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Economics, Game Theory and Jane Austen
By Michael Chwe
Economist Michael Chwe has written a book called "Jane Austen: Game Theorist." Do you need more of a reason to read this post? Video from Michael Chwe's YouTube channel.
I'm a specialist in game theory, the mathematical analysis of strategic thinking. Probably the best-known game theorist is John Nash, who received the Nobel Prize in economics and was featured in the movie "A Beautiful Mind."
I have published mathematical economics papers in journals such as the "Journal of Economic Theory." But my latest book is built around the theoretical insights of Jane Austen. This popular and beloved writer used little mathematics or economics. But Austen's novels, written in the early 1800s, anticipated by more than a century the most fundamental game-theoretic concepts, including the emphasis on choice, the theory of utility, and the theoretical analysis of strategic thinking. In fact, Austen's novels contain game-theoretic insights not yet superseded by modern social science.
Before going into Austen's theoretical contributions, let me briefly introduce how game theory is used in economics.
How Game Theory Is Used in Economics
For most of its history, economics concentrated on the analysis of what it calls "perfectly competitive" markets: markets with a multitude of buyers and a multitude of sellers, with no single firm having any influence over market prices.
But even back in the 19th century, economists realized how imperfect markets were becoming. This was the era of "oligopoly" -- a "market situation in which producers are so few that the actions of each of them have an impact on price and on competitors." The oligopolists of the era were the industrial giants like Rockefeller's Standard Oil, the American Tobacco Company, and U.S. Steel. Some oligopolies, like Rockefeller's, were partially dismantled, but many oligopolies, old and new, exist today.
Economists today routinely analyze oligopolies using game theory, once described as the discipline of looking ahead (to what others will do) and reasoning backward (to figure out what you should do in anticipation of what others will do). Game theory's popularity is relatively recent. Its mathematical techniques were pioneered in the 1940s and 1950s by John Nash, John von Neumann and Oskar Morgenstern, although one of the earliest game-theoretic analyses of oligopoly was by Antoine Augustine Cournot in 1838.
Most economics students are taught first about monopolies and perfectly competitive markets because they are easier to analyze. Analyzing monopolies is not difficult: since there is only one firm, it simply acts in order to maximize its profits.
Analyzing perfectly competitive markets is not difficult either: each firm only worries about overall market conditions and not specific competitors because no single competitor is big enough to change market conditions by itself. For example, among taco trucks in Los Angeles, each taco truck worries only about the going price for tacos, not about the decisions of any other particular truck; each truck is a "price taker" and takes the going price of tacos as given.
In oligopolies, however, the situation is more complicated. Each firm must think carefully about its competitors: for example, before releasing a low-cost iPhone for emerging markets, Apple must consider whether its major competitors, Samsung and Huawei, will respond by making smartphones that are even cheaper. Apple must anticipate what Samsung and Huawei will do.
Of course, many markets are perfectly competitive (the restaurant business is a common example). But I suspect that today most economists would say that oligopolies, in which each firm must worry about each of its competitors, are more typical, or at least more interesting.
In other words, competition (and cooperation) among firms these days is usually not a matter of "price taking" -- accepting the price that a perfectly competitive market determines by the interplay of supply and demand - but of "price making," a situation that demands strategy. This is where game theory, the mathematical analysis of strategic thinking, comes in.
How Jane Austen Used Game Theory in her Books
Might it be useful in understanding Jane Austen? I am not the first to use game theory to approach literature. In 1980, Steve Brams wrote a book using game theory to interpret the Bible. The economists Bertrand Crettez and Régis Deloche have written on coordination in Molière's play "Tartuffe." Ilias Chrissochoidis and Steffen Huck have analyzed the mythic plots of Richard Wagner's operas "Lohengrin" and "Tannhauser."
But let's stick with Austen. Maybe it's just me, but as a game theorist, I am sensitive to how her characters act strategically in anticipation of the actions of others. For example, Marianne Dashwood in "Sense and Sensibility" seems to indulge in emotional paroxysms, in one case not changing out of her wet clothes, falling ill and almost dying. But, hearing that she is close to death, her one-time suitor Willoughby abruptly visits to tell her that he did indeed have true affection for her, and married someone else only because of money.
A game theorist might suspect that Marianne broadcasts her suffering anticipating that Willoughby would come back to her or at least acknowledge that he had loved her. Later, Marianne tells her sister Elinor: "My illness, I well knew, had been entirely brought on by myself."
I believe that Austen is a game theorist herself, interested in how people make choices and how people anticipate the choices of others. Like any game theorist, Austen's interest is both practical and theoretical.
For example, what distinguishes game theory, and economics generally, from other social science approaches is its emphasis on individual choice. That's how economists explain behavior. For Austen, choice is an obsession.
She mentions "the power of choice" and states that it is "a great deal better to chuse than to be chosen." When Fanny Price, in "Mansfield Park," receives the proposal of the rich but smarmy Henry Crawford, her entire adoptive family pressures her to accept, but Fanny heroically resists, telling her uncle Sir Thomas that it is simply her choice: "I -- I cannot like him, sir, well enough to marry him."
Economists love results that are not intuitive. One such result, which still gives people pause, is that a country technologically worse at producing everything should still trade with a technologically superior country -- as long as it has a comparative advantage in producing one good relative to another.
Austen loves non-intuitive results too. Fanny Price has an amber cross ornament, a gift from her beloved brother William, but has nothing to wear it with for the upcoming ball. Mary Crawford, Henry Crawford's sister, gives Fanny a gold necklace. Edmund Bertram, the young man whom Fanny really likes, gives Fanny a gold chain. Fanny must choose between Mary's necklace and Edmund's chain. This choice is difficult because Edmund likes Mary, and thus Edmund asks Fanny to wear Mary's necklace in order to show gratitude toward Mary. But Fanny would much rather wear Edmund's chain.
