The Journal of Socio-Economics 40 (2011) 977–984

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The Journal of Socio-Economics

journal homepage: www.elsevier.com/locate/soceco

George Katona: A founding father of old behavioral economics

Hamid Hosseini ∗
McGowan School of Business, King’s College PA, River St, Wilkes Barre, PA 18711, United States

a r t i c l e i n f o a b s t r a c t

Article history: Assuming the division of behavioral economics into old and new, the paper begins to argue that old
Received 8 November 2010 behavioral economics began with the works of two giants – George Katuna and Herbert Simon dur-
Received in revised form 18 March 2011 ing the 1950s and early 1960s. The contributors of Herbert Simon are well established, thanks to the
Accepted 6 April 2011
popularity of bounded rationality and satisficing, and his being award Noble Prize in economics. How-
ever, economists are much less familiar with the contributions of George Katona that can be viewed
JEL classification:
as the father of behavioral economics. Furthermore, the author argues that Katona was also misunder-
B29
stood by various economists when he was attempting to create a psychologically based economics that
B31
B59
rejected the mechanistic psychology of neoclassical economics and introducing the survey method to
economic research that he had been using in his experimental psychology research previously. He also
Keywords: had influenced various economists during their debates in the 1950s without given the credit for. Many
Conventional economics historians of behavioral economics limit Katona’s contributions to the start of behavioral economics
Behavioral economics only to his contributions to macroeconomics. However, the paper demonstrates that Katona’s behavioral
Old behavioral economics
economics included his contributions to macroeconomics (bringing realism to Keynesian consumption
Founding fathers
function and consumption behavior), micro-economics (business behavior, the rationality assumption,
Cognitive psychology
Experimental psychology etc.), public finance and economic policy, and his introduction of the survey method. To demonstrate
Keynesian consumption function these contributions, the author argues that Katona attempted to bring realism to economic analysis –
Real behavior through psychological concepts – beginning with his early days of research in Germany which coin-
Rationality cided with German hyper inflation- and continued whether working at New school for Social Research,
Expectations Chicago University’s Cowles Commission, the U.S. Department of Agriculture, or the University of Michi-
Survey research center gan’s Survey Research Center. The author also argues that Katona’s contributions went through stages,
depending upon what economic problem persisted at the time, what advertises he was facing, and what
institution/organization he was associated with.
© 2011 Elsevier Inc. All rights reserved.

1. Introduction body of classical and neoclassic economic theory to achieve a more

Although elements of what we now call behavioral economics
can be found in the writings of Alfred Marshall, Wesley Mitchell,
J.M. Clark and other less orthodox pre-WWII economists of this
brand of economics is essentially a post-WWII construct. As
suggested by Erik Angner and George Loewenstein, behavioral eco-
nomics, which has little to do with behaviorism in psychology,
consists of “the attempt to increase the explanatory and predictive
power of economic theory by providing it with more psycholog-
ically plausible foundations” (Angner and Loewenstein, 2012, p.
1). To them, “behavioral economics should be seen as a branch of
cognitive science”, and “as an application of cognitive science to
the realm of economic decision-making” (Angner and Loewenstein,
2012, p. 2). As argued by Herbert Simon, behavioral economics
emerged because: “we need to augment and award the existing
∗ Tel.: +1 570 208 5900x5696.
E-mail address: hamidhosseini@kings.edu
realistic picture of economic process” (preface to the Handbook of
Behavioral Economics by Gilad and Kaish, 1986, p. xvi). To Simon,
“economists as social scientists must be prepared to name the key
attributes of human actors” (1985, p. 3030). This, to him, is only
possible by utilizing behavioral economics (1986, p. xvi). Gilad,
Kaish, and Loeb, in a 1984 paper, summarized the views of the 1984
SABE (Society for the Advancement of Behavioral Economics) par-
ticipants about the nature of behavioral economics through four
important attributes that distinguishes this new type of economics
from the conventional one, the most important among those being
their objection to the simplistic model of rational economic agents
exhibiting optimizing behavior (1984, p. 1).
Various historians of economics believe that behavioral
economics began, in the 1950s and early 1960s, in two
different American universities – Carnegie Institute of Tech-
nology (now Carnegie-Mellon University) and the University
of Michigan (Hosseini, 2003). However, Earl (1988, p. 3), Sent
(2004) and Angner and Loewenstein (2012) add to those two
American institutions also two English universities: Oxford

1053-5357/$ – see front matter © 2011 Elsevier Inc. All rights reserved.
doi:10.1016/j.socec.2011.04.002
978 H. Hosseini / The Journal of Socio-Economics 40 (2011) 977–984
University and the University of Sterling. This brand of economics
was initially nameless, or sometimes being called psychological
economics or economic psychology. However, it eventually became
known as behavioral economics. As far as the term behavioral eco-
nomics is concerned, Angner and Loewenstein (2012, p. 1) maintain
that Kenneth Boulding and Harold Johnson used the term behav-
ioral economics for the first time in their 1958 papers; Gilad et al.
(1984, p. 1) believe the term was forged by George Katona. And,
according to Esther-Mirjam Sent the term appeared in the works
of several writers in the early 1960s (2004, p. 4).
While historians of behavioral economics initially did not speak
of different types of behavioral economics, Sent (2004) and Angner
and Loewenstein (2012) make a distinction between old and new
behavioral economics. While these writers find old behavioral eco-
nomics in the works of writers such as Herbert Simon and George
Katona, however, they view the contributions of the likes of Amos
Tversky, Daniel Kahneman, Baruch Fishoff, Paul Slavic and others as
new behavioral economics. In my view, to be more exact, perhaps
we should even acknowledge an older group in Europe who talked
about economic psychology, of course distinct from what appeared
after WWII. We are reminded by two Swedish economists – Karl-
Erik Warneryd and Folke Olander – that the concept of economic
psychology was discussed by Bohm-Bawerk and some other (un-
named) members of the Austrian school during the last quarter of
the 19th century, and French social psychologist Gabriel Tarde pub-
lished an article on the subject at the same time, and published a
two-value study La Psychologie Economique in 1902 (1972, p. 120).
