There can be several Nash equilibria.  But there is at least one.  (Nash' theorem).

Initial conditions (and changing conditions !) will determine WHICH equilibrium is reached (hypothetically, in a steady-state situation).  But what is for sure, is that no situation that is NOT a Nash equilibrium, will remain stable.

And you seem to forget that central planning ITSELF is a game, too.  Who is going to be a central planner, and what are you going to do as a potential or actual central planner, IS JUST AS WELL A GAME.  Central planners also optimize their personal gain.

Freedom is choice.  It is an oxymoron to say that you strip choice from individuals, but not their freedom.

If you want to eat strawberries for desert, and central planning tells you that you should take chocolate cake, then it takes away your freedom to pick your desert.  And no, central planning will never know that you prefer strawberries today.

Then I think that you didn't understand the meaning of a Nash equilibrium.  The hypothesis set forward in game theory is that we have non-cooperative individuals who try to optimize their own gain in a rational way each independently, and the question is: what are stable configurations of strategies in such a case.  That is to say: what strategies can be applied, so that no individual has something to gain by NOT adopting it.  Those sets of strategies are then stable against the postulated desire of every individual to rationally improve his situation given his environment.  That's what a Nash equilibrium is.

Any proposed set of strategies that is hence not a Nash equilibrium, means that some individuals would have personal gain if they didn't follow it.  As such it is not stable: there's a serious probability that said individual will NOT adopt the prescribed strategy, or will change from the prescribed strategy to another one when he realises that that is in his personal advantage.

Even Jesus realized the Nash equilibrium


Indeed, the situation: "you can bring a bottle of wine, or a bottle of water, and we will drink the mixture", has a single Nash equilibrium: we all bring water and we drink it !

Although it would maybe have been better that everybody brought wine, and we drank wine, that's the UNSTABLE situation, because indeed, everybody makes the rational decision, that whatever the others bring, if you add a bottle of water instead of adding a bottle of wine, what you will drink in the end will not be very different, and what you will pay (for a bottle of wine, or a bottle of water) will be quite different.  So, whatever the others decide to do, you will be better off bringing water than bringing wine.

Most naive social engineering is based upon not realizing that non-Nash strategies are not stable.  The usual reaction to the discovery of this evident truth is then to be outraged by so much egoism

I'm sorry but YOUR hypothesis was universal empathy.  If you don't have universal empathy, then any non- nash equilibrium will not be stable (that's exactly the idea of a Nash equilibrium: that you do not NEED total cooperation for it to be stable).

A Nash equilibrium is such, that, from the POV of a single individual, there is no incentive to change strategy.  That is, if a single individual changed strategy, and all the others kept their way of doing (the Nash equilibrium), the single individual would lose.  So he won't change strategy.

So in order for a situation to be stable and NOT be a Nash equilibrium, it means that some people would win by changing strategy, but they WON'T because of "empathy".  They would systematically take decisions at their own loss, for the sake of keeping the global solution.  So in order for this situation to remain stable, it would be absolutely necessary that random people suffer from universal empathy.

In other words, in order for your claim to be true (that is, there are stable optimal solutions which are not Nash equilibria), you need to make the hypothesis that random people do suffer from universal empathy.

So no social construction can be stable without being a Nash equilibrium.  However, it will be a Nash equilibrium with a very complex and sophisticated cost function, which will include all of human forms of satisfaction and dissatisfaction, including empathy.  It won't be a "bookkeepers" cost function, with just monetary gain or something.  So it may SEEM that certain situations are stable and nevertheless not a Nash equilibrium, because we don't understand the real cost function.  That's exactly what happened with the real-world prisoners dilemma.  We thought that the cost function was a naive "years of prison", while there's much more that enters it.  In fact, it is essentially unfathomable.  We're back to human action.

