Game over?
Maybe Nobel-winning game theory had to be invented, but old-style market economics seems set for a comeback
Iwonder what ordinary folk think when they hear that the Nobel Prize in Economics has gone to a couple of game theorists, Thomas Schelling and Robert Aumann. How do you get a Nobel Prize for games? Discover a powerful new bidding strategy in bridge? Plumb the aerodynamics of the dart? Discover the precise airflow that maximizes the responsiveness of the puck in air hockey?
As you might suspect, “games” has a technical meaning in economics. (So many words do!). Games are social interactions — not always fun, war is a game in this sense — in which you interact with identifiable opponents, or possibly allies, whose behaviour you react to. Games are all the rage in economics. Remember John Nash, hero of A Beautiful Mind (if “hero” is the right word for it), who won the Nobel Prize in 1994. Game-theory Nobelists are a strong upward trend.
For its part, old-fashioned economics ( the kind I like) studied markets. In markets, competitive markets at least, individual economic agents interact more or less anonymously. The individual wheat farmer doesn’t care which particular consumer ends up buying the bread his wheat makes or even how much wheat his neighbour plants in the spring. But he pays slavish attention to the price of wheat that millions of individual acts of demand and supply have produced. By contrast, Boeing cares a lot about what Airbus does. It’s playing a ( high stakes) game.
The economics profession doesn’t always make the right intellectual investments. But some people think the emphasis on game theory reflects the fact that life itself is increasingly a set of games, that more and more of society’s interactions are in small groups. Let’s hope not. Markets are better in lots of ways.
If the market were a game, it would be bingo. A crucial piece of information is called out and hordes of people put down their heads and respond. Of course, in bingo new production isn’t possible: the number of N17s or G23s is given. In a true market, if “B47” is drawn, more B47 gets produced. Just think how literally billions of people around the world have their heads down responding to the higher oil prices the market has called out.
Markets are anonymous and automatic. If you’re like me, that’s one of their big attractions. By comparison, the outcomes of games are inherently iffy.
Because not all human interactions take place in markets, and maybe also because the economies of large-scale industrial production meant that the small firms of the 19th century were replaced by the behemoths of the 20th, game theory had to be invented. War also attended the birth — the Cold War, to be precise. In fact, news stories about the Nobels gave the impression the prize had gone to two Cold War strategists, which is unfortunate.
Or maybe not. This year’s Peace Prize went to a nuclear arms control agency famous mainly for its repeated failure to control nuclear arms. By contrast, the citation for Schelling claims his analysis of the strategy of conflict “had a profound impact on military theorists and practitioners in the Cold War era, played a major role in establishing ‘ strategic studies’ as an academic field of study, and may well have contributed significantly to deterrence and disarmament among the superpowers.”
But game theory goes well beyond nuclear strategizing — which is precisely the problem. Game theory often doesn’t give very clear answers. We may understand the rules, strategies and tactics that govern chess, but what we’d really like to know is how a particular chess game will go. And we can’t. There are millions of possible outcomes.
Not in markets. Tell me what the cost structures are in a competitive market and I can be reasonably sure where output and price will end up. No wonder many of us are nostalgic for the older economics.
But game theory has taken over … or has it?
Because the analytical result that “almost anything can happen” is so dissatisfying, some economists are going experimental or “behavioural.” Increasing numbers of us have subjects sit down to play games on the computer for money. The idea is to narrow the range of theoretically possible game-theory outcomes by discovering the rules of thumb people devise in playing such games. In one of his own experiments, Schelling found that in a game where people were rewarded for independently guessing the same positive number, players pretty quickly figured out “1” was a good bet.
But then what happens in realworld situations when you’ve discovered the rules of thumb people are using? Presumably they start changing the rules of thumb. Oldfashioned markets were so much simpler.
Is that just nostalgia speaking? Maybe not. Maybe markets are making a comeback. There clearly are many human interactions where only small numbers of people are involved and where game theory is the best we can do. But think about it: We’re living through an era when the Internet is bringing the entire world market on to people’s desktops. In short, problems involving large numbers of people are back. Competition may have atrophied on the local or even the national scale, but at the level of the world, it’s robust. Which means the new-time technology may help revive that old-time economics.
Bingo!