Posts Tagged ‘John Nash’

Don’t Go for the Blonde

February 17, 2009

“If we all go for the blonde, we block each other and make the other girls mad at us.”

That’s how John Nash’s great insight into “governing dynamics” came to him, according to the movie A Beautiful Mind.  His insight was that Adam Smith’s fundamental model — the one capitalism is based on — was flawed.  Contra Smith, the best outcome doesn’t come from every individual acting purely on rational self-interest; it comes from every individual acting rationally in the interest of both self and the group.

That’s the lesson our Wall Street bankers need to learn.

As this article details, the banks receiving billions of taxpayer dollars under TARP are not lending that money out, as congress had hoped (maybe even intended); instead, they’re hanging onto it.  Why?  Because that’s what maximizes each bank’s own individual interests: in an unstable, recessionary economy, you hang on to the money you’ve got; you don’t put it at risk.

Looked at strictly on an individual level, that is the rational thing to do.  It’s what best serves your bank’s shareholders.  However, looked at on a collective level, it’s ultimately devastating to all the banks’ shareholders, along with the rest of us.  A continuing credit crunch further weakens demand.  Weakened demand causes a shrinking GDP.  And that, ladies and gents, is a recession.  Which causes banks to be even more tightfisted and risk-averse.  Which makes the recession still worse, and so on.  And that, ladies and gents, is a recession spiraling into a depression.   Everybody loses, including — maybe especially — banks and their shareholders.

It’s a textbook collective action problem.  The thing that’s best for the group as a whole is not the thing that’s best for each player individually.  As long as everybody is acting purely on rational self-interest, the thing that would be best for everybody never happens.  In fact, everybody will end up in the crapper.

So how do we get the banks to do what’s best for everybody, instead of what’s best for each of them individually?