game theory

Economics in One Lesson: Nash

NashJohn Nash passed away yesterday. He was killed, along with his wife, in a taxi accident. Nash is not a figure who had a recent and continual impact on economics but he is perhaps the person who had the single idea with the most important impact on economists of anyone.

That idea was equilibrium or as we economists call it today, Nash Equilibrium. I wrote the entry on Nash equilibrium for the Palgrave Dictionary of Strategic Management and since it isn’t openly available I am posting it here.

Half a century ago, an influential book, Economics in One Lesson, argued that if you understood opportunity cost you could understand economics. Opportunity cost is important but it is not a concept from economics per se but a concept from rational decision theory.

The concept that makes an economist a true economist is instead Nash equilibrium. That is, it is the marginal contribution of an economist to any situation. The idea is simple: if you are trying to assess the impact of your actions, you need to consider the equilibrium. That is, you need to work out whether, if you did something, holding the actions of others fixed today, that others will likely keep their actions fixed tomorrow. If not, you need to alter your decision calculus markedly. For instance, it makes no sense to say that a new innovation (e.g., Bitcoin) will win in the market unless you can also assess that it will win in a market that understands the new innovation (e.g., one where many actors have adopted crypocurrencies or some other variant) as well as in a market still centred around traditional banking.

Indeed, even opportunity cost can be rarely computed without working out the full equilibrium of a path not taken. This is why, if I were to re-write Economics in One Lesson, it is Nash equilibrium that would be the lesson and not opportunity cost.

Farewell, John Nash. I hope you find a new point of rest.


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