Adam Smith Vs. John Nash—Which Path Should Be Used in the Trade War?

I was watching the movie A Beautiful Mind the other night and there was a particular part of the movie that jumped out at me this time. I have seen the movie several times before and the scene I am referring to had never really stood out to me. If you aren’t familiar with the movie, it is about the life of mathematician John Forbes Nash. He was a brilliant mathematician that struggled with mental illness. I won’t go any further in the review in case there are readers that haven’t seen the movie.

The scene I am talking about takes place in a bar. Nash is sitting at a table surrounded by books and papers when some young ladies walk in. Nash’s friends are all eyeing one girl in particular—a tall blond. As they all seem to be most interested in the blond, Nash’s friends quote Adam Smith, “In competition, individual ambition serves the common good.”

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At this point Nash is searching for an idea on which to write a thesis and somehow comes up with his own theory at that very moment. Of course this is Hollywood’s version so it is undoubtedly glorified in some way. Regardless, Nash makes a few comments—“Adam Smith needs revision. If we all go for the blond we will block each other and not a single one of us is going to get her.”

Nash goes back to Smith’s theories and summarizes that “the best result comes from everyone in the group doing what’s best for himself.” At this point Nash states that the theory is incomplete and that “the best result would come from everyone in the group doing what’s best for himself and the group.”

So now you have the backdrop of the movie and what many believe was the foundation for the Nash Equilibrium. Again this is a movie and I honestly don’t know how accurate the events are, but what it did do was make me think about the current trade war.

Obviously both the U.S. and China are trying to do what is best for their country. Each side wants to feel like they have won the war, but in the end we need the outcome to be a positive for both sides. As the two largest economies in the world, it would be in both sides best interest to work out a deal that doesn’t cripple the other one. We need one another.

In today’s global economy, it is probably true that both the United States and China could survive without one another, but they would only survive and not thrive. I would compare it to an individual going off the grid and living in the woods by themselves. With the proper tools and skills the individual will likely survive, but they won’t thrive. In order to thrive they will need to use their own skills and work with others with other skill sets to thrive.

There is some truth to both Adam Smith’s theory as well as John Nash’s theory. As socialist economies have failed worldwide, Smith’s idea of “individual ambition” comes to mind. If people don’t have any ambition to work because the fruits of their labor are shared with others that don’t work, there won’t be economic growth. However, for an economy to thrive, individuals have to work together for the optimum outcome.

As it stands right now, both President Trump and President Xi, seem to be working more from Smith’s theory and looking out for their own interest more so than Nash’s theory where we need to work together in order to thrive.

To make another analogy, I will refer to my other area of expertise—basketball. LeBron James is arguably one of the best players in the history of the game. He spent the first seven seasons of his career in Cleveland and put up phenomenal individual stats, but didn’t win any championships. In 2010 he left Cleveland for Miami where he teamed up with Dwayne Wade and Chris Bosh to form a “superteam”. The trio would end up winning back-to-back titles in 2012 and 2013. LeBron would return to Cleveland to form another “superteam” with Kyrie Irving and Kevin Love and they would go on to win a title in 2016.

LeBron was and is a great player, but it wasn’t until he teamed with other great players that he was able to fulfill his dream of winning a title. His individual ambition wasn’t enough to win a title, it took joining forces with others to win three titles.

There isn’t a championship trophy on the line in the trade war, but there is economic success on the line. The two parties can act in their own best interest, but the deal that works out better for both parties is the one that is likely to be the most successful.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

One comment

  1. Edouard D'Orange

    Interesting philosophical article. I thought that the movie “A Beautiful Mind” glorified Professor Nash way too much. I thought he was dangerous and delusional. Compromise might also be another word to use for a desired outcome in the U.S.-China trade war because each side doesn’t win, but both get some small “victory”.

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