Yeah 

The point with the mathematical prisoners dilemma is that it is very abstract.  It is as if the ONLY cost/reward is years of prison.  In reality there's a lot more that plays: reputation, revenge, IOU, agreements, ...  Because, if you don't know the other person's decision, you run the risk that the other guy didn't betray you, and that you betrayed him.  If he gets free, or he has friends outside, you might be worse off outside than inside the prison !  So the REAL cost/reward structure in a real prisoners dilemma is much more complicated than in the abstract game.

Empathy is a phenomenon whereby you experience good or bad sensations as a function of what you perceive that SPECIFIC OTHER persons experience.  Empathy is always limited to a small circle of persons (family, friends), and is a phenomenon that can happen or not.

If empathy were universal, no police, no prisons, no laws would be necessary.  After all, each of us would feel much better, knowing that other people would feel better by his actions.  That's obviously not the case.  We would all sit together around the camp fire and sing Youmbala.

That's correct, but the fundamental problem with laws that forbid INTENTIONS and not acts, are that intentions are unfathomable.

If your solution is not a Nash equilibrium, it will simply not be adopted in a non-cooperative game.  So even though it might be Pareto-optimal, it won't work.  As such, the ONLY solutions you should consider, are Nash equilibria, simply because the others are unstable and will not be adopted, or remain adopted.

The prisoners dilemma is indeed the best illustration of that.  The point is that the optimal solution will not be adopted, simply because each individual can improve his situation by changing strategy.  As such, the only Nash equilibrium is not the optimal solution, but it is the only stable solution.

It is the same reason why cartels can't last.

I would say: hoarding can be 2 things: a form of saving, or a form of cornering a market.

Because otherwise they wouldn't remain rich ?

Poverty has the tendency to propagate.  It breeds, until it dies of poverty.  Malthus.


Nash equilibrium.  If your "global optimal" solution isn't a Nash equilibrium, it won't last.
You reach a Nash equilibrium when everybody applies a strategy, such that no-one can gain anything by changing only his own strategy.

This is another argument why "a strategy that is good for an individual" is also a strategy that is good for everybody.  Because otherwise it wouldn't be a Nash equilibrium.

It is the problem with all "moralising" utopia.  "We should all help one another".  It simply isn't a Nash equilibrium: someone can win in that game, by having all others help each other (him included) and not helping others himself (change in just his own strategy).
 

I think the misunderstanding between both of you comes from two different views of hoarding.

The first view on hoarding is that you store stuff when it is cheap (that is, when there is a lot of offer, and not much demand), and you sell when it is expensive (that is, when there isn't much offer, and there's a lot of demand).

This is the "good" kind of speculation, that softens scarcity.  It is the chipmunk that puts nuts aside in summer for the hard season.  When nuts are abundantly available, they don't consume everything, but they put aside some.  When there are no more nuts available, they live off their hoarded savings.

Hoarding that way increases prices when things are cheap, and decreases prices when things are expensive, as such stabilising price.  The benefit you make on hoarding is exactly equal to the price difference.  Hoarding stops being interesting when price is totally stabilised and there is no "cheap" and "expensive" season any more.

But the other view of hoarding is "pump and dump" market manipulation.  In an a priori constant price market without temporary preferences ("summers" and "winters" for nuts), you might try to manipulate the market by storing a lot of stuff, making buying contracts at "normal price", by your hoarding, you increase the market price, and when the stuff that became scarce because of you having bought half of the available production, you make sales contracts at higher prices, and then dump everything on the market.

The point is of course that in order to do so, you need to be able to buy a significant fraction of the market.

So "pump and dump" can only happen with very significant sole players on the market, or by a cartel.  However, the normal hoarding behaviour can be done by many many small independent hoarders.

Many small, individual hoarders cannot do a pump and dump, because the whole trick is to be perfectly synchronized in buying "just before" the scarcity, and selling "just before" everything floods the market.  If you are slightly out of sync in a pump and dump, you loose instead of gaining.

This is the fundamental flaw in collectivist thinking.  If a strategy is good for an individual, it is good when applied to every one because every one is an individual.  If it isn't good for every one, then it wasn't good for an individual either.