Accusing Adam Smith of failing to use psychological insights in
propounding his economic theory, as these two writers maintain,
Tarde defined economic psychology as the study of the psychologi-
cal foundations of economic theory (Warneryd and Olander, 1972).
In 1954, another French writer – Louis Reynaud – also published
another book about what Tarde had called economic psychology,
by exactly the same title (Warneryd and Olander, 1972). Of course,
their notion of economic psychology was not the same as what
eventually became known as behavioral economics.
By founding fathers, in this paper, I mean the writers who started
what Sent, Angner, and Loewenstein call old behavioral economists,
namely those post-WWII writers who had in common a general dis-
satisfaction with conventional economics and a desire to develop
a more realistic alternative that would utilize insights from (cog-
nitive) psychology. As suggested by Yang and Lester (1995, cited
by Hosseini, 2003, p. 394), while conventional economists were
deducing principles of economic behavior from features of human
nature assumed to be valid at all times and in all cultures, Katona
and Simon tried to explain the actual behavior of economic agents.
These founding fathers wanted to replace the mechanistic psy-
chology of conventional economics with a real one, thus, creating
a type of economics that, as Katona indicated, “tries to find out
what actually takes place when people – as consumers, business-
men, or policy makers – make decisions” (Katona, 1975, p. 7). In
other words, the founding fathers of behavioral economics were
those post-WWII writers who wanted to increase the explanatory
power of economics by providing it with a more realistic psycho-
logical foundation, thus, to bring more realism to this branch of
cognitive/social science.
Among the founding fathers two writers – in my view giants
– stand out: Herbert Simon and George Katona. The contributions
of Herbert Simon – thanks perhaps to his well-known notions of
bounded rationality and satisfaicing – have been acknowledged by
the economic profession, not to mention that he was awarded the
Nobel Prize in economics for those contributions, however, much
of the contributions of Geoge Katona have been overlooked. As also
indicated by Jose Edwards (2010, p. 208), Katona was also misun-
derstood by economists. He has also been ignored by historians of
economic thought, although (as suggested by one of the referees) he
was mentioned by Joseph Schumpeter (1954, p. 267). Undoubtedly,
Katona, whose contributions to the start of behavioral economics
are the focus of this paper, made substantial contributions to (old)
behavioral economics. After all, as suggested by Likert (1972, p. 8),
Katona had a major role in the start of behavioral economics; in the
opinion of Bukhard Strumpel (1972, p. 3) Katona was the father of
behavioral economics; and, according to Robert Pratt, Jr. “Virtually
all research in the field of behavioral economics is an outgrowth of
pioneering work done by George Katona and his colleagues at the
University of Michigan’s Survey-Research Center” (1972, p. 193).
Interesting enough, in that 1972 essay, Robert Pratt, Jr, demon-
strated that Katona also influenced the field of marketing. For
example, on page 198 of the essay, he cites Katona’s (1964) book
The Mass Consumption Society in which Katona lists (on p. 289–290)
six “expenditures and conditions which cause consumers to reflect
and make. . .. genuine decisions before making a purchase”. Among
these are large expenditures (of houses, cars) which are subjectively
thought to be major or fairly rare; unsatisfactory past experience,
especially disappointment of expectations; some purchases of new
products or the first purchase of a product; certain personality char-
acteristics often associated with education; etc. According to Robert
Pratt, Jr., Katona’s landmark study (with Mueller) published in 1954
too should be viewed as a contribution to the field of marketing. To
Pratt, Katona defined this area of study by asking questions relevant
to it (Pratt, p. 200).
What I intend to do in this paper is to argue that Katona
made substantial contributions to the start of behavioral eco-
nomics, and that, contrary to the assumption by some writers such
as Sent (2004) who viewed Katona’s contributions to behavioral
economics as limited to macroeconomics, Katona’s behavioral eco-
nomics involved various aspects of economics. For example, many
of the publications of George Katona are indicative of his interest in
the theory of the firm. Examples are his 1945 book Price Control and
Business, his 1946 AER paper “Psychological Analysis of Business
Decisions and Expectations”, his 1955 paper “Business Expecta-
tions in the Framework of Psychological Economics: Towards a
Theory of Expectations” (published in the 1958 book Expectations,
Uncertainty and Business Behavior, edited by Mary Jean Bowman),
and his 1957 book (with the Collaborations of Albert Lauterback
and Stanly Steinkam) entitled Business Looks at Banks: A Study of
Business Behavior. It is no wonder that he wrote: “Economics as
a behavioral science studies the behavior of consumers, business-
men, and government policy makers in spending, saving, investing,
price setting, and other activities” (1975, p. 3). However, as demon-
strated below, his contributions to macroeconomics, in particular
as it applies to consumer behavior (and the Keynesian consump-
tion function), was the most significant. This explains James Tobin’s
view that: “The careers of consumption function and George Katona
have been intertwined since 1945. The consumption – saving deci-
sion has been a major subject of theoretical and empirical inquiry
to which no one has contributed more than Katona” (1972, p. 37).
