In his 1928 paper, von Neumann did not attempt to do econom- ics9—it was strictly math, proving a theorem about strategic games. Only years later did he merge game theory with economics, with the assistance of an economist named Oskar Morgenstern.
Morgenstern, born in Germany in 1902, taught economics at the University of Vienna from 1929 to 1938. In a book published in 1928, the same year as von Neumann’s minimax paper, Morgenstern discussed problems of economic forecasting. A par- ticular point he addressed was the “influence of predictions on predicted events.” This, Morgenstern knew, was a problem peculiar to the social sciences, including economics. When a chemist pre- dicts how molecules will react in a test tube, the molecules are oblivious. They do what they do the same way whether a chemist correctly predicts it or not. But in the social sciences, people dis- play much more independence than molecules do. In particular, if people know what you’re predicting they will do, they might do something else just to annoy you. More realistically, some people might learn of a prediction and try to turn that foreknowledge to their advantage, upsetting the conditions that led to the prediction and so throwing random factors into the outcome. (By the way, in the Foundation Trilogy, that’s why Seldon’s Plan had to be so se- cret. It wouldn’t work if anybody knew what it was.)
Anyway, Morgenstern illustrated the problem with a scenario from The Adventures of Sherlock Holmes. In the story The Final Prob- lem, Holmes was attempting to elude Professor Moriarty while trav- eling from London to Paris. It wasn’t obvious that Holmes could simply outthink Moriarty. Moriarty might anticipate what Holmes was thinking. But then Holmes could anticipate Moriarty’s antici- pation, and so on: I think that he thinks that I think that he thinks, ad infinitum, or at least nauseum.10 Consequently, Morgenstern concluded, the situation called for strategy. He returned to the Holmes–Moriarty issue in a 1935 paper exploring the paradoxes of perfect future knowledge.
named Eduard Čech approached Morgenstern and told him about
similar ideas in von Neumann’s 1928 paper on parlor games. Morgenstern was entranced, and he awaited an opportunity to meet von Neumann and discuss the relevance of the 1928 paper to Morgenstern’s views on economics.
The chance came in 1938, when Morgenstern accepted a three- year appointment to lecture at Princeton University. (Von Neumann had by then taken up his position at the nearby Institute for Ad- vanced Study.) “The principal reason for my wanting to go to Princeton,” Morgenstern said, “was the possibility that I might be- come acquainted with von Neumann.”11 As Morgenstern told the story, he soon revived von Neumann’s interest in game theory and began writing a paper to show its relevance to economics. As von Neumann critiqued early drafts, the paper grew longer, with von Neumann eventually joining Morgenstern as a coauthor. By this time—it was now 1940—the paper had grown substantially, and it kept growing, ultimately into a book published by the Princeton University Press in 1944. (Subsequent historical study suggests, though, that von Neumann had previously written most of the book without Morgenstern’s help.12)
Theory of Games and Economic Behavior instantly became the game theory bible. In the eyes of game theory believers, it was to economics what Newton’s Principia was to physics. It was a sort of newtonizing of Adam Smith, providing mathematical rigor to de- scribe how individual interactions affect a collective economy. “We hope to establish,” wrote von Neumann and Morgenstern, “that the typical problems of economic behavior become strictly identical with the mathematical notions of suitable games of strategy.” It will become apparent, they asserted, that “this theory of games of strategy is the proper instrument with which to develop a theory of economic behavior.”13 The authors then developed the theory throughout more than 600 pages, dense with equations and dia- grams. But the opening sections are remarkably readable, laying out the authors’ goals and intentions in a kind of extended pre- amble designed to persuade skeptical economists that their field needed an overhaul.
While noting that many economists had already been using mathematics, von Neumann and Morgenstern declared that “its use has not been highly successful,” especially when compared to other sciences such as physics. Throughout its early pages, the book draws on physics as the model for how math can make murky knowledge precise and practical—in contrast to economics, where the basic ideas had been expressed so fuzzily that past efforts to use math had been doomed. “Economic problems . . . are often stated in such vague terms as to make mathematical treatment a priori appear hopeless because it is quite uncertain what the prob- lems really are,” the authors wrote.14 What economics needed was a theory that made precise and meaningful measurements possible, and game theory filled the bill.
Von Neumann and Morgenstern were careful to emphasize, though, that their theory was just a first step. “There exists at present no universal system of economic theory,” they wrote, and if such a theory were ever to be developed, “it will very probably not be during our lifetime.”15 But game theory could provide the foundation for such a theory, by focusing on the simplest of eco- nomic interactions as a guide to developing general principles that would someday be able to solve more complicated problems. Just as modern physics began when Galileo studied the rather simple problem of falling bodies, economics could benefit from a similar understanding of simple economic behavior.
“The great progress in every science came when, in the study of problems which were modest as compared with ultimate aims, methods were developed that could be extended further and fur- ther,” von Neumann and Morgenstern declared.16 And so it made sense to focus on the simplest aspect of economics—the economic interaction of individual buyers and sellers. While economic sci- ence as a whole involves the entire complicated system of produc- ing and pricing goods, and earning and spending money, at the root of it all is the choicemaking of the individuals participating in the economy.