Smith’s Self-Interest and Nash’s Equilibrium

Living together is one of the basic conditions both for meeting human beings’ fundamental needs and for satisfying their need for security. Meeting these needs brings serious changes to people’s level of well-being. Every gain that benefits a person is in their interest. Human interests, which are directly linked to the level of well-being, are often among the strongest factors in the course of a person’s life. Given that the interests of individuals and societies cannot be made equal and that resources cannot be unlimited, conflicts of interest are inevitable.

Humanity has long reflected on how individuals and societies, within a balance of interests, affect one another and on the consequences of these effects; it has worked on various methodologies and produced many systems of thought and models. In my view, two of these currents have had an enormous impact on humanity’s fate over the last three centuries.

Adam Smith: Individualism and the Invisible Hand

“Laissez-faire, laissez-passer!” (Let them do, let them pass!)

This phrase, which belongs to the French physiocrats and became identified with Adam Smith’s 1776 book “The Wealth of Nations”, was one of the main factors in the formation of free-market ethics and subsequently led to Smith being called “the father of capitalism”. Smith’s ideas updated society’s decision-making mechanisms and directly influenced political and security mechanisms as well.

In the second half of the 18th century Europe went through dizzying developments. Enormous economy-driven changes took place. These changes created fertile ground for serious conflict between people’s interests and their moral values, and in the process a serious need for a solution arose.

Smith found a solution that would put people at ease in the conflict between “morality” and “economic interest”. Smith believed that in order to attain wealth people needed to be free and unconstrained and should act in their own interest in the decisions they made, and he accepted that the effort individuals made to attain wealth carried moral value. According to Smith, the disputes that might arise among people striving for their own interests were balanced by the sublime “invisible hand”. This reached such a point that even colonialism was cast in a positive light through the invisible hand.

Disregarding the rights of others for the sake of one’s own well-being and security needs was implicitly made the foremost policy. But in the end, in the economic depression of 1929 and afterwards, this “invisible hand” put people through one of the worst bottlenecks in history.

Because of the 1929 depression, America’s loans to Germany were cut off, the German people were radicalised by the economic crisis they fell into and nationalism grew stronger; to escape the crisis, the German state increased public spending. The item that was increased is well known: arms production. The ultimate outcome of rearmament and rising nationalism was the Second World War. An estimated 70 to 85 million people lost their lives in this war.

I would like to stop here for now and turn to the other subject in the title.

The Nash Equilibrium: Sacrifice, Shared Gains and Game Theory

After the 1929 depression and the Second World War, it became very clear how serving only one’s own interests leads to shared disaster and deprivation when it clashes with the interests of others. It became plainly understood that everyone must sacrifice some of their own interests for the community they belong to.

Many of us have seen “A Beautiful Mind”, the film based on the life of the American mathematician John Nash. In the film Nash, sitting in a bar with his friends, analyses his friends’ wish to impress a beautiful woman and dance with her. There he explains Adam Smith’s theory together with his own very nicely. His friends quote Smith to Nash: “In competition, individual ambition serves the common good.” They go on to argue that it is every man for himself. They say that everyone can compete freely for the chance to dance with the beautiful woman. But Nash corrects his friends there and replies: “The best result will come from everyone in the group doing what’s best for himself and the group.” In other words, he says that the best result can truly be achieved only by reconciling one’s own interests with those of the group. The scenario in which everyone makes an effort to dance with the beautiful woman has no chance of success.

For me, this scene from the film is the clearest story of Nash’s “game theory”. There is a definition of economics that applies to everyone: “the use of limited resources for unlimited needs.” According to Nash, the sacrifices individuals make in their interests will benefit the group they belong to, and in this way the individual will be more than repaid for the sacrifice. Nash treats individuals as players who make their decisions independently of one another. The foundations of this approach, which examines individuals’ behaviour as a game, were laid by John von Neumann and Oskar Morgenstern in 1944, and Nash contributed to “game theory” the concept of equilibrium that bears his name.

Game theory itself rests on many theories and illustrations.

Game theory is the balance of interests within society. The best example explaining this balance is the “prisoner’s dilemma”. Suppose that you and your friend are accused of something. The police offer you both the same deal: stay silent, or confess by incriminating your friend. If you confess and incriminate your friend, you will get 2 years and your friend 10 years. If you both confess and incriminate each other, you will each get 8 years. If you both stay silent, you will each get 5 years.

What should your basic strategy be here? Looking at the game, it is clear that when each player tries to maximise their own interest by opting for the short prison sentence, they gain nothing in terms of reducing their own and their friend’s sentences. But when the parties take the other’s interest into account alongside their own, they will have reduced both their own sentence and the other’s.

Nash imagines a world in which everyone wins, though each wins a little, in which shared gains are ultimately greater and losses are minimised.

From Past to Present

In a world that globalised with the Industrial Revolution, economic models changed, and so did security models. States that put their own interests first and disregarded those of other societies made enormous progress, but they severely set back the progress of other societies and paved the way for great injustices around the world. Over time, the decline that appeared in many regions of the world created serious security gaps, and these security problems affected both the people of those regions and other societies around the world.

Today, the condition of African societies, whose resources were plundered through colonialism, has reached the point of threatening the societies that exploited them.

Afghan society, too, became the target of these modern interest groups, and in the end the insecurity of Afghan society came to affect the whole world.

Syrian society is one of the clearest examples. The dictatorial and lawless regimes in neighbouring countries that paved the way for security problems in Syrian society, and the modern societies that used their activities for their own interests, have now received their share of the suffering this society endures.

For years, in pursuit of their own interests, European societies tied themselves to Russia for cheap gas. They did not raise their voices strongly against the lawlessness, wars and atrocities originating in Russia. In the ongoing Ukraine-Russia war, Europe is now in a very serious impasse and incapable of a strong response. It has lost in a short time the gains it made over many years.

Today, in many parts of the world, people are still subjected to lawlessness, deprived of their rights and condemned to destitution. The genocidal policy that China is pursuing against the Uyghurs is merely watched by many states, alongside the inadequate efforts of a few to stop it. A pencil we buy because it is cheap and made in China may carry the due of a Uyghur exploited with pain, blood and tears. The peoples of the world who support the growth of a lawless power here will, over the years, receive their share of this system of lawlessness. Perhaps far more will be lost than the gains being lost now in the Russia-Ukraine war.

In Conclusion

From the past to the present, systems and models that conform to Nash’s game theory and aim for everyone to win have always been a source of peace for people and the societies they live in.

Yes, Adam Smith’s calculation did not add up, and it opened the door to many disasters for humanity. Those who sit back expecting help from Smith’s “invisible hand” solely for their own interests should not forget that the globalised world system no longer accepts a closed social structure. A gun fired, a bomb exploding or the cry of a person wronged anywhere in the world will inevitably appear at our door tomorrow.

In the models to be built and the systems to be established, or in the steps to be taken individually, those who calculate like Smith will always lose and make others lose.