap between the rich and poor
countries. Out of these concerns came the field of development economics, with offshoots in regional
economics, urban economics, and environmental economics.

These postwar developments were best exemplified not by the emergence of new techniques or by
additions to the economics curriculum but by the disappearance of divisive “schools,” by the
increasingly standardized professional training of economists throughout the world, and by the
transformation of the science from a rarefied academic exercise into an operational discipline geared to
practical advice. This transformation brought prestige (the Nobel Prize in Economic Sciences was first
awarded in 1969) but also new responsibility to the profession: now that economics really mattered,
economists had to reconcile the differences that so often exist between analytical precision and
economic relevance.