Katona, being influenced by Gestalt psychology and its expecta-
tions and problem-solving attributes, was very interested in public
policy issues, whether writing about consumer or business behav-
ior. In fact, introducing a psychological dimension to economics
was his attempt to bring realism to economic analysis, making it
more relevant to public policy. This policy-orientation of Katona
explains why he wrote his 1942 book War Without Inflation and
his 1945 book Price Control and Business. Utilizing his psychologi-
cal theory of understanding (which he developed in his 1940 book
about psychology) in his explanation of price controls in 1945,
Katona demonstrated this policy orientation when he wrote: “If
such an understanding is achieved, and if the price regulations are
equitable and do not interfere arbitrarily with production, distribu-
tion, or consumption, price control need not arouse hostility but,
on the contrary, can enlist the cooperation of all concerned. Such
 H. Hosseini / The Journal of Socio-Economics 40 (2011) 977–984
cooperation is, in fact, essential to the success of price control, the
intricate roles of which cannot be enforced by police power alone”
(1945, Price Control and Business, p. 217). Katona’s interest in public
policy and his support of the positive role of government is also
obvious in his statements of a few pages later in which he advo-
cates government announcements directed “to change business
attitudes and to rally public opinion behind price control” (Katona,
1945, p. 221), or his argument that the “failure to evoke full under-
standing of the functions of price control” and the businessmen’s
confidence in its success were “largely responsible for occasional
waves of hoarding and inventory accumulations and the resulting
price increases” (Katona, 1945).
As demonstrated below, the contributions of George Katona
went through stages, depending upon what economic problem
persisted at the time, what adversities he was facing, and what
institution/organization he was associated with.
2. Katona, his life, and his transformation from an
experimental psychologist to a behavioral economist
George Katona was born in 1901, in Budapest, Hungry. Initially
interested in the study of law, he entered the University of Budapest
in 1918. As a result of political turmoil in his native Hungary after
WWI, he moved to Germany to study experimental psychology
under prominent psychologist Muller at Germany’s Gottingen Uni-
versity. Focusing on the role of experimental methodologies in the
psychology of perception, Katona received his Ph.D. after two years,
in 1921. Moving to Frankfurt to teach at the university, and work-
ing at a bank to supplement his income, he continued his research
in experimental psychology. The result of this early research was
an award winning monograph published in 1923. Working in the
research department of that Frankfurt bank, and witnessing the
notorious German hyperinflation, he published, in 1923, a paper
on the psychology of inflation in Frankfurt Zeitung, which received
a great deal of attention. The impact of German hyperinflation, his
experience at the research center of the Frankfurt bank, and the
success of his 1923 paper made him interested in the study of
economics (Warneryd, 1982, p. 1). To learn more economics and
psychology, he moved to Berlin. In Berlin, the center of Gestalt
psychology at the time, Katona learned Gestalt psychology from
Max Wertheimer; he also learned economics from Gustav Stolper.
It was Gustav Stolper who asked Katona to become an assistant
editor of the weekly publication German Economist (Der Deutsche
Volkswirt). Between 1926 and 1933, Katona published numerous
commentaries on the state of the German economy while also pub-
lishing several papers on the psychology of perception (Curtin,
1984, p. 500). Explaining these publications, Katona wrote: “The
day after October 28, 1929 – the great crash on Wall Street – I
wrote a lead editorial predicting that prosperity had ended and a
depression was coming” (His Reminiscences, published in 1972, in
Strumpel et al., Human Behavior in Economic Affairs). Since Stolper’s
German Economist was one of the first papers to be banned by
Hitler’s government in 1933, Katona and Stolper immigrated to the
United States in 1933 (Katona became a U.S. citizen in 1939). Arriv-
ing in New York City, Katona and Stolper founded an investment
office to advise European investors. This collaboration continued
until 1936, when Katona’s career was disrupted by a severe case
of tuberculosis which lasted until 1939, when he recovered. It was
this long illness that made Katona return to academia.
Katona’s research in psychology in Berlin had been influenced
by psychologist Max Wertheimer’s experiments on perception and
learning. Wertheimer, who had immigrated to the United States
shortly before Katona, had helped to establish, in New York City, the
University-in-Exile (later New School for Social Research, and now
New School University). Recovering from his illness in 1939, Katona
979
joined his psychologist friend/mentor Wertheimer to teach and do
research in psychology at New School. With the help of a grant from
the Carnegie Corporation, while at New School, Katona wrote his
important book in psychology in 1940. As a result of his scholarship,
in 1942, Katona was invited by Jacob Marshak to work for the Uni-
versity of Chicago’s Cowles Commission for Research in Economics
to conduct and direct studies of business reaction to (war time)
price controls. Since he was always interested in the behavior of
the business sector, as stated by Richard Curtin, “The opportunity
for direct observation and measurement of both the attitudes and
the actions of business decision makers greatly appealed to Katona”
(1984, p. 501).
After two years of working for the Cowles Commission, Katona
moved to Washington D.C. to work for the U.S. Department of
Agriculture’s Division of Program Survey, directed by Rensis Likert.
Apparently, Likert offered Katona that position after discovering the
research Katona had conducted on the survey method. In Washing-
ton, Katona co-directed the first nation-wide survey of ownership
of liquid assets in the United States. In 1947, Katona, Likert and
other colleagues moved to Ann Arbor, Michigan to establish the
Survey Research Center (SRC) at the University of Michigan. Katona,
appointed as Professor of Economics and Psychology at the Univer-
sity of Michigan, also directed nation-wide surveys of consumers
for twenty-five years at SRC. Although retiring in 1972, Katona
remained active at the SRC in Michigan. In the 1960s, he also taught
as a visiting professor at MIT and NYU (as the Ford distinguished
visiting professor). Katona died in Berlin (then West Germany), in
1981.
3. Katona: his general contributions to behavioral
economics
Writing several dozen books and articles, George Katona
contributed to psychology, and helped to create (old) behav-
ioral economics. Trained as a psychologist and gradually being
exposed to and becoming interested in economic matters, Katona
emphasized the psychological foundations of economic behavior.
However, he believed conventional economists had ignored this
foundation. This explains why, in his 1951 Psychological Foundations
of Economic Behavior, he wrote: “economic process stems directly
from human behavior and that this simple but important fact has
not received its due in modern economic analysis. This author has
set for himself the task of describing a psychological approach to
economic analysis and the current research in the field of economic
behavior” (1951, preface, p. v).
