Monday, March 20, 2006

Nash v Smith?

‘Open sources’ by Dave Rosenberg and Matt Asay in InfoWorld, 18 March:

‘Selling freedom, not free’

As the open source business ecosystem grows and matures, I'm finding it increasingly important for me to not only pitch my company's paid version, but also others'. Were I true Adam Smith, I'd argue that

...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

But I'm not. I'm with
John Nash: I'm best served by helping myself AND my community. Smith would argue that my goal is to induce those around me, out of their own enlightened self-interest (he calls it "self love"), to serve my needs because it also serves theirs. I don't disagree.

But I think there's a higher good, and one that best serves my community and myself in the short term. And that is, again, by actively trying to build up my community.

This is the second time I have commented on a piece authored by Matt Asay (see below for 13 March) and on the same subject. I have no views on whether ‘open source’ is a good marketing move or not – I do not try to out-guess entrepreneurs who follow a strategy they consider beneficial. What I do comment upon is an apparent need for them to misinterpret the views of Adam Smith while prosecuting their strategy.

Businesses can sometimes benefit from making available an element of their intellectual property or an element of the apparatus needed to operate it for free or for the cost of distribution only. That is a business decision. I think here of telecoms and free handsets; Microsoft (retains the source code) and IBMs PC licensed to manufacturters (compared to Wang and Apple); HP, etc., and computer printers where the money is made in the inks; and Kodak and giveaway-priced cheap cameras.

Rosenberg and Asay call on Nash and criticise Smith; it is not clear they understand what either were saying.

The authors have a narrow view of Adam Smith’s moral political economy. Given the total dependence of everybody on everybody else in the commercial society with which Smith was familiar, he did not advocate that people should act selfishly.Quite the reverse, in fact. People had to co-operate even to get their dinner from the ‘butcher, the brewer and the baker’ (“Wealth of Nations”: WN I.ii.2: pp 26-7) and he expressly insisted that ‘self-love’ was not enough. It was necessary to appeal to the other party’s self-interest and not just to create sympathy for one’s own. Merely seeking one’s own self-interest faced the problem that if both parties act to a potential transaction involving ‘truck, barter and exchange’ there is likely to be no exchange transaction between them, unless one of them surrenders and take whatever price is offered.

However, if both were determined not to surrender, then the two solutions (i.e., two prices, two quantities, or two conditions) they bring to the table would never be mediated into the single solution (i.e., one price, one quantity, or one set of conditions) to which they can both agree.

In the absence of property rights exchange transactions would not occur. Now this can be arranged in individual cases, but resources are scarce. Benevolence is limited not by the goodwill will of people, but by the scarcity of the means to fulfil it.
It is from markets that create wealth (the annual production of goods and services) that abject poverty is eliminated. Country’s with limited markets, no private ownership of the products of labour, capital and technology, no law of contracts and an independent justice system, are all sunk in deep poverty. The ‘pie’ for them has never got started. John Nash (of the film, ‘Beautiful Minds’) does not help.

For a start, Nash in his famous articles ignored the negotiating process by assumption, and set out the conditions for defining an optimum solution, none of which operate in the real world, e.g., perfect knowledge of each other’s numerical utility functions, perfect rationality of the players, and arrived at the mathematical proof that the parties would maximize the product of improvement of net utilities if and when his assumptions operated. Useful as a limiting case, but also hopelessly impractical. It showed what ought to happen, but, as David Hume showed, ‘ought is not is’.

While Nash was writing what ought to happen, Professor Tucker experimented with Prisoner Dilemma Games, producing some interesting results. In my experience of running thousands of such games with managers across business and public sector organizations, the most common result (92%) is for ‘defections’ among pairs, not for ‘Nash’ solutions. Players are not perfectly rational and they cannot be unless they have perfect of information about their partner's preferences (no hiding places for 'strategic' behaviours).

In short, not knowing each other’s numerical utility preferences causes defection from the Nash equilibrium. Negotiators can learn to move towards a Nash Equilibrium by training in Smithian ‘conditional bargaining’ (see my ‘New Negotiating Edge: a behavioral approach to results and relationships’ (Breeley, 1998) or my MBA Elective textbook, Negotiation, Edinburgh Business School, (1991) 2000.

Imperfect information requires a degree of trust not found even when players engage in Prisoner Dilemma games over 'points' with no value. 'Defection' is both a 'protection' strategy and an 'exploitation' strategy. Yet firms co-operate too in certain circumstances. In fact, the whole of production is a co-operative game, as Smith showed. It isn't 'war'; it is the mediation of self-intertest through the exchange mechanism.

Neither requires we replace private property rights – its only practical to work with them. It relies on choosing between ‘doing what is best for self’ (definitely not a Smithian behaviour) and doing ‘what is best for both of us’ (definitely a Smithian virtue). Given that choice, working with the Smithian conditional proposition (‘Give me some of what I want and I will give you some of what you want’) we choose to do what is best for both of us.

The quotation by Dave Rosenberg and Matt Asay from ‘Wealth of Nations’ is torn out of its context. Smith was discussing the unintentional consequences of human motivation, which acts in the case he is discussing (whether to invest their capital stock locally or abroad, not about markets please note), but not always – it was not a universal rule – to work in favour of the community by concentrating investment locally and building economic growth faster in an 18th century economy that sorely needed lifting out of poverty. Rosenberg and Asay extrapolate from this single example of Smith’s into making it Smith’s general rule for inter-personal behaviour. It was nothing of the kind.

Neither ‘self-love’ nor ‘benevolence’ was sufficient. Nor, if I may say so, is adherence to a Nash ‘solution’, which requires the Nash perfect assumptions to operate for his conclusion to apply, but none of his assumptions operates in the real world! I trust that both Rosenberg and Asay have read the Nash articles on the ‘bargaining problem’, published in Econometrica in 1950 and 1953? I suggest they read them again.

Read Rosenberg and Asay’s article at:


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