Fanny is relieved to find that "upon trial the one given her by Miss Crawford would by no means go through the ring of the cross. She had, to oblige Edmund, resolved to wear it -- but it was too large for the purpose. His therefore must be worn; and having, with delightful feelings, joined the chain and the cross, those memorials of the two most beloved of her heart ... she was able, without an effort, to resolve on wearing Miss Crawford's necklace too."
With this episode, Austen illustrates how in some situations, not having a choice can be better. This is a nonintuitive result well known in game theory. But Austen does it one better. She is so committed to individual choice that she cannot leave it at this: she has Fanny choose to wear Mary's necklace too. Even when it seems better not to have to make a choice, Austen shows that another choice can make things better still.
Essential to economic theory is the idea of utility: when a person chooses among several alternatives, the economist models this by assigning to each alternative a number corresponding to that alternative's "utility."
For example, if a person chooses between two houses, one house might be in a better location but have fewer bathrooms, while the other might have a quieter backyard but have higher maintenance costs. Economists assume that when a person chooses among houses, the many aspects of a house in the end reduce to a single utility number.
People who are not economists might find this strange, but not Jane Austen. Austen consistently argues for commensurability: the many aspects of an alternative are in the end reducible to a single feeling. In "Northanger Abbey," Catherine Morland plans a walk with Henry and Eleanor Tilney but they do not show up, perhaps because of the rain. Thus she decides to go with her brother and John and Isabella Thorpe on a carriage ride. "Catherine's feelings ... were in a very unsettled state; divided between regret for the loss of one great pleasure, and the hope of enjoying another, almost its equal in degree, however unlike in kind.... To feel herself slighted by [the Tilneys] was very painful. On the other hand, the delight of [the carriage ride] ... was such a counterpoise of good as might console her for almost any thing."
Austen even sometimes uses numbers to quantify feelings: in "Pride and Prejudice," when her sister Lydia runs off unmarried with Wickham, Elizabeth Bennet worries that her love interest Mr. Darcy's opinion of their family will further decrease, and thus "had she known nothing of Darcy, she could have borne the dread of Lydia's infamy somewhat better. It would have spared her, she thought, one sleepless night out of two."
Non-economists often object that real people surely do not calculate as economists do in complicated mathematical models. But for Austen, calculation is not the least bit unnatural. For example, in "Emma," after Emma and Mr. Knightley reveal the news of their engagement to their friends, they predict together how quickly the news will spread through the town: "they had calculated from the time of its being known ... how soon it would be over Highbury ... with great sagacity."
Austen has several names for strategic thinking, including "foresight" and "penetration." For example, Mr. John Knightley warns Emma that Mr. Elton might be interested in her, but Emma is certain that Mr. Elton is interested in Harriet Smith. Mr. George Knightley had earlier warned Emma that Mr. Elton would never marry Harriet because of her lack of wealth. After Mr. Elton drunkenly proposes to Emma in a carriage, however, Emma admits to herself, "There was no denying that those brothers had penetration."
Game theory assumes that a person thinks strategically about others. However, sometimes a person clearly does not. The conspicuous absence of strategic thinking, what I call "cluelessness," is not something modern game theory tries to explain. But Austen does.
For example, in "Northanger Abbey," General Tilney thinks that Catherine Morland is an heiress and thus invites her to Northanger Abbey to encourage her progress with his son Henry. When General Tilney finds out that Catherine is not wealthy at all, he ritually expels her, sending Catherine home without even a servant to accompany her.
But this move backfires badly: "Henry's indignation on hearing how Catherine had been treated ... had been open and bold ... He felt himself bound as much in honour as in affection to Miss Morland."
General Tilney's action only increases Henry's attachment to Catherine, and his sending Catherine home without an escort provides the perfect excuse for Henry to visit her to see if she arrived home safely. During this visit, Henry proposes.
General Tilney could have foreseen all this if he weren't clueless. He did not think strategically about Henry; he did not consider how Henry would react. "The General, accustomed on every ordinary occasion to give the law in his family, prepared for no reluctance."
What explains General Tilney's lack of strategic thinking, his cluelessness? Austen offers several explanations. One is that high-status people believe that they should not have to enter into the minds of low-status people, and in fact, not doing so is a mark of their higher status.
Thus, when a high-status person interacts with a low-status person, the high-status person has difficulty understanding the low-status person as strategic. This is an advantage that the low-status person can exploit. This can help us understand why, for example, after the U.S. invaded Iraq, the resulting Iraqi insurgency came as a complete surprise to U.S. leaders, even though anyone who puts himself in the shoes of an Iraqi commander would easily see the futility of engaging U.S. forces conventionally.
For a possible example in economics, Clayton Christensen finds that companies that are industry leaders often underestimate the disruptive potential of low-status competitors that start by producing cheap, low-quality goods but gradually improve.
It might be a while before we know how useful game theory is for studying literature in general. After all, game theory was around for 20 to 30 years before economics fully embraced it. In the meantime, I look forward to more conversations between the social sciences and the humanities. Perhaps in the future, the connections between economics and the study of literature will no longer be considered surprising.
Michael Chwe is a professor at University of California, Los Angeles who teaches courses on game theory to graduate and undergraduate students. His books include "Rational Ritual: Culture, Coordination, and Common Knowledge" and now "Jane Austen: Game Theorist.
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