Katona’s contributions in the start of behavioral economics were
acknowledged in 1977 by the American Psychological Association
(APA). In the APA citation for Distinguished Professional Contribu-
tion Award to Katona we read: “Katona pioneered the development
of a new body of knowledge bridging the gap between economics
and psychology. . . His great methodological innovation in behav-
ioral economics was to explain changes in the economic system
by analyzing actions and predispositions to action on the individ-
ual level and applying micro-data to macro-economic analysis and
prediction” (Quoted by Curtin, 2004, p. 496).
In fact, not only Katona was critical of what he called “economics
without psychology”, he was also critical of “psychology without
economics”. In his 1951 book we read “. . ..the basic need for psy-
chology in economic research consists in the need to discover and
analyze the forces behind economic process, the forces responsible
for economic actions, decisions and choices. . . Economics without
psychology has not succeeded in explaining important economic
processes and psychology without economics has no chance of
explaining some of the most common aspects of human behavior”
(1951, pp. 9–10).
980 H. Hosseini / The Journal of Socio-Economics 40 (2011) 977–984
Katona described his views of behavioral economics in vari-
ous books and essays, in particular in three of his books: his 1951
Psychological Analysis of Economic Behavior, his 1975 Psychological
Economics, and his 1980 book Essays on Behavioral Economics (that
also includes an essay by James Morgan). In his 1980 book, acknowl-
edging the importance of psychology to economic analysis, Katona
argues that for three reasons behavioral economics combines eco-
nomics and psychology. These three reasons are: (1) Behavioral
economics is concerned with the actions of economic decision
makers, functioning in their roles as consumers, workers, and
entrepreneurs. As explained by Richard Curtin, this implies that:
“The analysis of behavior in their choice situations requires the inte-
gration of the psychological antecedents of economic behavior such
as motives, attitudes, and expectations” (1984, p. 496). Whether
using the terms economic psychology, psychological economics,
or behavioral economics to describe it, Katona was describing a
type of economics that is interdisciplinary and which focuses on
human behavior. (2) Behavioral economics emphasizes the study
of the process of decision making rather than the economic conse-
quences of human behavior. [This suggests that Katona focused on
how households decide to make major purchases or new invest-
ments, rather than the exact amounts spent or invested]. And (3)
The approach of behavioral economics is empirical with a method-
ology that is inductive (1984, p. 496).
As described in Katona’s 1980 book, behavioral economics
depicts several interrelated areas of study that include: consumer
behavior which includes spending, investing (by individu-
als/households), retirement planning, and other related behavior;
work behavior that includes investments in human capital and pro-
ductive economic activities done at home; and business behavior
that includes decisions about pricing of the firm, products, firm
location, ways of management, and entrepreneurial behavior.
Obviously, Katona, like Simon, had to question some of the basic
assumptions of conventional economics. For example, in contrast
to neoclassical economics that assumes a given utility function,
Katona, like Simon, focused on “discovering the empirical laws
that described behavior correctly and as accurately as possible”
(Sent, 2004, p. 742). Or, in contrast to neoclassical economics that
assumes a close connection between rationality and utility or profit
maximization, Katona and Simon “scrutinized the implications
of departures of actual behavior from neoclassical assumptions”
(Sent, 2004, p. 742). In fact, as early as 1951, Katona was critical of
the rationality assumption of neoclassical economics. In his 1951
book he wrote: “unlike pure (neoclassical) theorists, we shall not
assume at the outset that rational behavior exists or that ratio-
nal behavior constitutes the topic of economic analysis. We shall
study economic behavior as we find it” (p. 16). Questioning the
simplistic view of the rationality assumption of neoclassical eco-
nomics, Katona, in his 1975 book, also stated that: “The consumer
is a human being, influenced by his experience. His socio-economic
norms, attitudes, and habits, as well as belonging to groups, all
influence his decisions. He is apt to prefer shortcuts, follow rules
of thumb, and behave in a routine manner. But he is also capa-
ble of acting intelligently. When he feels that it really matters,
he will deliberate and choose to the best of his ability” (1975, p.
218).
As stated before, contributions of Katona to behavioral eco-
nomics went through various stages, reflecting his life experiences,
economic experiences, or important political and economic events.
For example, his 1924 award winning monograph in Germany
reflected his research in psychology and his exposure to the Gestalt
psychology of Max Wertheimer while living in Berlin. And, his 1923
essay on the psychology of hyperinflation reflected his reaction, as
a young psychologist, to the hyperinflation of Germany.
Katona’s first major work in the United States, Organizing and
Memorizing: Studies in the Psychology of Learning and Teaching, was
published in 1940. This book in psychology, which was based on his
research about the psychology of learning while at the New School
and supported by a grant from the Carnegie Corporation, demon-
strated the importance of learning through organizing rather than
memorizing. His findings in the book opposed the accepted theory
then advocated by E.L. Thorndike. This book was “widely recognized
for its advances in both the theory of learning and the methodology
used by the analysis” (Curtin, 1984, p. 501).
Although his 1940 book was in psychology, its arguments played
a significant role in the development of Katona’s view about change
in economic attitudes and expectations (Edwards, 2010, p. 195).
This point is also obvious in Katona’s 1951 book. While discussing
attitudes and expectations that concern economic behavior in that
book, Katona writes: “. . .The strongest and most influential expec-
tations originate in understanding” (1951, p. 53).
While his 1940 book originated from his (pre-WWII) research
when teaching at New School, the outbreak of WWII in 1939 (in
Europe) renewed his interest in economics. In his 1971 Reminis-
cences, he indicated his interest in economics as follows: “But I
was not fully satisfied with research in psychology. In 1939 WWII
broke out in Europe. It provided the opportunity to integrate my
interest in economics and in psychology” (in Strumpel et al., 1972,
p. 13). Katona’s first book that explicitly reflected his concern with
(behavioral) economics was his 1942 book War Without Inflation.
