ABSTRACT
In the previous chapter, we witnessed the contradiction inherent in standard noncooperative game theory – namely, that it started out as science of strategic interaction and has largely gotten stuck in the province of a science of parametric in(ter)dependence. This critical appraisal was not meant to minimize the contribution of game theory to economics, or to social science in general. Although it might not in the end be the “DNA of society,” as Roger Myerson has presented Nash-equilibrium rationality, it has nevertheless uncovered an important “hidden truth” of neoclassical theory: individual instrumental rationality cannot be anything but strategic; pessimistic liberalism, as the moral and political doctrine underlying most of modern economics, cannot assume anything less than a purposeful, calculating desire of people to get their way by making use of their environment, and this includes using other people’s characteristics, including their rationality and their reaction patterns. We discovered that what makes agents in many models act as if they were parametrically rational is the fact that these models assume their environment to be parametric. This is, as we saw, the essence of the neoclassical view of a system’s equilibrium, expressed by the independent-agent approximation and the idea that non-equilibrium actions are invisible to the Eye of Reason. In older neoclassical economics, this parameterization of agents’ environments was achieved by assumptions of perfect competition in prices or quantities. In more sophisticated neoclassical approaches, to which noncooperative game theory can be argued to belong (and which has given new life to approaches in terms of “imperfect” competition and/or information), the parameterization is done through the joint assumptions of perfect knowledge of the game situation (strategic or extensive form) and of common knowledge of rationality.
