During the second half of the last century, game theory became an important analytical tool in the social sciences and for thinking about all sorts of strategy, from dealing with business competitors to adversaries in a nuclear war. It offered a way to think about strategy in abstract terms, quite separate from its traditional associations with military affairs. By presenting potential outcomes using a two-by-two matrix, it showed how strategic moves depended on expectations about the moves of others, and how this insight could be used to design better moves. It allowed for explorations into how the structure of a conflict influenced behaviour. For example, could the players communicate with each other?
Game theory was the invention of John von Neumann, a mathematical genius from Hungary. He had the idea of applying probability theory to poker in the 1920s. After he emigrated to the US and reached Princeton he teamed up with another émigré, the Austrian economist Oskar Morgenstern, who saw the wider possibilities of von Neumann’s ideas. Together in 1944 they published the classic text, The Theory of Games and Economic Behavior. At 641 pages long it was not an easy read. The authors acknowledged that a reader would need to ‘familiarize himself with the mathematical way of reasoning definitely beyond its routine, primitive phases’. While it gained attention at think-tanks such as the RAND Corporation it was hardly a best seller.
In 1947 they were contacted by John McDonald, a journalist working for Fortune magazine. He had written some well-regarded books about fishing, a hobby he had picked up in the early 1930s, and was now trying to write some serious pieces about some of his other interests, including card games. But he was dissatisfied with his early drafts and was looking for a new angle. At this point a colleague at Fortune, the economist John Kenneth Galbraith, told him about von Neumann and Morgenstern. An academic theory of games sounded promising and so he made contact with them and they agreed to be interviewed extensively about their ideas. After publishing two articles in Fortune he developed his ideas further into a short, lively book, published in 1950. The title, Strategy in Poker, Business and War captured the idea of a general theory of strategy (‘what one can get and how one can get it’) with a range of disparate but significant applications.
McDonald’s book was far more readable and successful than von Neumann and Morgenstern’s original work. Critics might complain that it did not do full justice to the theory. Nor did it push the theory forward, as John Nash was starting to do at the same time. But McDonald’s sharp and occasionally playful language conveyed enthusiasm – ‘more avant garde than Sartre, more subtle than a Jesuit, and as honest as one can safely be’ – and captured the core ideas effectively. Instead of heavy mathematical proofs it had cartoons by one of McDonald’s friends, Robert Osborn.
The starting point was that poker was ‘a kind of laboratory of man’s experience’, a ‘controlled experiment’ of human action. The big idea was explained in the following terms:
Strategical games give a player a choice of action in a situation where all players are interdependent. Uncertainty in a game may derive merely from a practical limitation in foresight, as in chess. But more often it derives from a chance element (controllable by the theory of probability) and from imperfect information on the part of one player regarding what his opponents may do (uncontrollable except in the theory of games). Strategy is a policy devised to reduce and control these uncertainties.
The strategies could involve adding to the uncertainties facing other players, hence the importance of bluffing in poker, and using probabilities to identify the optimum outcome. It was necessary to think about not only maximizing gain but also minimizing losses. This objective was described as ‘minimax’ and was, McDonald reported, ‘one of the most talked-about novelties in learned circles today.’ The same approach could work in a great variety of settings. ‘War is chance’, he noted, ‘and minimax must be its modern philosophy.’ It was appropriate because war was a consequence of uncertainty. It would not be necessary if ‘the opposing forces could measure accurately one another’s strength.’
This was therefore a whole new way of thinking about strategy. It worked because it was non-ideological and that meant that it was of no help in the business of ‘assessing values’. It was a theory with ‘imagination but no magic’, involving ‘an act of logic with an unusual twist, which can be followed to the borderline of mathematical computation.’
McDonald had joined Fortune in 1945 and stayed there as a writer and editor until 1971. At the time the magazine was at the peak of its influence. Its audience went beyond the world of business. The owner Henry Luce had assembled a formidable stable of writers who were given the space to examine issues at length and in depth. Even more remarkably, a striking proportion of these writers were leftists. As Galbraith noted, the Republican Luce had discovered that ‘with rare exceptions, good writers on business were either liberals or socialists.’