This book also demonstrated his attempt to apply the psychology of
his 1940 book to economic behavior, or in the words of Jose Edwards
“to the analysis of economic subjects” (2010, p. 198). The 1942 book
started from the premise that inflation was not the automatic effect
of economic factors. Rather, it was also strongly influenced by psy-
chological factors (Katona, 1942, p. 14). In his 1942 book, Katona
maintained that economic aggregates only function as precondi-
tions for potential inflation (Also cited by Edwards, 2010, p. 198).
To Katona, economic aggregates would lead to actual inflation only
if it is supported by frames of reference giving rise to inflation-
ary expectations (1942, p. 14). As argued by Edwards, to Katona
wartime inflation was largely the outcome of an inflationary frame
of reference formed by the government and the media (Edwards,
2010, p. 197).
During his years with the Cowles Commission, Katona’s con-
cern was to conduct studies of business reaction to price controls.
As argued by Curtin: “The opportunity for observation and mea-
surement of both attitudes and the actions of business decision
makers greatly appealed to Katona” (1984, p. 501). For this rea-
son, Katona collected and analyzed survey data on reactions to
price controls on the part of producers, distributors, and retail-
ers of household durables, relating compliance or circumvention
to both economic and psychological factors. Katona’s 1945 book
Price Control and Business was the result of his Cowles Commission
experience. Katona argued that this book was devoted to the anal-
ysis of the: “actions of American businessmen as affected by price
regulations and other wartime conditions” (1945, p. 2, also quoted
by Edwards, 2010, p. 198). The study, which covered from April
1942 to 1944 (and not the entire period of price control) had the
following features. The method: detailed interviews with a small
sample of businessmen, better suited for discovering the types and
motives of business adjustments than for compiling quantitative
data on prices, sales, costs, and profits. The sample: manufactur-
ers and distributors of a few important consumer goods in the
Chicago area, and not all businessmen affected by price control
(1945, p. 2). As suggested by Edwards, Katona’s own description
of this method was that it was an alternative to the NBER – type
of analysis of aggregate data, and was twofold: “It was intended
at the same time as a recollection of data to support war plan-
ning, and as a test of the potentiality of the method of interviews
as a legitimate tool of economic research” (Edwards, 2010, pp.
198–199).
 H. Hosseini / The Journal of Socio-Economics 40 (2011) 977–984
The method used by Katona was rather innovative. It consisted
of gathering data through questionnaires designed to make busi-
nessmen discuss with qualified interviewers who were granted
relatively wide freedom (Katona, 1945, p. 8). These data acquired
contained information about different pricing procedures for dif-
ferent types of activities.
According to Edwards, the attitudes of businessmen were found
to explain pricing procedures, affecting the relative positioning
of various firms (Katona, 1945, p. 8). Katona’s conclusion in his
1945 book was that the analysis of the motives and the attitudes
of businessmen was a worthwhile approach for studying eco-
nomic phenomena. The method of detailed interviews was found
to be the appropriate tool of analysis. According to Edwards: “It
was in this context that Katona produced the passages on which
Machlup (1945) supported his claims against Lester’s question-
naires” (p. 201). According to the findings of Katona, government
agencies should support the price control actions with announce-
ments directed “to change business attitudes and to rely on public
opinion behind price control” (1945, p. 221).
In 1946, Katona moved to the Department of Agriculture and in
1947 to the University of Michigan where, with the help of Likert
and Angus Campbell, he founded the Survey Research Center (SRC).
Katona’s efforts, both at the Department of Agriculture and at SRC,
were aimed at the empirical analysis of the attitudes and motives
of consumers (and not businessmen).
4. The survey research center and Katona’s contributions to
macroeconomics
The focus of SRC was on understanding the role of the consumer
in the transition from a wartime economy to “what all hoped would
be a new era of peace and prosperity” (Curtin, 2004, p. 131). To
appreciate this transition one has to realize that at the end of WWII
many, among both economists and the general public, were fearful
that the deflationary spiral and mass unemployment of the Great
Depression of the 1930s would return. Concerning that false pre-
diction, since it did not occur, Katona, in his 1975 book, stated that:
“When the war ended in 1945, the following view of the underlying
economic prospects was held by many experts and often appeared
in print: For the past few years, economic activity has been sus-
tained by government orders for war materials. They are about
to cease, and millions of workers will be discharged. At the same
time, the labor market will be clogged by millions of soldiers and
sailors who will be demobilized. Between 1940 and 1945 prices
were driven up because of the high incomes of the war workers
and shortages of civilian consumer goods. Although increased pro-
duction of peacetime goods will give employment to many people,
this production cannot compensate for the oversize factors. There-
fore, a downward trend in employment, production, and prices is
imminent. A few months after the end of the war there will be a
depression with several millions of people unemployed” (1975, pp.
103–104).
Forecasting errors did also exist on the inflation side, since
others predicted that rapid inflation would emerge after the
war. Explaining those forecasting errors Katona wrote “Some
economists predicted rapid inflation. During the war an unprece-
dented large proportion of income had been saved. For several years
in succession people had saved approximately a fourth of what they
earned and most of the money had been put into war bonds and
bank deposits, which could be cashed or withdrawn without delay.
When people would be spending both their incomes and their accu-
mulated liquid assets, demand would exceed the supply of goods
and runaway inflation develop” (1975, p. 104).
Obviously neither of those forecasts came true, as Katona’s
1945/1946 survey at SRC had also predicted. The question is why?
981
As suggested by Katona: “Surveys conducted in 1945 and 1946
revealed that the American people did not think along those lines.
In contrast to the experts, people on the whole were optimistic
about economic development as well as about their own financial
situation. They believed that the end of the war-a most welcome
event-could not have any but good economic consequences. . . nor
was rapid inflation expected” (1975, p. 104).
As argued by Richard Curtin, the forecasting errors by
economists caused a great deal of concern among economists
about: “whether the underlying economic theory or statistical
methodology, or both were wrong” (2004, p. 31).
