Imprisoned by fear, mistrust, self-interest

The inability of the international community to develop meaningful solutions to global issues is largely attributable to a conundrum known as the "prisoner's dilemma", suggests Peter Lyons.

Following an inconclusive G20 Summit, he looks at the economic implications of the theory.

Yet again, a sad conundrum plays out on the international stage.

The G20 summit ended last week with no useful consensus to tackle the critical economic imbalances in the world economy.

The conundrum is called the "prisoner's dilemma".

This dilemma has been a destructive feature of human existence since early civilisation.

The prisoner's dilemma refers to a situation in which people (or firms or countries) are unsure about the intentions of others.

For this reason, they act in their own self-interest. As a result, everyone ends up worse off.

In the current global situation, there is huge mistrust, particularly between developing nations such as China and developed countries such as the United States, Japan and those of Europe.

The Chinese are being accused of deliberately keeping the value of their currency low against the United States dollar to give their exporters an unfair advantage.

They are accusing the United States and other nations of printing money to push down their own exchange rates.

The quantitative easing by the Federal Reserve also reduces the value of the huge Chinese holdings of dollar-denominated debt.

This atmosphere of mutual suspicion and understated hostility is a classic feature of the prisoner's dilemma.

The worst-case outcome would be for the international economy to sink into a morass of protectionism, competitive devaluations and debt defaults.

The impact on unemployment and living standards here and abroad could be horrific.

This was a key feature of the 1930s depression.

It transformed what was potentially a nasty recession into a deep depression that only ended with the outbreak of World War 2.

History clearly shows that economic turmoil easily degenerates into political extremism and armed conflict.

The prisoner's dilemma was formally framed by Merrill Flood and Melvin Dresher in 1950.

 

It is part of the body of economic literature known as "game theory".

It provides a fascinating insight into aspects of human behaviour in a variety of contexts.

The inability of the international community to develop meaningful solutions to such issues as global warming, refugees and armed conflict within and between nations is largely attributable to the prisoner's dilemma.

Each country is wary of the intentions and goodwill of others. Each is therefore unwilling to be the first to implement meaningful policy in the international arena.

The end result is policy inertia and pointless talkfests.

The prisoner's dilemma appears to prevail when the dominant world power is unable or unwilling to provide the necessary leadership.

There is ample evidence of this trend throughout history.

The Roman Empire provided the rule of law, infrastructure and property rights that led to a lengthy period of relative prosperity for much of Western Europe until its final disintegration in the 5th century.

Subsequent European history has been a bloody affair of competition between states, fiefdoms, rulers and church.

The postwar period has been remarkable in Europe for its level of co-operation, peace and prosperity.

Here lies a glimmer of hope for the international community.

Great Britain was the hegemonic power in the 19th century, with the most powerful navy in the world.

It promoted free trade and a stable international monetary system. This contributed to a surge in global prosperity. This system disintegrated during World War 1.

Currently, the United States is mired in a lengthy economic crisis, with unemployment nudging 10%.

President Obama appears hamstrung in his attempts to reignite the economy, particularly through fiscal stimulus.

This is the likely reason for the Federal Reserve embarking on a new round of quantitative easing. So back to the prisoner's dilemma.

The superstructure of the international economy represented by such organisations as the IMF, World Bank and WTO appears very fragile in the face of national self-interest.

The United States as the current world hegemonic power is unable to provide the necessary leadership.

There are no easy solutions to this conundrum of the international environment.

What it does highlight is that accepted economic theory such as free trade and sound money policies goes out the window in the face of the human instinct for tribalism.

Tribalism and group identification are the product of evolutionary traits shaped over millennia of human development.

The only slender hope of mitigating this effect is education so more people are aware of the destructive effects of the prisoner's dilemma.

There is urgent need for international co-operation. The alternatives are too bleak.

Peter Lyons teaches economics in Auckland and has authored several economics texts.

 

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