Typical example: having a lot of children.  Is that a good or a bad thing for an individual ?  Is it good or bad that I have 10 children ?  If my aim is Darwinistic, and I want to get as much of my genetic material in the next generation, what should I do ?  Breed like rabbits, have one kid, have no kids ?

You may say: if YOU have 10 children, that might be Darwinistically good for YOU, but if EVERYONE has 10 children, the world will go down in over population.

No.  In fact, I should have as many children as I can economically support efficiently.  If I have enough economic means to educate well, 5 children, that's what I should do.  If I make less children, I will diminish my genetic presence in the next generation, and if I make more of them, they will be economically weaker and may not survive the next round.  If I optimize the number of children, and my economic value so that each of them reaches a good level to start in live, then that's my best solution.

And now, it turns out that if everybody would do that, that is, optimise its number of kids as a function of his own economic power, then that that would also be globally the best solution.  Poor people wouldn't make kids because they would starve any ways.  Rich people would have a lot of children.  In the end, you would have an economically better balanced next generation.

But that doesn't happen, because there are obliged economic transfers from the rich to the poor, who allow poor to breed more poverty. 

So even in the most "collectivist" a priori questions, you see that if everybody really optimises for one-self, everybody optimizes for one-self.  In fact, that's nothing more than game theory.

Amen !

Because the only way to have continuous mild deflation with fixed supply is when there is steady growth of course.
In other words, if there is no economic growth, and there is a steady supply of money, then there is no reason to assume there will be deflation either (at least in the long term - short term fluctuations in the velocity of money - that is in the demand of store of value in money - can always induce temporary inflation or deflation).


Yes, because prices are set in markets.  Prices are the response variable, always.  Prices that are set freely in markets are never "a priori" variables. 


If they lower production, prices will rise.

There are simplifications, but I essentially write the first few chapters of Keynes' Treatise on Money.  So maybe he didn't understand banking either.

"investing" for me, means "buying capital goods", means of production.  So if you hoard, you do not buy capital goods. You do not buy machines with the aim to produce.  If you were USING your own money to buy machines for a production you're planning, then you would indeed be investing in yourself, and "gamble" that you are a better business than a business out there in which you could have invested.


I'm assuming steady state, and long term constant money velocity, which means that the economic growth is constant, that inflation or deflation is constant.  Now, if the velocity of money is constant, it also means that the aggregate demand for "store of value" is constant: that people "hoard" always the same amount.  

So your hoarding is not ADDITIONAL to other hoarding: we consider that the total amount of hoarding is already stabilized.  As such, if you hoard more, the hypothesis is that some else hoards less, because we assume steady state.

So the difference between both ("investing in the total basket" and "hoarding") would simply come down to a different constant value of the velocity of money.  If people hoard more, the velocity is lower.  If people "invest more" the velocity would be somewhat higher.

You could also see it differently: if people hoard more, it is as if the total amount of money is smaller.  And if people invest more, it is as if the total amount of money were higher.  But as long as people do, on average, the SAME thing, that amount won't CHANGE.

Of course, in a deflationary model, you can assume that it is more interesting to hoard than in an inflationary model.  So the amount of hoarding will probably be higher in a deflationary model than in an inflationary model.  But once things have stabilized (that is, once the amount of hoarding has adapted to the amount of inflation or deflation), and once hence the velocity of money has adapted, there is no difference in fact between both.

Of course, on the short term, there will be fluctuations.  There will be short term changes in inflation and deflation, there will be short term changes in hoarding versus investing, there will be short term fluctuations in economic growth.

We're trying to look at the long term picture to see the long term influences of these elements, and for that, it is better to assume the simplistic steady state as a basis to start from.  Because the claim "inflation is good"  or "deflation is a disaster" is a general statement, which, if true, would be easily demonstrated in steady state models.  It doesn't.  In fact, economy is largely indifferent to it.

