Game Theory and an Austrian Perspective

Whereas Simon Kuznets conscientiously warned of the incompleteness of national income data, Oskar Morgenstern was a persistent critic of the accuracy of economic observations. He was convinced that the results of statistical analyses are no better than the raw material on which they are based, and believed fully in the maxim, “Garbage In, Garbage Out (GIGO).”

Many economists have striven for the reasonably precise empirical validations of theory possible in some of the physical sciences. Morgenstern argued that there several reasons why data problems in the social sciences are essentially different from data problems in the physical sciences.

Incentives often exist for collectors of aggregate data to fabricate statistics and for those who give the data to report incorrect figures. “Disguised” or inaccurate data may be given and collected for tax purposes, to throw competitors off the track, or to guard trade secrets. Many aggregates obtained, moreover, are little better than guesses because these aggregates require data for parts of the economy about which there is little precise and reliable information.

Accuracy is extremely important in national income data, according to Morgenstern, because errors that creep into the data at different levels of collection have a way of compounding. He asserted that “national income is a total of composites which differ in reliability from sector to sector and year to year, and hence the error of the composite is a complex amalgam of errors in the parts whose magnitude is not easily determined.” In a speech in 1975, Morgenstern argued that the data errors that enter calculations of GDP are larger than the fluctuations of GDP that most economists consider significant. If Morgenstern was correct in this assertion, it seriously undermines the reliance usually placed on GDP as a predictor of booms and recessions.

Despite his persistence as a critic of measurements used in modern economics, Oskar Morgenstern was admired and respected by the members of his profession. Among his many accomplishments was the development of modern “Game Theory,” in concert with his colleague, the brilliant mathematician Jon von Neumann.

Morgenstern came to America as a refugee from the Nazis after Hitler's invasion of Vienna. A little-known circumstance of his background is that his mother was the illegitimate daughter of the Austrian Emperor Frederick III. Those who knew him will attest to his patrician bearing, and gentlemanly manner. Such a favorable impression did he create on his colleagues that he was often called “a prince,” though few realized how close to the truth they really were.