Nobel Laureate Lawrence Klein too found this forecasting error
problematic. To him, “The order of magnitude of the error involved
is great and, what is more serious, it is great enough to lead to disas-
trous policy recommendations” (1946, p. 291). However, according
to Klein, the problem was not caused by the underlying theory of
the methodology. Rather, to him, the problem was caused by its
implementation. To Klein, what was needed was the utilization of
models with more detailed equations, fewer exogenous variables,
and more dynamic specification (1946, p. 291).
Of course, Katona (and his colleagues at SRC) disagreed. As
demonstrating in both his 1946 AER essay and his 1951 book
Psychological Analysis of Economic Behavior, in addition to infor-
mation about consumers’ financial situations, forecasting models
also require information on the psychological factors that shape
changes in consumer’s spending and saving decisions. In other
words, what economics needed was a correct and realistic psycho-
logical foundation. According to Katona, during the 1960s, Laurence
Klein took care of this problem; this was done by his attempt to
fit anticipatory problems, including The Index of Consumer Senti-
ments, in his Wharton econometrics model (Katona, 1975, p. 100).
The Index of Consumer Sentiments (ICS), an ongoing tool to deter-
mine the general feelings of consumers toward the economy, was
first developed in the late 1940s under the direction of George
Katona at the University of Michigan’s SRC; these specified and
formulated criteria for collecting, quantifying, and measuring con-
sumer confidence, i.e. for a cross section of the populace.
It was due to his attempt to build this type of economics
that Katona challenged what he called the Keynesian “fundamen-
tal psychological law” concerning consumer behavior (and also
explored economic accounts of business behavior). In terms of
macroeconomic analysis of consumption, Katona wanted to update
Keynesian macroeconomic analysis, in particular as it relates
to the consumption function. In this 1946 AER essay we read:
“J.M. Keynes, in describing psychological characteristics of human
nature, did not borrow from psychologists but proposed, without
their aid, what he called a fundamental psychological law refer-
ring to propensity to consume under the influence of changes in
income” (Katona, 1945, p. 45, also quoted by Jose Edwards, p. 203).
The following two statements by Rensis Likert demonstrate the sig-
nificance of Katona’s contributions. “When Katona started his work,
the prevailing view among economists was that the general level of
the total economy and major changes in this level were controlled
by the actions of business and government. Consumers were felt to
have no influence, since their rate of expenditures was determined
by their income, which in turn was controlled by the decisions of
business and government” (in Strumpel et al., 1972, pp. 3–4). Sev-
eral pages later Likert wrote: “When Katona started his nationwide
consumer surveys, the prevailing view was that the rate of con-
sumer expenditures was not an independent factor affecting the
level of economic activity. Increased or decreased rates of expendi-
tures by business or government were viewed as the factors which
determine whether we had good times or bad times. Consumers
were felt to have little independent influence. . . Amid consider-
able skepticism, Katona persevered in his view that consumers are
important as an independent factor. . .” (Strumpel et al., 1972, p. 8).
982 H. Hosseini / The Journal of Socio-Economics 40 (2011) 977–984
Like macroeconomists, Katona was also interested in the role
of expectations in macroeconomic analysis. However, his view of
expectations, which to him was a special kind of attitude, was dif-
ferent from those of the economists. For him, as described by Jose
Edwards, expectations should not be derived exclusively from cur-
rent and past data but studied by means of the analysis of other
attitudinal data, as well as motives of these attitudes” (p. 203).
According to Edwards, this view of Katona was influenced by his
1940 work about the psychology of learning (p. 203). In fact, Katona
made a mention of the point in his 1946 AER essay as well. “The
study of expectations forms part of the psychology of learning,
since expectations are not innate or instinctive form of behavior
but rather the result of experience” (p. 51).
According to Katona, because for Keynes variations in consump-
tion and saving are only explainable by changes in income, the
Keynesian consumption function was based on economics with-
out psychology. However, to Katona (a) the volume of consumption
and saving does not follow income in a mechanistic way, since it
also depends on prevailing expectations, (b) one’s past experience
is not the only factor shaping expectations, since expectations can
also be influenced, (c) thus the average propensities to consume
and save too can be influenced (Katona, 1946). Katona explained
this influence in his 1940 book on the psychology of learning as
follows: “This can be done, without destroying the people’s free
choice, by making consumers and businessmen understand why
certain kinds of public and private policies lead to certain results”
(Katona, 1946).
The influence of Katona’s book on the psychology of learning on
his critique of the Keynesian consumption function, i.e., that con-
sumption is a stable function of aggregate disposable income, was
best explained by Robert Pratt, Jr. in his 1972 essay (pp. 189–212).
Pratt reminds us that to Katona consumption is both a function
of ability, i.e. disposable personal income, as well as a willingness
to spend that income, assuming that willingness to spend is also
measurable (p. 194). In other words, to Katona, at a given time,
willingness to spend varies according to the degree of optimism or
pessimism felt by consumers (Pratt, 1972).
As correctly emphasized by Pratt, it is in the measurement of the
willingness to spend that Katona turns to psychology (Pratt, 1972).
For Katona, consumer response to stimulus, T.V. or radio advertise-
ment, point-of-purchase displays, packaging, extended warranties,
etc., is likely to differ among different individuals at a point in
time and differ for the same person in different points in time.
The reason for this is that individuals perceive and interpret stim-
uli differently. These inner conditions emphasized by Katona are
what Gestalt psychologist have called intervening variables which
include motives, beliefs, assumptions, prejudices, attitudes, aspi-
rations, feelings, emotions, expectations, social values, and more.
