I received very interesting comments on my previous post, The Fountainhead. . Although I have read the novel many times, these comments gave me a whole new insight into Ayn Rand’s philosophy. Absolute capitalism, without any governmental intervention is one of the core principles of Rand’s philosophy. While capitalism is one of the best systems we have today, it is not without its flaws. I had mentioned about difference between Adam Smith’s and John Nash’s theories to highlight this point. Sukumar requested me to elaborate on this and I am doing this post in response to his request.
Adam Smith is considered the father of economics. In his book written in 1776 titled “An Inquiry into the Nature and Causes of the Wealth of Nations”, he introduced a concept called invisible hands. The basic premise of his theory was that if each person worked towards his self-interest then the interest of the entire world will be served.
Smith says“….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.” If you notice, this is pretty much what Rand says too, altruism for its own sake does not serve humanity as much as self interest does. This is also the foundation of capitalism.
For example, I run a company, I want to maximize profits and ensure its survival. So I produce the best quality goods at the lowest possible prize thus the consumers are benefited. In a free market, I cannot afford to have very high prices because I will soon be obsolete’ed by competition, I cannot compromise on my quality because I will lose my customers. On the face of it, it looks like a perfect system. In fact Adam Smith thought of it as a work of god. His invisible hand was a metaphor for the way god administered the universe in which human happiness is maximized and also the interest of the world was served.
Those of you who have watched the movie, “The Beautiful Mind” would have heard of John Nash. He is an expert in game theory and he formulated a theory for a category of games called non-zero-sum games. Game theory was founded John von Neumann, to understand the general logic of strategic interactions. Its application can range from war strategies to pricing. Before John Nash most of the theories were centered around zero-sum games, interactions where one person wins and the other loses. There is absolutely no benefit in collaboration. Examples could be of two countries at war or two companies fighting for the same contract. Game theory uses mathematics to identify the best strategy to be employed in such situations.
From an economist’s point of view, most of the situations are not zero sum. In most instances there is some benefit in collaborating. Even in war situations, diplomacy has a role to play. Before John Nash there was no good models for non-zero-sum games. The most famous example of a non-zero-sum game is the prisoner’s dilemma (I have written about it in this blog and how Dawkins applies it in his theory of evolution).
According to Nash, the best choice for any player would depend critically on what he thinks the other players might do. You would notice this factor in the prisoner’s dilemma too. Take for example, two companies are bidding for the same contract. All things being equal, what would each party do to maximize their chances; try to underbid the competitor? We have seen this situation is ugly prize wars, which harms the players in the long run. A better thing to do would be to form a cartel and artificially fix the prizes. Some thing of this nature happened in India last year, even though the duty on cars was reduced in last year’s budget, the manufacturers did not pass on the benefit to the customers and instead chose to increase their profit margins. What was even more amazing was that it was happened during a time when the competition so stiff. New brands and models appeared every day.
In short, Nash concludes that the optimal choice that a person makes, given his beliefs of other people’s choices, may not always serve his best interest or that of the society.
One of the reasons I believe that absolute capitalism without any checks and bounds will not serve the interest of the society. Does Adam Smith have any answers for global warming?
If you want to know more you can refer to the following sources
This a layman’s understanding of the theories of these great men. Please feel free to correct me if I have made a mistake.