April 23, 2004

Nash has an Equilibrium?

Good to know the money spent towards our son's education has not been wasted. He weighs in on this:
I think the real result of increased productivity is exactly what he touched on, a shift from the manufacturing sector to the service sector in all post-industrial economies. People won't "not work", it's not a rational decision, it's not an equilibrium if nobody works and we keep our present standard of living.

Think of it this way: All haircuts are done by machines and nobody works, I start cutting hair and I'm a person and I'm the only person who cuts hair. If we assume a preference for diversity, some people will want the "natural" hair cut, and I will make a huge profit (as I am the only human cutting hair), so my standard of living goes up. Then my neighbors see there is money to be made and they start cutting hair and the process continues.

Basically I believe that if enough people don't work, the marginal profit of working would be so high in service sectors that everyone would start working again until it reached a market clearing price where the cost of working was equal to the gain from just hanging out. It would be sort of like Organic Food, it would be more expensive to have a person do it but you would want that "personal touch". In summary I think he's been proven right by the shift from manufacturing to service industries, but I believe that same argument won't carry an economy from a service based economy to utopia, not as long as money still exists anyway.

So, the answer to: "Is there anything in the realm of pure economic theory which says that a very large society couldn't simply exploit the highly productive (and therefore highly compensated) labor of a relatively small few? Or am I missing something having been absent from this issue for so long?" is: Yes, Game Theory, this set up is not a Nash Equilibrium as long as a profit can be made ie as long as we have a monetary system and a society that focuses on aquiring material wealth.

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