QUICK BITS No. 3

Nikos Makrymanolakis, M.Sc., Phd:

Adam Smith wrote: "[Every individual] intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectually than when he really intends to promote it."

In game theory selfish and rational individuals, pursuing their own interest. The extend their choices promote the society, can show up the efficiency of Adam Smith's invisible hand.

So, I would say that game theory can provide an indication of invisible hand's span and efficiency. I wouldn't put the subject as game theory against invisible hand's theory.

Comment

Nikos Makrymanolaki equates self-interest with personal moral selfishness. Hence, a thirsty traveller in a desert is selfish if she finds an oasis with water and drinks the water (or indeed eats food in normal life). Methinks such thinking is defective. In Game Theory players make choices, given the limited options open to them and the choices open to the other players. A purely selfish choice by a player may end the game for both of them.

Moreover, in Smith’s example, the player who seeks the security for her capital, who invests locally, adds to her wellbeing and also adds to domestic investment, which also benefits others by adding to “domestic employment and output”. Who is the loser? Who is a victim of her actions guided by her self interest (not by her selfishness?). 

Smith's use of the metaphor from Wealth of Nations of an invisible hand had nothing to do with selfishness.