Oskar Morgenstern, “Vollkommene Voraussicht und wirtschaftliches Gleichgewicht” (1935)

Morgenstern’s essay is a compact critique of a premise often left implicit in general-equilibrium theory: that equilibrium requires agents who can foresee the future without error. He treats this not as a minor technical assumption but as a logical fault line running through theories of risk, profit, money, monopoly, duopoly, and cycles. The issue is therefore broader than Walrasian equilibrium narrowly understood; it concerns whether economic theory can coherently model action in time while assuming away the uncertainty that gives action its practical meaning.

Es handelt sich um die Annahme der (hier synonym gebrauchten) „vollen Voraussicht“ oder „vollkommenen Voraussicht“, die angeblich eine der Vorbedingungen des Gleichgewichtes ist.

English translation: At issue is the assumption of (here used synonymously) »full foresight« or »perfect foresight«, which is alleged to be one of the preconditions of equilibrium.

The first section surveys major theorists to show that the literature has no settled position. Some writers make foresight central, some leave it vague, and some rely on expectations without confronting their implications. Morgenstern’s point is not merely historical. If equilibrium theory asserts full interdependence among economic magnitudes, then agents would have to foresee not isolated prices or quantities but the whole web of actions from which those magnitudes arise.

His decisive move is definitional. “Perfect foresight” is not a transparent concept; it must specify subject, object, spatial scope, and temporal horizon.

Zunächst ist die Fragestellung als unvollständig zu bezeichnen, denn es ist zu fragen: Voraussicht wessen? welcherart Dinge oder Ereignisse? für welche örtliche Verhältnisse? für welche Zeitdauer?

English translation: First, the way the question is posed must be called incomplete, for one must ask: foresight of whom? of what kind of things or events? for what local conditions? for what length of time?

Once this is made explicit, the assumption becomes unstable. Unlimited foresight would extend beyond any finite planning horizon, while limited foresight is no longer perfect in the relevant sense. More importantly, in a world of interdependent agents, each person’s forecast must include others’ future actions, their forecasts of one’s own actions, and so on. Morgenstern’s Holmes–Moriarty example turns this into a strategic regress: mutual prediction has no natural stopping point.

Immer liegt eine unendliche Kette von wechselseitig vermuteten Reaktionen und Gegenreaktionen vor.

English translation: There is always an infinite chain of mutually conjectured reactions and counter-reactions.

The result is paradoxical. The very assumption meant to secure equilibrium undermines its determinacy, because action under mutual perfect anticipation dissolves into an endless chain of anticipated reactions unless some arbitrary decision interrupts it—and that interruption too would have to be foreseen. Thus Morgenstern rejects the idea that perfect foresight can function as a coherent equilibrium condition.

Unbeschränkte Voraussicht und wirtschaftliches Gleichgewicht sind also miteinander unverträglich.

English translation: Unlimited foresight and economic equilibrium are therefore incompatible with each other.

He does not conclude that economics should assume total ignorance. Some positive degree of expectation is indispensable for production, exchange, saving, investment, and continuity of conduct. The relevant theoretical problem is therefore the uneven, probabilistic, and socially distributed character of knowledge about the future. Morgenstern distinguishes knowledge of economic theory from foresight of concrete historical events; even a highly educated agent may misunderstand timing, institutions, rivals, or shocks. Risk, entrepreneurial gain, optimism, pessimism, and error remain possible because practical expectations never coincide with omniscience.

This also changes the interpretation of adjustment mechanisms. Walrasian tâtonnement and Edgeworthian recontracting presuppose imperfect foresight, since correction is meaningful only when agents do not already know the final equilibrium price. Likewise, technical predictability is not the same as effective foresight: a relation may be scientifically knowable without being equally known, used, or trusted by all actors. Expectations may be disciplined by knowledge, but they can also be mistaken, fanciful, or strategically self-defeating.

Morgenstern then tests the assumption by imagining its consequences. Lotteries, gambling, much advertising, newspapers, and large parts of communication would lose their function. In monopoly and duopoly theory, perfect foresight becomes especially problematic, because rivals who fully anticipate one another’s reactions would also anticipate the advantages of monopoly-like coordination, unsettling standard competitive conclusions.

The essay’s methodological importance lies in replacing the fiction of omniscient equilibrium with a research program on degrees and distributions of foresight. Time enters economics through expectation, but expectation is heterogeneous, fallible, and reflexive. In this respect Morgenstern anticipates later game-theoretic concerns: economic outcomes depend not only on what agents know, but on what they believe others know, and on how those beliefs feed back into action.