As suggested by Pratt, for Katona, intervening variables that play a
dynamic part in person’s buying or not buying decisions, provide
the psychological framework within which perceived environmen-
tal stimuli are organized and interpreted (Pratt, 1972). Katona, on
the basis of his psychological theory of learning reflected in his 1940
book, assumed that intervening variables are constantly changing
through time as a result of new learning and experience. According
to Pratt, Katona’s use of the measures of optimism and pessimism
to predict aggregate buying behavior was also influenced by Kurk
Lewin’s theory of aspiration (Pratt, 1972, p. 196).
It was to complement the Keyesian assumption that personal
disposable income is the sole cause of variations in aggregate
consumption that Katona adhered to the study of consumption
behavior through the method of sample interviews which origi-
nated with Rensis Likert in the Division of Program Surveys of the
United States Department of Agriculture. This method was used
by Katona and Likert in the first national survey on liquid assets
“to collect financial data of individual economic units as well as
data on motives for, attitudes toward, and expectations of saving”
(Katona and Likert, 1946, p. 197). The purpose of that survey was
“to explore the household’s use of the considerable amount saved
during WWII” (Edwards, p. 204). This survey was sponsored by the
(U.S.) Federal Reserve Board, and conducted by Katona, Likert and
Angus Campbell at the U.S. Department of Agriculture. This division
was dissolved in 1947, causing the creation of SRC at the University
of Michigan.
In their 1946 The Review of Economics and Statistics essay, Katona
and Likert explain steps in the survey method used in their SRC
surveys of consumption/savings of U.S. households as follows: (a)
a representative, carefully stratified sample of spending units is
drawn; (b) specific questions are formulated, designed to secure the
full and unbiased cooperation of respondents; (c) all respondents
in the sample are asked these questions not only about their actions
(e.g. about the amount saved), attitudes and expectations, but also
about their reasons for these actions, attitudes, and expectations;
(d) interviewers, after general training in interviewing techniques,
are instructed on how to use their particular questionnaire and how
to introduce the various parts of the interview so as to cover all of it
systematically with all respondents, and to make them understand
why the questions are asked; emphasis is placed on building rap-
port with the respondent both in the design of the questionnaire
and in the interviewing techniques employed; (f) coding and anal-
ysis techniques are used which incorporate objective checks on the
coding of all measures of attitude and behavior” (pp. 197–198).
For Katona (and Likert) it was important that respondents
would understand the questionnaires. According to those authors,
as also emphasized by Edwards, “the results of the interviews
showed that standard macroeconomics was accurate for analyzing
economic phenomena in contexts of given attitudes and expecta-
tions” (Edwards, p. 205). In other words, macroeconomic concepts
such as the Keynesian consumption function work in the short
run. However, the analysis of the interviews showed that people
rapidly changed their behavior (Edwards, 2010), since as suggested
by Katona and Likert “changes in attitude precede(d) changes in
action” (1946). In other words, they do not hold in the long run.
Concerning those intervening variables, i.e. motives, attitudes, etc.,
Katona wrote: “Analysis of attitudes and motives is required to
find out whether in a given situation it is permissible to neglect
the intervening variables. Possibly, the situations in which inter-
vening variables may not be neglected are the most interesting
ones, making turning points in business cycles or crucial stages
of inflation or deflation” (1947, p. 451). To Katona, thus what he
initially called economic psychology (later behavioral economics)
is an empirical discipline that utilizes information that concerns
attitudes, motives, plans, intentions and expectations, as well as
economic data on the distribution of income, savings, and liquid
asset holdings, etc. (1947, p. 451). It was for this type of analy-
sis that Katona was critical of Keynes’ consumption function for
being “rigidly and passively tied to income” (1951, p. 136). To him,
the study of the propensity to consume should not omit the study
of expectations. This is why he wrote: “Keynes, who assigns great
importance to the expectations of businessmen in shaping their
policies, does not take expectations into account when he analyzes
the factors influencing consumer behavior” (1951, p. 141). In other
words, it was Katona who insisted that consumers constitute an
important and independent factor affecting the economy. Accord-
ing to Likert, it was Katona who demonstrated the important role of
the consumer. For, “the data he collected, and the analysis that he
and his colleagues made, gradually demonstrated even to the most
skeptical that consumer perception, expectations, and motivations
can exercise a significant, independent impact on the economy”
(1972, p. 8). Those contributions of Katona were also emphasized
by Joseph Newman. To him, challenging the (Keynesian) assump-
tion that changes in personal income would result in immediate
 H. Hosseini / The Journal of Socio-Economics 40 (2011) 977–984
changes in consumption, Katona maintained that “growth in con-
sumer income and assets allowed people considerable direction
in their spending and saving. Therefore, their spending depended
not only on their ability to spend but also their willingness and
expectations had to be taken into consideration. Since changes in
attitudes and expectations occur in advance of action, Katona set
about to measure those changes and use them as leading indi-
cations of economic activity. That required obtaining data from
individual consumers. . . In order for his plans to be carried out, sur-
vey research methodology had to be developed” (A 1983 lecture,
available online).
Of course, what Katona did at Survey Research Center, or in his
creation of a psychologically – based economics, was based on what
Curtin (1978) calls “several crucial advances at the time”. In the
words of Curtin: “The development of survey research methodol-
ogy was dependent on several crucial advances. Area probability
methods of sample selection and advances in statistics provided
the base for the construction of representative samples which yield
estimates with known sampling variances. Valid and reliable sur-
vey instruments needed to be designed, and methods for machine
tabulation were needed to handle the large cross-section data
bases. Katona’s initial survey projects could not draw on established
methods, so together with his colleagues at the Survey Research
Center; he acquired the wide range of skills necessary to com-
plete the research. Katona documented the sampling procedures,
the fixed-questions open-response interviewing techniques, the
use and advantage of panel designs, as well as the more general
functions and uses of survey research for the analysis of economic
behavior. . .” (p. 497).
