Governing dynamics Adam Smith

October 3, 2017
The Heart Chord
Prisoner's_dilemma

Is what’s best for me also best for the group?

The Father of Economics, Adam Smith believed that the best result comes from everyone in the group doing what’s best for him – “In competition, individual ambition serves the common good.” But in 1950, John Nash presented a paper at Princeton that argued that the best result for the group comes from everyone making the best decision while taking into account the decision of the others.

The above video clip from the movie A Beautiful Mind shows a fictionalised account of how John Nash reached this conclusion. But for beginners, it’s a great example of the theory at work. Below is the transcript of the dialogues-

Hansen: Recall the lessons of Adam Smith, the father of modern economics. “In competition …”

Everybody: “… individual ambition serves the common good.”

Nash: [after thinking] 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.

(Laughs)

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…he was wrong.

Another popular example of this theory is the Prisoner’s Dilemma. There are 2 prisoners who are interrogated separately. If both remain silent, both only spend 1 year in jail. But they think what is best for them is confessing because that is better than spending 20 years in jail. So, both decide to confess, spending 5 years in jail. Because of Self-Interest, they reach a conclusion that is worse for them both.

PS: This was a simple explanation of the conclusions of John Nash and Adam Smith. If this got you interested, then for starters I recommend reading The Essential John Nash and The Essential Adam Smith. If you know about more such books, we would love to hear your suggestions.

Did You Know?

MAD or Mutually Assured Destruction is a military strategy in which both the warring sides have Weapons of Mass Destruction that will destroy both sides. It is believed that this danger stops both the sides from using those very weapons. MAD is form of Nash Equilibrium – neither side, once armed, has any incentive to initiate a conflict.

Question: Answer in Comments

Points at Stake: +1

Thomas Schelling was awarded the Nobel Prize for Economics for his work on Game Theory. In one of his articles, he wrote a review of the book Red Alert that is about Nuclear War. It was read by a director named Stanley Kubrick who was inspired to read the book. What movie did he direct taking inspiration from the book?

Bonus

Hex is a two-player board game, played on a diamond-shaped square board made of hexagons. It was created by the Danish inventor Piet Hein, and independently by John Nash at Princeton.

How to play:

  1. Each player owns a coloured stone or chip. They start from two opposite edges of the board.
  2. The players take turns placing their pieces on any open slot. Either side may move first.
  3. he aim of the game is for each player to create an unbroken chain of their own pieces, which connects their two edges of the board.
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