Nature Says No to Nash?

In the wake of the atomic bomb physics envy swept academia, placing an emphasis on rationality and mathematics in disciplines which had traditionally been subjective social sciences. In the wake of the 2009 Global Financial Crisis, the pendulum swung away from the scientific approach in economics. Lay observers and economists alike are now considering behavioral economics or game theory as alternative approaches to explaining economics. But what of ecology?

A recent article by Jonathan Dawson at the Guardian suggests that economists begin to take cues from ecology to model the global economy. Dawson argues that ecology and economy are both complex adaptive systems of the same type. Quoting Ogilvy VP Roy Sutherland, Dawson explains the need to break from methodological individualism:

“In reality, man is much more like an anxious, moralising, herd-like, reciprocating, image-conscious, story-telling game theorist.” ~ Rory Sutherland

The allusion to game-theory is an interesting one. While Nash tells us that humans are self-interested individuals seeking to maximize their individual utility, the concept that actions of each individual participant in the economy are determined by the potential strategies of other participants is a significant break from classical models. At the same time, the nash equilibrium is rarely the pareto optimal point in which combined outcomes are maximized.

Dawson believes that following an ecological model will result in higher instances of pareto optimality. Ecosystems exhibit the sacrifice of substantial gains in efficiency in order to maintain the resiliency of the system, for example a forest selecting higher biodiversity. Applying this to the global economy, he says that monetary monoculture increases the vulnerability of our system. Also, he believes that there are less examples of competition in ecology than there are of cooperation such as symbiosis.

While these examples are interesting, they say little about economics. For starters, the goal of reframing the economic paradigm is confusing. Do we seek to redefine economics because it is a poor description of how the economy actually works? Or do we seek to reorganize our economic system to make it more functional. The ecological approach aims to solve the latter, which is a near insurmountable feat. Also, game theory, evolutionary biology, and behavioral science seem to point to a mixed conclusion about pareto vs. nash equilibrium. It is a bit of an audacious claim and an oversimplification to divide disciplines into: zero sum, nash equilibria games vs. non-zero sum, pareto optimality games. Humans are part of nature, but it will take a combination of psychology, evolutionary biology and mathematical economists to unravel the mystery of our economy.

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1 thought on “Nature Says No to Nash?”

  1. I think you are right to critique this article on the grounds that “the goal of reframing the economic paradigm is confusing.” Dawson does not clearly make the distinction between economics and economies, and this distinction is important. While they are certainly related, and certainly affect one another, the means by which we study and describe economic systems are distinct from the way we choose to structure our economies. One is scientific, the other political.

    I think the important question for economics is this: if we make the political choice that resiliency is more important to us than efficiency, can our economic model usefully describe this resiliency? Our economic model is reductionist, making sweeping assumptions about human nature, but are these assumptions helpful? In many cases they are, this is why the model has held on for so long. Now, with Behavioral Economics and evolutionary game theory, we are simply modifying this model, not throwing it away. The new, modified model will still be reductionist and will still make assumptions, like all scientific models do. That’s not a problem as long the model continues to improve.

    I don’t think, however, that the reorganization of our economic system is by any means an insurmountable feat. Our current organization was created politically (think of Bretton-Woods, or Nixon’s decision to pull the US off the gold standard), there is no reason this organization couldn’t be modified and improved again. Economic games are useful tools for understanding economic behavior and it is important to note that the rules of these games are not entirely given by nature, they are largely given by political institutions. The rules can be changed, maybe even to encourage resiliency over efficiency.

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