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John Von Neumann and Oskar Morgenstern T PDF
John Von Neumann and Oskar Morgenstern T PDF
Walras L. 2000, «Notes d’humeur», in Oeuvres diverses, Oeuvres économiques complètes, vol.
xiii, Paris, Economica, 503-622.
Weintraub E. R. 985, General Equilibrium Analysis : Studies in Appraisal, London, Cam-
bridge University Press.
Herbert Simon’s enthusiastic review in the American Journal of Sociology (945 ; repr. here)
might be added to the list, as the author was also about to join (in 947) the Cowles Commis-
sion.
2
See Dimand and Dimand 996, 53-54, and Kuhn’s own reminiscence here, at pp. ix-x.
3
This has been openly recognized by, for instance, Kenneth Arrow (a member of Cowles
from 947 to 949 : see Arrow 983 [968], -5) and Gerard Debreu (a member from 950 :
see Debreu 984, 267-70).
154 Book Reviews
von Neumann and Morgenstern a method of analysis that was not their own, as
he claimed that the authors had followed the method of detached reasoning. Such a
method, in Marschak’s presentation, entailed the translation of any heuristic reason-
ing and intuition in terms of formal concepts and propositions that, once stated,
could be totally detached from experience. The analysis then reached purely for-
mal conclusions that could only eventually be given a substantial content, that is,
re-translated into non-formal language (Marschak 946, 5). This method was of
course nothing but the formalist approach to axiomatics in its purest – that is, Bour-
bakist, or Debreuvian – form, but, unfortunately, it was not that of von Neumann
and Morgenstern. Such a serious misunderstanding of one of the key features of the
tgeb betrays the intention to use von Neumann’s name as a prestigious flag to be
exhibited ahead of the powerful army of formalist mathematical economists that
was gathering in Chicago.
Consider now the kind of applications of the new theory suggested by Hurwicz
and Marschak in their authoritative reviews. Both authors struggled to establish a
strong link between the tgeb and industrial economics. For example, Hurwicz ar-
gued that, starting from Cournot, economists had had recourse to ad hoc assump-
tions in tying down their oligopoly models : the commonest hypothesis was that
every firm had a well-defined idea of the rivals’ behavior, but this was simply unten-
able in a strategically interdependent setup. A possible way out, but surely not the
only one, was that suggested in the tgeb, namely, the refusal to identify rational stra-
tegic behavior with the maximization principle (here, pp. 647-648). Yet, Hurwicz was
skeptical about von Neumann and Morgenstern’s solution : first, because it entailed
that only the mathematical expectation, and not, for example, the variance, of the
payoffs was relevant for the decision-maker, and, second, because it was inspired by
the belief that it was necessary to search for a uniquely determined solution of all
games. He believed instead that the outcome of social interaction could be repre-
sented by the entire interval of possible solutions (here, p. 656). Note the peculiarity
of Hurwicz’s argument : after stating that the major problem of past oligopoly mod-
els was the impossibility of pinning down a definite solution and that von Neumann
and Morgenstern had finally solved it, he also claimed that, at the end of the day, the
tgeb’s solution was not a general one and should be replaced by an interval of al-
locations ! To make things worse, try to imagine what might have been the reaction
of those brave economists who endeavored to read the tgeb and found a model of
bilateral monopoly where, despite the employment of the ‘deterministic’ solution
concept criticized by Hurwicz, the result offered by von Neumann and Morgenstern
was still indeterminate…
Even Marschak’s review explicitly associated the tgeb with industrial economics.
Indeed, Marschak was even more direct in his effort to entice potential readers as he
started the review by presenting one of the final examples of the book, namely, the
three-player non-zero-sum game with one seller and two buyers. While the goal was
clearly to show how von Neumann and Morgenstern’s theory allowed a rigorous
handling of oligopolistic indeterminacy, the choice of the ‘one seller, two buyers’
game was a forced one, since this was the only completely developed economic ex-
ample in the book and the one that did offer an original result (namely, the possible
collusion between the two buyers) in terms of potential market structures. The
reviewer observed that economists had always considered the study of the motives
and forces inducing the bargainers to pick a specific imputation inside the interval
of possible ones as beyond the reach of formal analysis. In his view, the invaluable
contribution of von Neumann and Morgenstern had been to … increase the indeter-
minacy by adding a further degree of freedom. In fact, their result was that, beyond
Book Reviews 155
the infinite imputations inside the interval, we also had to take into account that
many possible intervals might exist (Marschak 946, 04) : what the rules of the game
allowed was just the determination of the set of possible solutions. Thus, in the eyes
of a reader of the review, von Neumann and Morgenstern’s solution appeared far
less determined than the traditional one – again, hardly a proper way to promote
the new discipline’s applicability to competition issues.