So we have essentially 2 models we look at:

A) inflationary model:
inflation = 2%
velocity = 3  (people don't hoard much)
real interest = 4%
economic growth = 4%

B) deflationary model:
inflation = -2%
velocity = 2 (see, the average hoarding is higher here)
real interest = 4%
economic growth = 4%

(note that in model B, we are not in "fixed supply" because the economic growth is still above the deflation rate, so there is still money creation, but less so than in A)

Of course, in B, prices will be 30% lower than in A because of the lower velocity.

A transition from A to B might be a scary ride !  But in steady state A or in steady state B, economically, things are essentially equivalent (except for the financial sector who lost all the "hoarders").

Of course, but that is sufficient.  The reserves and the imposed fractional ratio determine how much money a bank can create.  You should maybe read the first chapters of the Treatise on Money by Keynes again ?

Simply said, if I'm bank A, and you're bank B, we can write loans to each other as much as we like, and those loans become created money.  If there's no legal limit, two banks can create an infinite amount of money, by lending to each other.  The reason being that the "debt certificate" that bank A holds of bank B, is considered an asset of bank A, and the "debt certificate" that bank B holds of bank A, is considered an asset of bank B.  As such, by lending themselves, say, each, $ 100 000.- they have created two times $100 000.- of assets one another.  Their balances are in check: they have each an "asset" (the other bank's debt) of $ 100 000.-, and they have each a debt of $ 100 000.- (as a bank account they opened for the other bank with $100 000.- on it).  They can even ask interest.  There's a cash flow due, and there's a cash flow coming in.

Now that they have their balances in check, and they have money (that is, the bank account in the other bank with $100 000 on it), they can lend it out to, say, someone needing a mortgage.  They then ask that person 3% interest on it.  If bank A lends out its freshly created $100 000,- to Joe, who wants to buy a house, by writing him a cheque on the other banks' account and then Joe has to give them $ 3000.- a year.

So on Monday, Bank A didn't have a dime.  On Tuesday, Banks A and B do their money-creating swap.  On Wednesday, bank A loans its money to Joe.  Now, bank A has an income of $3000.- a year.  Its balance is still in check.  It has no dime, but it has a debt to bank B of $ 100 000.- and it has a mortgage contract worth $100 000.- with Joe.  Its balance is in check.
Bank B will do the same.

On Thursday, the directors of bank A and B meet in a bar, and decide to start over next Monday....
As such, they generate each an income of about $ 3000.,- a week, as long as they find mortgage customers...

They can do the same with a mutual loan of $ 1000 000.- or even $ 1000 000 000.- or ....
But in reality, they can't because there's a legal limit: their reserves.  It was Keynes' (correct) argument to require a reserve and a reserve ratio by law, to avoid the "runaway" of banks creating money.

Suppose that the reserve ratio is 5%, and bank A and bank B manage to have $ 1000 000.- each as a reserve deposit.  That means that they can now play that game until they have about $ 20 000 000.- of customer bank accounts (of the other bank, say ;-) ) and lending out $ 20 000 000.-

They cannot "go party" with $ 20 000 000.- because they have to have their balances in check.  It is not that they can SPEND that money. But they can LOAN that money, and invest it and they don't need a high return on it.  If their reserve COSTS them, say, 1%, and they can obtain even 0.5% on the $ 20 000 000.- they work with, then they make sheer benefit even though they invest badly.

Indeed, the 1% on their reserve costs them only $ 10 000, and the 0.5% on the $ 20 000 000 brings them $100 0000 !

So IF you can obtain reserves, you can create money.  And if you can create money, you obtain the interest on it "for free".  You cannot spend the money itself, but you can spend the interest, which you do get for free.

When banks get into problems is when they screw up so badly that they LOSE money, and that they loose their $ 20 000 000.-

The trick of "pumping money" with banks is to use the reserve fraction ratio as a leverage on the interest: if you get $ 1000.- more reserves, you can play with 20 000 or so.  So you only need to generate a return on those 20 000 that is 20 times smaller than the cost of your 1000 in order to break even.  If you become greedy, and you start doing risky things with those 20 000, then you might be very rich, or you might be in deep shit if it goes wrong.  

