Saturday, March 10, 2007

Propaganda From Landsburg

Michael Greinecker comments on game theory. His post reminds me that I've been meaning to point out some nonsense for a while. One should believe nothing one reads in a Wall Street Journal op ed:
"Competition is often destructive. Everybody knows that. The remarkable exception, enshrined in Smith's enduring metaphor of the Invisible Hand, is that in the presence of free competitive markets, functioning price systems and well-defined property rights, the 'best result' (in a sense that can be defined precisely) does come from everyone in the group doing what's best for himself.

That's not obvious, but it's true. It was proved, as a matter of pure mathematics, by economists like Gerard Debreu, Kenneth Arrow and Lionel McKenzie, beginning around the time Nash was supposedly having that fateful drink. Surely that would have been good enough for Nash, who through all his breakdowns never lost his respect for mathematical reasoning.

In the real world, as opposed to the movie, Nash complemented Smith without supplanting him. The Invisible Hand tells you that good things happen when people compete in free markets. Nash laid the game-theoretic mathematical foundations for figuring out what happens when people compete in other ways. It turns out that without markets, many different things can happen, not all of them good. That means we should have more respect for markets, not less." -- Steven A. Landsburg, (22 February 2002)
Arrow and Debreu did not show that competitive markets lead to the "best result". Their conclusions have nothing to do with what Adam Smith was talking about with his metaphor of the invisible hand. Von Neumann and Morgenstern, not Nash, laid the foundations for game theory. Game theory is not confined to explaining competition outside of "free markets" or "without markets".

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