On December 5, 1994, Nash travels to Stockholm to receive the Nobel Prize. At the same time, Vice-President Al Gore is announcing the opening of “the greatest auction ever”: an FCC-run auction for airwave spectrums, which CEOs of American communications conglomerates are bidding for, in order to license cellular phone services. This auction was designed by young economists who used tools that the game theorists Nash, Harsanyi, and Selten had created for analyzing rivalry and cooperation among players. Though economics had long been dominated by Adam Smith’s metaphor of the “invisible hand”—the idea that individualism shapes competition—game theory provided a way of understanding a new world, one in which economies are shaped by a handful of key players: private businesses, big government, and foreign investment.
Game theory helped the American government to auction off airwave spectrums, which were becoming important resources as the telecommunications industry expanded and cellular phones were invented. Though Nash’s innovations in game theory could seem arcane or complicated on paper, they were vital to the development of the American telecommunications sector. Nash’s genius—his “beautiful mind”—had a truly widespread reach, beyond the limits of the mathematical community.
Today, game theory is used to study and implement policy, the sale of government-controlled public resources, and auctions by government, including the FCC auction. Traditional auction formats would have been inadequate for the FCC auction, since the value of each individual airwaves license was dependent on what other licenses the users are able to purchase. Game theory—including the Nash equilibrium—helped the government to ensure that licenses could be purchased by corporations that could use them best. By late spring 1995, Washington had raised more than $10 billion from a series of spectrum auctions.
In the penultimate chapter of A Beautiful Mind, Nasar shows why game theory is important today, tying together Nash’s momentous Nobel Prize victory and developments in modern American economics.