Therefore, it may seem that Theory of Games and Economic Behavior, by mathematician John von Neumann and economist Oskar Morgenstern, is incompatible with Austrian views. Or is it?
The nature of the problems investigated and the techniques employed in this book necessitate a procedure which in many instances is thoroughly mathematical.
…the mathematical deductions are frequently intricate…
…the reader who wants to acquaint himself more thoroughly with the subject expounded here, will have to familiarize himself with the mathematical way of reasoning definitely beyond its routine, primitive phases.
However, if one approaches the book with open mind, the first chapter, at least, does not look too disagreeable.
the economic problems were not formulated clearly and are often stated in such vague terms as to make mathematical treatment a priori appear hopeless because it is quite uncertain what the problems really are. There is no point in using exact methods where there is no clarity in the concepts and issues to which they are to be applied.
It is hard to disagree with this sentiment. The authors do not reject the importance of empirical knowledge (I hear some hard-core Austrians screaming), but they do not focus on empirical research. Instead: “We shall attempt to utilize only some commonplace experience concerning human behavior which lends itself to mathematical treatment and which is of economic importance.” This ends the first chapter.
Thus, the authors promptly switch to a multi-person economy (a social economy, as they call it). They still see the goal of every individual as maximization of his utility (that’s money, if you forgot), but notice that, unlike in one-person economy, the actor does not control all “the variables” – goals of individuals may conflict, and maximization of one’s utility does not necessarily means maximization of another’s. And here comes an interesting moment, one which actually made me wishing to write this post. I will quote profusely:
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 participants.
Ha! I like these guys! Tell me the last sentence is not a denial of interpersonal utility comparison! They say that to try and optimize separate well-being of all people simultaneously is impossible, but to replace these multiple independent goals by a single aggregated goal (e.g., a sum of all well-beings) is unwarranted. Note that they do not actually say it’s impossible, as any red-blooded Austrian would.
So far, the material of the book was not entirely to Austrian liking, but on the other hand, it was not radically incompatible with core tenets of the school (come on, it’s much better than Keynes!).
My belief is that there may be some value in the rest of the book, maybe something that will rehabilitate math as the tool for economic theory.
In the next installment I hope to cover the chapter three – the one discussing utility and (you wouldn’t believe it) preferences. Maybe by the end of these series we can definitely answer the question – can Austrians do math? And are they allowed to do it (or will they be smitten for this unholy practice and become Keynesians in their next life)?