Friday, January 04, 2008

Adam Smith and John Nash Were Not in Dispute

'Taking no prisoners with Tom Seager' by Xanthe Matychak (here)

Sustainability requires cooperation. You have to discard the idea of Adam Smith economics, which says that it's better for society if everyone is working in their own self-interest, and move towards the economics of John Nash, which says we can find a better outcome if we work collectively.”

If Tom Seager is ‘taking no prisoners’ he ought at least to ensure he shoots the guilty and not the innocent.

It’s not clear what he means by self interest in ‘Adam Smith economics’, or does he mean the ‘Adam Smith’ as taught in 21st century academe, which is unrelated in the main to what Adam Smith wrote in the 18th century?

The fallacy of what Seager calls ‘the economics of John Nash’ traces his alleged criticism of Adam Smith to a screen play for ‘Beautiful Mind’ and a mythical scene in bar of a group of men all trying to come onto the same girl, and by doing so, defeating their own sexual intentions for the evening.

The Nash article in Economica, 1950 (has he read it?), was about two boys, Bill and Jack, trying to bargain over swapping their toys. Nash didn’t state how they arrived at the optimal solution – he assumed the bargaining process away and focused on the outcome only, which was not very helpful for behavioural guidance.

In brief, he showed mathematically that the only outcome that was optimal is where the product of the net gains in individual utility was maximised. Of course the assumptions to arrive at this correct solution were absolutely unrealistic and could never be, and never have been, operational in the real world.

Adam Smith, on the other hand, a close observer of human behaviour, did address the bargaining process without making unreal assumptions in 1776. The bargain consisted of the exchange of offers that stated: ‘Give that which I want, and you shall have this which you want.

Each bargainer asked for what they wanted out of the set of possible trades and offered to the other what they were prepared to exchange for what they wanted. In short, they offered to give up what they valued less in exchange for what they valued more. When both agreed to a solution, the bargain was concluded.

But Smith said more than this in his famous paragraph about the ‘butcher, the brewer, and the baker’ (WN I.ii.2: pp 26-7). He specifically said that benevolence was not reliable enough to feed everybody with their dinner tonight – the benevolent do not have sufficient to feed everybody else – so it was not sufficient to explain how desperate you are for your dinner from people supplying dinners.

He admonished: ‘We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.’

In short, don’t approach the transaction from your own self-interest, but address the interests of the other party.

Two selfish people will have difficulty concluding a bargain – neither would let go of their demands; only if they mediate their self-interests to do what is better for both of them will they conclude their bargains. This is a world away from the screen-writers’ version of Adam Smith on self interest.

Bargainers have to co-operate to get the outcome than approaches the optimal outcome assumed by John Nash. He did not improve on Adam Smith; he stated the Smithian outcome.

If Tom Seager actually read Adam Smith he would not have written the false dichotomy between Smith and Nash, copied from an ‘ignorant’ Hollywood screen-writer who hadn’t read Adam Smith either.

As an aside, I am not even sure that the screen-writer has ever been out with a bunch of guys, if he thinks they would all chase the same young lady among a group of other young ladies. At least, I never saw that happening during my undergraduate years when such activities were regular events (speaking, of course, as a Smithian observer of human behaviour in all its forms and combinations).


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