McDonald came into that category. Born in 1906, he had been raised in Detroit. His studies at first prepared him to follow his father into a career in pharmacy but after taking a Masters degree in literature from the University of Michigan he moved to New York City to make his name as a writer. There he became close friends with Herbert Solow, then editor of a left-wing Jewish journal. With Solow, McDonald became politically active, joining a group of writers and artists supporting communist candidates in the 1932 federal elections. The two objected to the Stalinist impulses of the communist parties and broke away in 1934. They did not join the Trotskyist alternatives then flourishing in New York but for a few weeks in 1937 they did get involved with Leon Trotsky himself.
In 1937 McDonald was recruited by Solow as one of group of writers working for a Commission chaired by the venerable philosopher John Dewey to investigate the charges that had been leveled against the exiled revolutionary in the Stalinist show trials of the previous year. The job of Solow’s group was to translate and prepare documents for the Commission, as well as provide security and get food to be sure he was not being poisoned (Trotsky was eventually assassinated by one of Stalin’s agents in 1940). With McDonald in Mexico was his second wife, the artist Dorothy Eisner who painted Trotsky’s portrait. They had met while he worked as an editor for the Federal Writers’ Project, which provided jobs for out-of-work writers.
After the war, during which he had worked for a foundation supporting makers of educational and documentary films, he moved, with Solow, to Fortune. Perhaps the main legacy of his previous life among left-wing faction fights was an interest in strategy. The interest certainly never left him. After the success of Strategy in Poker, Business and War McDonald continued to have an interest in game theory and its applications, writing other articles on how decisions are made in business. He worked closely with academics on strategic decision-making in highly competitive situations. A post-retirement book, The Game of Business, published in 1975, was a denser read although it contained some meaty case studies.
His most important contribution to business theory, however, was a book in which he was listed only as editor, although in fact he did most of the writing. In 1954 he began to collaborate with Alfred Sloan, then board chairman and former chief executive of General Motors, a behemoth of capitalism, with half a million employees. Sloan had built it up during the interwar years through intense competition with Ford. McDonald intended to write some joint pieces on business management but they decided instead on a full memoir of Sloan’s fifty-year career. Using tape recordings of interviews with Sloan and the company’s archives, McDonald worked intensively on the project for a few years, having taken leave of absence from Fortune to do so. With lucid prose and commanding detail, McDonald explained the importance of Sloan’s skills in marketing (a ‘car for every purse and purpose’) and also in organizational design, which was a model of distributed authority, as each price range of car had its own division, with each chief executive granted considerable authority from the centre.
My Years with General Motors is now regarded as a classic of business literature. Yet the book almost did not appear. General Motors always lived on the edge of what the Sherman Anti-Trust Act might allow in terms of market position. The company’s lawyers refused to sanction publication out of worries that the government might use documents cited in the book as the basis for an antitrust action. It took five years, and a civil lawsuit filed by McDonald, before it was finally published in January 1964.
Not long after that, the shine came off General Motors. It failed to meet the challenge from German and Japanese manufacturers. Nonetheless up to this point it provided a natural case study for any writer on business strategy. The historian Alfred D. Chandler, who worked on McDonald’s project, launched his career by using the company to show how ‘strategy’ led ‘structure’. Well before that, in the mid-1940s, Peter Drucker, in the early stages of his long career as a management theorist, had been invited into the company and given full access to documents and people, including Sloan. This led to his landmark book The Concept of the Corporation. General Motors was unhappy with its critical tone and its focus on poor labour relations.
In 1990 Drucker contributed an introduction to a new edition of Sloan’s book, speculating that it was written in response to his own book to ‘set the record straight’. The claim incensed McDonald, then well into his 80s. He had kept all his notes and papers. The result was a riveting account of the book’s origins and the legal struggles. A Ghost’s Memoir: the Making of Alfred P. Sloan’s My Years with General Motors was published posthumously in 2002.
Fortune was full of writers who had made the transition from 1930s leftist politics, with its intense factionalism, to celebrating some of the titans of American capitalism. Many had star quality, not only Galbraith but also Daniel Bell, William H. Whyte Jr., and Alfred Kazin. McDonald was less of a star yet his influence on thinking about business strategy, first by popularising game theory and then as Alfred Sloan’s ghost-writer, was profound.