John Nash and Adam Smith (Why I’m a Democrat – Part I)

This will be part of a long running series, “Why I’m a Democrat,” that I intend to blog intermittently over the coming months.  It is pretty well established by social and natural scientists that philosophical differences are pretty low on the list of reasons why people choose the political affiliations they do.  Self-identity, culture, as well as values and related emotional contexts play a leading role for most people’s political preferences.  For complex reasons, parental political affiliation, educational level, race, gender, and even beer preferences, all represent predictors of political affiliation.

Occupation is another powerful correlate of political affiliation. The fact that I am part of the 80 plus percent of political scientists that affiliated with the Democrat party is almost certainly no coincidence — although the question of whether exposure to social science made me a Democrat or whether my predisposition towards progressive politics led me to social science is an open question. If we want to at least try to transcend our cultural and emotional predispositions in choosing our political affiliation, however, it is useful to take a closer look at some of the underlying assumptions of Republicans and Democrats.

One basic difference between the two parties boils down to the difference between the theories most associated with Adam Smith and John Nash.  Each had a distinctive idea of how the “collective good” could best be served.

Adam Smith is generally regarded as the father of modern, laissez-faire economics.  His The Wealth of Nations, published in 1776, was the single most influential text in convincing British policy-makers to abandon mercantilist trading policies in the subsequent centuries.  Eventually the United States followed suit, and, after the Second World War, “Smithian” economics, stressing limited state intervention over international and domestic economic activities, has characterized the global economic order.

Adam Smith asserted that the collective good is often served by individual selfishness.  The “invisible hand” operates because, when an individual acts in a rationally self-interested way, “by promoting his own good he frequently promotes that of society.”  Government economic policies, therefore, interfere with this “invisible hand,” and inhibit the efficient production and allocation of goods and services.  The modern Republican party (and libertarians to an even greater extent) have latched onto the message that collective outcomes will be maximized if government would “just get out of the way.”

John Nash, however, turned much of this on its head as a Princeton University graduate student.   Submitted in 1950, Nash’s 27-page doctoral dissertation suggested that there existed “non-cooperative equilibria”  — situations in which rational, self-interested decisions would lead to sub-optimal outcomes for society.   The 2001 film, A Beautiful Mind, illustrates this brilliantly in a bar scene that involves several young men who desire the attentions of a lovely blond women.  As Russell Crowe, playing John Nash, points out, however, if every one of the men pursues his self-interest, then they will “block” each other and none of them will achieve their goal.  Some sort of cooperative arrangement is needed to maximize the collective outcome, even if no one achieves their individual goal.

Mancur Olson later expanded on some of Nash’s ideas and is associated with his work on the “collective action problem” and the problem of “free riders.”  The scope was a bit different, Olson focused on large-scale interactions and Nash on small-scale bargaining, but the lesson was the same — individuals pursuing private goods do not necessarily promote the general welfare.

The underlying philosophy of the Democratic party recognizes the collective action problem.  Oftentimes, outside coordination and incentives (or disincentives) are needed to optimize public good, economic outcomes, and to prevent people from harming others in their own pursuit of self-interest.

On one level, the collective action problem is self-evident.  It is why we have a legal system that punishes theft and fraud.  Such disincentives are important in altering the calculations of would-be criminals concerning what and what does not represent their self-interest.  Similarly, few would voluntarily contribute taxes absent government “incentives” to do so.

Democrats understand that the collective action problem extends to other areas.  Your factory might earn you a profit, but it pollutes our air, and therefore needs to be regulated or taxed such that the cost to the public is offset.  Private industry has little incentive to invest in “basic scientific research” whose benefits are diffuse, so the government should fund research that yields public benefits.  Health insurance companies have the incentive of minimizing costs, not maximizing public health and welfare, and therefore ought be regulated or the public provided with an alternate option.

In the sphere of international relations, countries have similar incentives to enact self-serving policies that hurt global welfare.  While Republicans are associated with unilateralism, Democrats tend to support organizations like the United Nations that oversee treaties incentivizing cooperation on areas like arms control, the environment, and human rights.

Finally, while the quasi-libertarians associated with the Tea Party like to loudly proclaim fidelity to the Constitution and its alleged focus on limited government, the Constitution was designed and enacted with the goal of overcoming collective action dilemmas that had developed under the ill-fated Articles of Confederation.  Under the Articles, states, pursuing their own self-interest, had taken to printing their own currencies, enacting trade barriers to one another, and, since the federal government had no power of taxation, refusing to “donate” their fair share to the national treasury.  In drafting a Constitution that would “promote the general welfare,” the founding fathers were, in effect, choosing a government that would help overcome the collective action problems that had caused America to stumble out of the gate of independence.

As we celebrate the Fourth of July this year, it is important to remember that America was built on institutions designed to restrain man’s self-serving impulses and channel them into productive outcomes.  The wisdom of the founding fathers rested on the understanding that the pursuit of individual happiness is best served when government is able to bridge the divide that sometimes exists between private self-interest and the common good.

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Posted on July 3, 2011, in Uncategorized. Bookmark the permalink. Leave a comment.

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