Economic History: John Nash

Economics is an area of study which has played host to a series of incredibly influential individuals, and many 'big name' conflicts; from Hayak to Keynes in the world of the macroeconomy and fiscal policy, to Nash and Smith in the nuances of the microeconomy, there have always been two sides to every answer. In this post I will be taking a look at the inroads into game theory and behavioural economics carved by John Forbes Nash.
Nash was a highly skilled American mathematician and was heralded for much of his work. The feature film 'A Beautiful Mind' was based on him and portrayed his life as a mentally-troubled economic genius. In his mid-life, he experienced extreme paranoia, and believed that there was a Soviet plot trying to overturn America. He was later diagnosed to be a sufferer of Schizophrenia, which is still nowadays confused with dual personality disorder, a very different ailment. Essentially Nash feared that the Soviet nations were trying to take over America, and using his great mind tried to find links and messages everywhere, always finding nothing, to his dismay, as there was nothing to find.
Nash is considered to be one of the forerunners in the world of game theory, a highly mathematical and intricate area of microeconomics. One of Nash's most famous 'games' is discussed an explained in the film in the layman's terms of 'pulling', it is known as the Nash Equilibrium and forms part of his concept of Governing Dynamics.
The Nash Equilibrium is the scenario where a group of two or more people interact, and assumes all parties involved know the strategies of all other parties. Nash himself stated that this is one way to reach an efficient outcome, or 'pay-off'', which contrasted with the long-held and respected theory of Adam Smith coined nowadays as the 'Invisible Hand'. In essence, Smith first used the Invisible Hand to describe 'cooperation without coercion', by which consumers and producers would act to benefit themselves, which would in turn benefit the society. Since then the metaphor has been extended to fit any scenario when one self-interested action generates a positive pay-off in society. Nash's theory, however, was one of cooperation with communication. He argued that if everyone acted to benefit society primarily, and themselves after putting the needs of everyone else first, this would see the best results for society and as a consequence, the individuals. If you consider it at its most basic level, Smith said acting selfishly will benefit everyone best, ensuring a maximum pay-off for all individuals, whilst Nash said acting selflessly will benefit everyone best, and therefore as a consequence, the individual will receive an optimal pay-off.
This was a massive leap forward in economic theory, as it was so widely applicable. The theory could be used in the macroeconomy (and provides a justification for left-wing government policy and a command economy), as well as in the field of games, where it could refer to groups as small as two individuals acting in the interest of society. His theory has sometimes been called ‘the greater good’, as it refers to collaboration of separate groups to reach a goal beyond that of which can be achieved through self-interest.
So with this theory, Nash achieved recognition, something which he always sought. I do not necessarily advocated that Nash had the right ideas, on the contrary, I would personally put my faith in Smith’s theory in terms of the wider economy, but I will tackle this debate in a later post.
The theory proposed by Nash is excellent in smaller markets and games, where it is possible for everyone to know everyone else’s strategy (a world of perfect information), as this is the fundamental variable he specifies. It is true that it can produce the best outcome for society under certain circumstances and provides a viable alternative to Smith’s notions; if anything their ideas represent right- and left-ism in a basic form, an age-old contrast.
I suppose one of the ironies from Nash’s life was that his governing dynamics if anything offered good arguments for a leftist, equalitarian government as he promoted acting the interest of everyone for the benefit of the individual, whilst at the height of his illness; he feared that very system’s propagators were trying to take over the USA.