5. Katona: his misunderstanding by economists
It is ironic that Katona, whose 1940 book was about the psychol-
ogy of understanding, was misunderstood by economists, at least
during the years he was trying to create what we now call behav-
ioral economics. James Tobin, in his 1972 essay “Wealth Liquidity,
and the Propensity to Consume” explains this misunderstanding
of Katona as follows: “A behavioral scientist by training and tem-
perament, he brought to economic research quite a different bag
of tools and insights from those of the technical economists. As
a social psychologist, he was probably not surprised to find that
he annoyed many of the brethren of his adopted scientific frater-
nity. What put them off was his disdain for utility-maximizing or
profit-maximizing models of individual behavior, and his failure
to base his statistical inferences and macro-economic conclusions
on explicit formal system-wide models” (1972, p. 37). Of course,
in the next sentence Tobin continues to state that: “But today
we can appreciate, even from the perspective of economic theory
and econometrics themselves, Katona’s perception, prescience, and
persistence” (Tobin, 1972).
Of course, that misunderstanding of Katona was multidimen-
sional, and included various aspects of what Katona was attempting
to do, including the purpose of his survey method. This, for exam-
ple, can be seen in the 1954 Federal Reserve Board appointed
committee headed by Smithies that also included Katona (and
Tobin). Within that committee, various members disagreed with
and were critical of the consumer surveys that were advocated
by Katona. Within that Fed Board – appointed committee, various
economists were interested in the predictive power of data gen-
erated by SRC, misunderstanding that Katona’s aim in generating
those data was to create a psychologically based economics (i.e.
behavioral economics) on the basis of the analysis of interviews
conducted that explained motives, and attitudes of consumers and
before that (i.e. until 1946) businessmen. While Katona’s interest
until 1946 was the study of businessmen, his focus shifted to the
983
analysis of consumer behavior while, at SCR. As implied by the
above, the attitudinal data produced under Katona’s program of
behavioral economics was strongly contested by economists of the
Smithies Committee who were interested in the utilization of the
data generated under Katona’s leadership for their utilization as the
theoretical tool which was desired by Katona.
Of course, in spite of the explicit opposition of those economists
to the attempt by Katona to create a psychologically based eco-
nomics (i.e. behavioral economics), it does not mean that Katona’s
efforts were not influencing economic analysis at the time. As
Jose Edwards argues in his University of Paris Ph.D. dissertation,
Katona’s influence on economic analysis can be seen in the “Mea-
surement Without Theory” (originating with Wesley Mitchell and
later involving Tjalling Koopmans and Vinig) and the “Full Cost”
controversies of the late 1940s and later (2010, p. 187). As Edwards
suggests, “Katona’s influence in these debates has been largely
overlooked” (2010, p. 187). In fact, Tjalling Koopmans’ arguments
about measurement without theory in his debate with Vinig and
articulated against the NBER type of analysis of economic aggre-
gates was influenced by Katona’s discussions that concerned the
motives of businessmen, as were several passages in the papers by
Koopmans that concerned that debate indicate (2010, p. 187). As
suggested by Phillip Mirowski (1989), one should not be surprised
that neoclassical economists associated with Cowles Commission
would ignore the contributions of George Katona. In his own words:
“Further, the Cowlesmen had little respect for survey techniques or
participant observation of social actors. This was illustrated in the
cool reception given to the survey on war time price controls con-
ducted by George Katona under the temporary auspices of Cowles”
(1990, p. 78, quoted by Edwards, 2010, p. 190). As was eventually
observed, the Cowles Commission eventually turned to economet-
rics and Walrasian general equilibrium theory. Katona’s influence
on Koopmans can be seen in his 1949 The Review of Economics and
Statistics paper, in which he stated: “The interview or question-
naire, and even small scale experiments were available as sources
of knowledge about individual behavior. . . we need not and should
not confine ourselves to assuming rational behavior. What we need
to measure is actual behavior, as shaped by habit, culture, ideals,
imitation, advertising, prejudice and misinformation as well as by
the narrower economic motives usually referred to as rational” (p.
949, p. 88). Katona also influenced the writing of Fritz Machlup
(in his debate with Richard Lester) that concerned the full cost
controversy. This influence too was overlooked. In his debate with
Richard Lester, based on the arguments made by Katona, Machlup
criticized the less than adequate method of mailed questionnaires
of Lester which did not include supporting interviews. In a man-
ner similar to that of Katona’s argument, Machlup argued that
Lester’s questionnaires were “inadequate for empirical studies of
business conduct” (1946, p. 538, also quoted by Edwards, 2010, p.
193). Further, Malchlup stated that: “Lester’s questionnaires suf-
fered not merely from the inherent weaknesses of the method but
also from defects of formulation” (Edwards, 2010). Again, there was
no mention of the works of Katona. According to Jose Edwards,
“It is worth mentioning that even though Machlup’s position was
explicitly based on Katona’s work, the latter is absent from the lit-
erature on the controversy” (Edwards, 2010, p. 194). An example
provided by Jose Edwards for this neglect is the 1992 HOPE essay by
Philippe Morgin. As Edwards argues, “Morgin’s (1992) account is a
good example. It makes reference to empirical studies by Eiteman
(1947), Ronald Edwards (1952), and Earley (1955, 1956) without
even mentioning Katona’s work” (Edwards, 2010).
Let us conclude with a statement by James Tobin, a member of
the above-mentioned Smithies Committee, who, in his 1959 The
Review of Economics and Statistics paper stated that: “I would not
conclude without stressing the very considerable debt the profes-
sion owes George Katona and his colleagues at The Survey Research
984 H. Hosseini / The Journal of Socio-Economics 40 (2011) 977–984
Center for their imaginative and pioneering work in the collection
and interpretation of buying intentions and attitudinal data. With-
out their leadership, we might still be talking about the importance
of consumer psychology for short-term business fluctuations and
bemoaning our inability to measure it. Thanks to the experience
they are accumulating, we can investigate the questions which atti-
tudes are the most important ones to investigate in periodic surveys
and what is the best way to use these data in combination with
other economic information” (1959, p. 44).
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