Sunday, January 09, 2011

Once Again On Adam Smith and Hollywood's "John Nash"

From the Archives:

"Hwee Ling writes a most interesting Blog, The Learning Economist:"

“Is Economics a "Science"?

The scientific approach involves the 4 following steps:
1. Observation
2. Reasoning
3. Formulation of Theory
4. Testing

In the movie "A Beautiful Mind", you can see part of this scientific approach in use: The scene is set in a bar in which John Nash (played by Russell Crowe) rebutted Adam Smith's idea that, 'the best result comes from everyone in the group doing what's best for himself'. Adam Smith had said: "In competition, individual ambition serves the common good."

But John Nash took an opposing view.

In the movie, he observed what was going on in the bar, in which it was clear that all his friends had the same idea.. to go straight for a pretty blond girl who had just walked into the place with her other pretty (but not quite as pretty) friends. He related to his friends how they could all score if they all didn't go for the blonde but for her friends instead... He told them that, 'the best result will come where everyone in the group does what is best for himself ... and the group.' He envisioned a scenario -- a bargaining strategy -- in which nobody loses.. Watch how the idea (which was later developed into a theory) was conceived after he carefully observed the scene...

In case you missed the dialogue, here's the transcript:

Nash : Adam Smith needs revision.

Hansen : What are you talking about?

Nash : If we all go for the blonde...we block each other. Not a single one of us is gonna get her. So then we go for her friends, but they will all give us the cold shoulder because nobody likes to be second choice. Well, what if no one goes for the blonde?
We don't get in each other's way, and we don't insult the other girls.
That's the only way we win.

Adam Smith said the best result comes from everyone in the group doing what's best for himself, right? That's what he said, right?

Others : Right.

Nash : Incomplete.
Incomplete, okay?
Because the best result will come...from everyone in the group doing what's best for himself...and the group.

Hansen : Nash, if this is some way for you to get the blonde on your own, you can go to hell.

Nash: Governing dynamics gentlemen. Governing dynamics. Adam Smith...was wrong.”

Nash leaves the bar.”

To which Umesh Bawa said today in his belated comment on my 2009 comment. Because few readers will trawl back to February 2009 to read his comment or mine, hence, I re-post his comment here (to read my original comment and nine other readers, you can ride the Lost Legacy Archives of February 17, 2009).

Umesh Bawa writes (2011):

“ADAM SMITH's theory work at individual level, whereas, NASH's theory work at both individual and in group.. So i don't find anything wrong in both discoveries...”

Umesh’s summary is interesting, but in my view does not quite capture the error in the Hollywood scriptwriter’s lines, attributed to that tortured genius, John Nash.

The scenario in the film is of a group of young men out for a night’s fun (please, do not jump to conclusions, while I am familiar with such events from being young myself long ago, I never fell for the ‘chase' of the best looking girl in competition with all 'others’ strategy).

But ‘Nash’ commits an error at the start: what is the group ‘interest’? His attributed ‘strategy’ wins only if an individual ‘wins’ the girl, for there is no way the group can ‘win’, i.e., them all ‘winning’ the same girl. This reduces to a separate question of deciding on which individual is to be given a ‘free run’, at her. By self-exclusion like "Nash" in the scene, choosing to go home, or some such move - chasing the one you're with, talking about football, or playing cards ...

The fact that ‘Nash’ recommends against them all competing for her recognizes that each individual decides in their own self-interest to refrain from the pointless group chase, and turns instead to chase one of the several other ‘not so pretty’ girls said to be with her in the scrip-writer’s scenario, and allegedly the "Nash" strategy.

It is each individual’s self-interest (possibly reinforced by experience) to select to ‘target’ other than the one chased by the pack, if he wants to increase his chances of a ‘score’ (please ignore this breach of polite euphemism).

That brings us back to Adam Smith, but first, I shall replace the writer’s imaginary ‘Adam Smith’ with the real Adam Smith and not the one invented by modern neo-classical economists (e.g., Paul Samuelson, Economics: an analytical analysis, 1948, p 36, McGraw-Hill) and repeated in almost every economic textbook from the 1950s to today and, apparently, believed by Umesh.

There is no historical evidence that Smith observed the Hollywood-like scenario of a group chasing a girl, though he did frequent Clubs with his professorial friends where drink was available (water was not safe to drink) and which he enjoyed.

He did, however, in his Theory of Moral Sentiments (1759) he observed that individual morality was a learned conditioned (not innate) by society, such that breaches of the moral virtues provoked hostile reactions from the ‘impartial spectator’, and were most often obeyed by individuals to avoid self-guilt and sorrow, and possible disapproval if observed by others (from mild chastisement to social exclusion).

This is a clear example of individuals acting in their self-interest to conform in aggregate to group self-interests in maintaining social harmony (however defined).

Moreover, he reinforced his observations on the role of group self-interests on individual self-interested behaviors, by pointing out that the negative virtues of justice and the rule of law were such that in a ‘society’ (should there be one) composed of robbers and murderers, each individual robber or murderer would refrain from robbing or murdering each other.

Umesh should contemplate that the real Adam Smith had a much more subtle (and profound) theory of self-interest than ‘John Nash’ and his Hollywood creator imagined.

The facts are, to paraphrase Umesh, that “ADAM SMITH's theory worked at individual and the group level", so Umesh shouldn’t find anything wrong with Smith’s understanding of self-interest applicable to “John Nash’s” lines in a film script.

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