The basic features of the John Neumann model of economic growth

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The basic features of the John Neumann model of economic growth

John von Neumann is well known in the realm of Economics for his discoveries in two fundamental fields of Economic Analysis: Theory of Games and Growth. In fact, he is considered to be the creator of the Theory of Games, having published his first article on the theme in 1928.

He later collaborated with Oskar Morgenstern in the publication of The Theory of Games and Economic Behaviour in 1944 and the mathematical formulations described in the book have greatly influenced economic analyses from then on.

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Reinhard Selten, who shared the 1994 Nobel Prize for Economics with John F. Nash and John C. Harsanyi for their advances in the analysis of equilibrium in the Theory of Games, acknowledges, in his autobiography, that his first steps in analysing the Theory of Games were based on John von Neumann and Oskar Morgenstern’s book.

At the beginning of the 1950’s, John C. Harsanyi published a series of articles based on the utility functions in economic welfare and ethics described by these authors.

Furthermore, Kenneth Arrow, winner of the Nobel Economics Prize for 1972, and Gerard Debreu, the winner in 1983, both based their works on Neumann’s model of the Utility Theory to solve General Equilibrium problems.

In 1937, however, John von Neumann published another innovative article on economic growth in the context of general equilibrium. It was a multi-sector model that demonstrated that growth in equilibrium could exist under the supposition of the existence of different sectors in the economy.

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It facilitated the analysis of the consequences of the circular nature of the production process, or one in which a good could be produced from others or even from itself.

He developed the theory of prices that are determined exclusively by the minimum cost of the goods obtained from other goods as well as the theory of an interest rate that is determined by the greatest possible expansion rate of the economic system.

Furthermore, it was the first rigorous and formal modelling of the theory of non-aggregated capital.

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