Wednesday, November 17, 2010

John von Neumann: Playing for Keeps

It should be noted that children at play are not playing about; their games should be seen as their most serious-minded activity.   Michel de Montaigne

According to Lewis Straus, one of the original five Atomic Energy Commissioners, when John von Neumann, eminent mathematician and co-author of Theory of Games and Economic Behavior (available at, lay dying of cancer in 1956-7, “gathered round his bedside, and attentive to his last words of advice and wisdom, were the Secretary of Defense and his deputies, the Secretaries of the Army, Navy and Air Force, and all the military Chiefs of Staff.” That’s quite a bit of attention being paid to one man and I can’t think of another person since who has been held in such high regard by the US’ Military Industrial Complex’s power elite. 

Ironically enough, he earned this high regard from such serious people, in part, by preaching that life was (heuristically) a game.  The irony fades when one discovers that Johnny, as he was universally (according to the biographies I’ve read) known, thought of both poker and nuclear deterrence as different forms of similar games.  Moreover, the sense of “game” to which von Neumann referred was consistent with the opening quote- a serious endeavor to which good players bring their full attention.  Life lived as a game, in my view, is life lived aware, with a focus on constant improvement, or as Socrates put it, a life examined.

Reading von Neumann's analysis of the complexities involved in trying to model economic behavior- the theory behind the symbols- was, for me, a window into the mental process of a true genius.  The process, for me, was the "meat", far more mentally nourishing than the "conclusions" which might be construed by some as useful economic strategies.

But, I digress.  Onward to the perspective. 

For von Neumann (leaning on the work of Austrian Economists) the quantum of modern economics was an exchange, or in game-speak, a move.  The sum of all such moves, and their effects on production, distribution, etc. comprise the game we call economics.  In that sense, von Neumann’s sale of the book was a move, and a pretty good one at that.

Importantly, within that perspective, there are no disinterested umpires, although some players do “double duty” just as a poker player will, from time to time, both deal and play.  Such “double duty” demands extra scrutiny from the other players whether the game is poker or international finance.  If you wish to assume simple selection of a player as Treasury Secretary or dealer guarantees righteousness, I want to deal a few hands of poker to you and your friends.

There are a few other “sacred-cow-slaying” passages of the book which caught my attention.

 Beware of Omniscient EconomistsFirst let us be aware that there exists at present no universal system of economic theory and that, if one should ever be developed, it will very probably not be during our lifetime. The reason for this is simply that economics is far too difficult a science to permit its construction rapidly, especially in view of the very limited knowledge and imperfect description of the facts with which economists are dealing. Only those who fail to appreciate this condition are likely to attempt the construction of universal systems.

On the Ideal of Free Competition: The classical definitions of free competition all involve further postulates besides the greatness of that number.   E.g., it is clear that if certain great groups of participants will for any reason whatsoever act together, then the great number of participants may not become effective;  the decisive exchanges may take place directly between large "coalitions," few in number, and not between individuals, many in number, acting independently. Our subsequent discussion of "games of strategy" will show that the role and size of "coalitions" is decisive throughout the entire subject.

The Futility of “Maximizing Utility”: A particularly striking expression of the popular misunderstanding about this pseudo-maximum problem is the famous statement according to which the purpose of social effort is the "greatest possible good for the greatest possible number." A guiding principle cannot be formulated by the requirement of maximizing two (or more) functions at once. Such a principle, taken literally, is self-contradictory, (in general one function will have no maximum where the other function has one.) It is no better than saying, e.g., that a firm should obtain maximum prices at maximum turnover, or a maximum revenue at minimum outlay. If some order of importance of these principles or some weighted average is meant, this should be stated. However, in the situation of the participants in a social economy nothing of that sort is intended, but all maxima are desired at once by various parties.  (see also: Fed mandate of maximum employment with minimal inflation)

Finally (for this essay, I think the book is well worth a read, no summary of mine would suffice) von Neumann raises the issue of economics as a non-zero-sum game, i.e. a game in which the sum of all payments equals the sum of all losses.  As we’ve been slaying sacred cows, let me join the fray.

The apparently widespread assumption of perpetually rising GDP can be thought of as the apparently equally widespread assumption of non-zero-sum games always increasing the pot of winnings.  I think this is a dangerous assumption.  “Moves” by big players, “double duty” players, and coalitions, and their effects on others’ moves can increase as well as decrease the pot of winnings.  To wit, it seems likely to me that continued social distribution of losses and privatized winnings (bank coalition bail-outs being a case in point) will (and, in my view, has already) decrease the pot of winnings.

In all games, cooperation is key, especially in games like economics, that are played for keeps.


Nonadamas said...

Excellent food for thought and tx for the book link as well.