Because of fiat inflation.  I'm convinced that 80% of the "useless" and very lucrative part of the financial sector resides in the inflation driven fiat currency.  The financial sector has the MONOPOLY in obtaining fresh fiat money from the CB, and hence obtains its seigniorage (indirectly).

In an inflationary situation, hoarding money is losing value.  So you are FORCED to put your money on a savings account, even to try to keep its value.  This forces you to give your money to a bank, not even to gain in value, but just trying to KEEP the value.  Now, that bank then gets A LOT OF MONEY at its disposition to do a lot of stuff with, like gambling, investing in doubtful things, and hence blowing bubbles.  Moreover those banks also get the fresh money from the central bank at lower rates than it writes out loans take a lot of value for nothing, but you are obliged to pass through them.  You can't borrow directly from the central bank as they can.  They have a privilege. 

THAT's why they exist. 

As I said, not entirely, because there ARE useful financial services, but not at the scale of the financial sector.  MOST of the financial sector exists because of fiat inflation --- which is why they are scared to death of deflation.

In fact, you said it all

But you are entirely right that there is something absurd in a state being a debtor.  After all, contracts are enforced by a state (or by cryptography.... ).  So how can a state be a debtor ?  How can a state make a contract with another state, or a foreign private entity ?  Who's going to enforce the contract ?  In the end, indeed, it is up to the other country to take up arms and to enforce its due... but then, why should they stop taking when they have collected their due ?

Moreover, the big problem with a state being a debtor is that a state can in principle (it being the local violence monopolist) extort its entire population - usually called taxes.  So yes, if you are having possessions in a certain state, if that state takes on a foreign loan, your possessions are at potential danger to be used as a collateral.

The problem with the Greek state is that most of its rich people possess ships.  They are not present on the territory of the state

In fact, this can be debated.  After all, if you would invest in a "total economy basket" (that is, a basket of shares that is an image of the actual economy), then your basket's value will grow with the economic growth.  You could think of such a basket as the most possibly hedged fund.  There is no lower risk.  Even a state bond has a higher risk, and it is considered in the financial world as the risk-less investment reference.

So whether you buy into that "total economy fund" or whether you simply have fixed supply, shouldn't alter anything.  At fixed supply, the deflation is (in the long run) equal to the economic growth.  If the economy grows with 2% a year, under fixed supply, you can expect a 2% rate deflation.  If the economy shrinks with 5%, you can expect, under fixed supply, an inflation of 5%.  This is assuming long term stability of the velocity of money.

Now, I don't see the economic utility of investing in a "total economy basket" because it expresses NO PREFERENCE.  Now, the value of speculation and investment resides exactly in the CHOICES you make: to support THIS business OVER that business, and hence send a signal to the market.  But to send a signal to "the whole of the economy" is equivalent to not sending a signal.

So what can you do ?  You can invest specifically.  Then you "add value" if you do so in a faster-growing sector, with higher return than the average growth.  But you can still do that in a deflationary environment, because investing in a faster-growing sector than the average economy will bring you MORE than the gain by deflation.

If average economic growth is 2% (and hence deflation is 2%) but a certain sector grows at 5% (has a return on investment of 5%), then it would still be beneficial to invest in that sector: you would win 3% in nominal terms (and hence 5% including inflation).  You would win over just hoarding.

The only thing is that deflation would evidently make you loose if you invested in sub-optimal sectors, which is less evident to see in an inflationary environment. 

So, in the end: in a deflationary environment, hoarding money gives you the average return on your value, in the same way as a useless "full basket" investment would do in a non-deflationary environment.  You can still win by investing in a faster-growing sector.  However, nobody can win in (over) investing in a lower-return sector, which is possible by a financial sector in an inflationary environment.  It is about the sole difference.

THIS !!