“Adam Smith…He Was Wrong” —The Genius of John NashPosted: November 1, 2012 | |
Author: Jason Steiner
This pivotal statement, uttered in a flurry of excitement while contemplating a night’s co-ed entertainment in A Beautiful Mind overthrew nearly 150 years of economic theory, resulted in a Nobel Prize, and fundamentally changed the way we view our world. The extensions of this idea have found applications ranging as lofty as currency exchanges and arms races to such trivialities as how to play a hand of good old Texas hold’em. It is so simple to understand in the abstract but often so difficult to translate effectively into actions in our daily lives.
It is this: that the expected results of our decisions and actions are maximized only in light of the actions of others.
Put simply, we are all in this together; we do not operate in independent silos, churning away with myopic tunnel vision at what we can foresee is our most advantageous path in the “every man for himself” paradigm of the traditional economic sense of Adam Smith. From a singular perspective, it makes intuitive sense to us that we must take into account the actions of others in order to adjust our own actions to the greatest advantage, but it makes much less so when such an honest evaluation produces results that actually appear to run counter to our own perceived best interests. In innovation environments that model the ideals of The Rainforest, this manifests itself in such tenants as seeking fairness over advantage, opening doors and listening, trusting and being trusted, and “paying it forward”. Each of these ideas would not necessarily appear to be in the best individual interest, but find their value in maximizing the combined contribution to both individual and group.
The situation can be stretched even further when, in maximizing the benefit to the individual and group, the contribution from the group is substantially more influential, resulting in non-trivial expenditures of effort in apparent conflict with individual interests. Such cases may be observed from an outside perspective as altruism or be viewed through the lens of ulterior motive. But, in truly integrated systems, they are perfectly rational; they justify, on an objective basis, extreme mentorship or any form of unselfish support without expectation of return. Indeed, it is precisely an embrace of this oft counter intuitive realization, both mathematically justified by Nash’s equilibriums and empirically verified through extensive analysis of innovative ecosystems, that is the cornerstone of maximizing mutual benefit and the root of highly innovative systems. A key element of maximizing mutual utility is an abandonment of the idea of “zero-sum” economics—that your loss is my gain, a concept traditionally attributed to Adam Smith. While it is untrue to say that Smith advocated this view explicitly (on a macro scale, Smith did believe that a rising tide does, in fact, lift all ships) a key element of Nash’s insight is that such economics need not necessarily exist even on a individual transaction level; that indeed, every transaction can result in a net positive-sum outcome if actions are taken that are best for both the individual and the group. It is precisely such environments with unlimited potential for positive sum transactions that are the most prosperous.
Since the publishing of Nash’s equilibrium in 1951, its effects have touched nearly every aspect of economics and competitive behavior. Beyond applications in human behavioral interactions as those discussed above, it has found wide spread relevance in entrepreneurial policy making. In this arena it has once again produced results that are frequently highly counter intuitive regarding many policies such as those designed to increase innovation through such mechanisms as preferential tax breaks and the lowering of commercialization cost barriers. Many of such well-meaning policies have mathematically been demonstrated and empirically verified to both decrease the level and caliber of radical innovation in selected systems (Haufler et. al., 2011) (Damsgaard et. al., 2012). It seems clear that if we are to make intelligent decisions about actions in either our own entrepreneurial ventures or in the larger context of entrepreneurial policy, that we must take into consideration the interacting effects of non-cooperative behavior and the unexpected conclusions that may be reached in attempting to maximize global innovation. If we are to take away anything from the ground breaking ideas of Nash and his equilibria, it is a revised sense of our concept of competition away from “zero-sum” transactions, an enhanced appreciation of the complexity of our integrated world and its effects on decision making and, perhaps most importantly, that in pursuit of the optimal outcome, we must recognize that we are all, indeed, in it together.
Erika Färnstrand Damsgaard, Pehr-Johan Norbäck, Lars Persson and Helder Vasconcelos. Why Entrepreneurs Choose Risky R&D Projects – But Still Not Risky Enough. Research Institute of Industrial Economics. IFN Working Paper No. 926, 2012
Andreas Haufler, Pehr-Johan Norbäck, Lars Persson. Entrepreneurial innovations and taxation. Paper presented at the CESifo Area Conference in Public Sector Economic. May 2011