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How "A Beautiful Mind" is Wrecking Free Enterprise

In the 2001 movie "A Beautiful Mind," Russell Crowe player real life mathematician John Nash. (Born June 13, 1928) the movie deals mostly with Nash's struggles with schizophrenia and touches only lightly on the revolution in game theory that won him the Nobel Prize in economics. What was the prize for and how does it impact us?

Nash's contribution to economics stems primarily from his doctoral dissertation and center around the idea of a Nash Equilibrium. Written out, the formula for a Nash Equilibrium is mostly Greek characters with minus signs and parenthesis' around them. We'll skip all that and go straight to an example.

Let's play the old game Lemonade Stand. In our version there are only three factors, sweetness of the lemonade, price and cost to make a cup. The sweeter the lemonade, the more people will buy but the more it costs to make a cup. You and I are playing.

Now, to start with, we are playing sort of at random, each making our own decisions about how sweet to make our juice and how much to charge. We make some money but it's hard to predict.

After a while we notice each other over there on opposite corners and start sending spies to see how sweet the other's lemonade is and how they are charging. This is free market competition. I will try to make my lemonade a little sweeter and charge a little less than you do and you will do the same. This is good for the consumer who gets a good product at a low cost but is not really that good for you and I. Eventually, our profit drops to almost nothing as we make sweeter and sweeter lemonade for less and less trying to stay ahead of each other.

Enter John Nash. Sooner or later I'm going to realize that all of my decisions are actually dependent on your decisions. "I can't make my lemonade any sweeter till I'm sure he's not going to drop price." Once both of us realize that all our decisions are dependent on each other we stop competing in a classis sense and enter a Nash Equilibrium. That's when things get bad for free enterprise.

It works like this. Once we realize we are in a Nash Equilibrium I walk over to your stand and say, "Look, I'm only making about a penny a cup right now because we are competing. But we're the only lemonade stands in town. If we both cut the sugar in our lemonade in half but leave the price the same, we can double our profits." Suddenly, consumer quality suffers but the businesses boom!

In the Lemonade Stand game, this isn't too dangerous

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