The reality was that, notwithstanding the reviewers’ optimistic claims, the tgeb’s
contribution to industrial economics was very poor. The only applications of some
interest to economists were the game of bilateral monopoly and the game with one
seller and two buyers. Yet, von Neumann and Morgenstern’s result in the former was
a price interval larger than that obtained by the traditional model, while in the latter
the emphasis with which the only really new result – the buyers’ coalition – was pre-
sented was a consequence of the dearth of other relevant outcomes. Furthermore,
von Neumann and Morgenstern’s approach to the analysis of competition was to-
tally abstract and formalized ; this at a time when the trend in industrial economics
was to abandon formalization and turn instead to more field work, following the ris-
ing structure-conduct-performance approach (see Mason 939). In short, to draw the
economists’ attention upon the tgeb’s alleged contributions to oligopoly theory was
a perfect own-goal by Hurwicz and Marschak, at least from the viewpoint of game
theory proper. However, if we take into account that the Cowlesmen real ambi-
tion was to reshape mathematical economics according to a formalist reformulation
of Walrasian theory, we can easily understand the reviewers’ choice to prudently
downplay the most anti-neoclassical aspects of von Neumann and Morgenstern’s
book, while at the same time presenting it as a contribution to a major sub-field of
orthodox economics in order to emphasize the potentialities of the new analytical
tools and methods.
The irony of this little story about the reviews of the tgeb is that the most thor-
ough and balanced assessments of the truly central point of von Neumann and Mor-
genstern’s theory were not given by the most fervent reviewers, but rather by the least
favorable ones, like Carl Kaysen in the Review of Economic Studies (946-947), Richard
Stone in the Economic Journal (948), Tibor Barna in Economica (946 ; repr. here), and,
outside of economics, Walter Rosenblith in Psychometrika (95 ; repr. here) and David
Hawkins in Philosophy of Science (945). For example, Kaysen correctly emphasized
that, contrary to what most other reviewers believed (or made their readers believe),
the tgeb did not aim at offering a new theory of oligopoly, but rather at demolishing
the whole edifice of standard economic theory founded upon the neutralization, via
the parametrization device (viz., the trick of considering as given some magnitudes
that should actually be taken as variables), of the interaction among rational agents.
He claimed that von Neumann and Morgenstern’s real innovation had been their
questioning the general validity of the parametrization method : game theory dealt
precisely with the cases where the device could not be used, since a game was de-
fined by the absence of parametrization (Kaysen 946-947, 2).
As it commonly happens, it is also at these more neutral reviews that we have to
look to find a broader methodological evaluation of the kind of scientific progress
embodied by the advent of game theory. This is well exemplified by Barna’s review,
where he argued that the mathematician’s viewpoint – and the related resolute pur-
suit of formal rigor – could hardly capture the whole of the economic problem
because, contrary to von Neumann and Morgenstern’s claim, «…the backwardness
of the science of economics is due not only to the lack of success of mathematical
economics, but also to the essential difference between the social and the natural
sciences…», namely, the former’s difficulty to subject their assumptions to empiri-
156 Book Reviews
cal testing. Thus, he concluded that the new discipline’s fortune among economists
would depend more on its usefulness in applied fields than on its mathematical con-
tent (here, p. 667). This was a far cry from the most enthusiastic reviewers’ claim
that such a result had already been achieved by the tgeb, and a prescient anticipation
of the true engine behind the eventual, 980s boom of game theory.
The contrast between two different views of what should really drive the progress
of economics – whether the pursuit of ever more rigorous formalizations or the ne-
cessity to tackle an ever wider set of empirical problems (possibly via less than fully
rigorous models) – has surfaced time and again during the last 60 years of the dismal
science. Historians must therefore be extremely grateful to Princeton University
Press for having brought to their attention, together with this new, wonderful edi-
tion of von Neumann and Morgenstern’s classic, a sample of the heterogeneity of
reactions with which the book was welcomed, as these may offer a few illuminating
insights about the history of postwar economics.
Nicola Giocoli
University of Pisa
References