“Together we raise, apart we fall” – good and wise saying. But when it is not so complex to understand & follow and when the dividends are great, why are we still not able to reap the benefits of “we” and stay apart? This is well captured by the game theory – in “Prisoner’s dilemma”. There is an incentive to defect based on one’s insecurity over the decision of the other player.
This does not apply to just individuals and firms. This can be extended to nations too. Take the case of today’s world. What is keeping this ongoing financial crisis to continue? The prime reason, the problem with the asset bubbles and the following credit crunch is inherent to any capitalistic economy and history has seen many such events in the past. Even many economists suggest the solution to be simple – another bubble to be the solution for a burst. (Of course, they didn’t necessarily mean the path for another recession. To take it as a healthy credit growth or a bubble is circumstantial and difficult to demarcate at times. This is a separate discussion altogether. We shall leave it here.) If one observes the overall behavior of the nations, one can feel the growing insecurities of the nations. Then it won’t be too difficult to decipher, this weakness to be at the core of the growing problem.
The trade theories – Smith’s Absolute advantage, Ricardian’s Competitive advantage sounds perfectly logical. Even Adam smith’s Self correcting arm was accepted for centuries. Then why are the economies not adjusting? Remember, all these theories were posed well before the game theories came into existence. Probably they didn’t consider the human (read it as national) psyche and the dominant feeling of “I” over the “We” among the nations.
Ideally the appreciating Yuan should naturally adjust the rising surplus of the China and the consequential unemployment in U.S. And the problem with the Greece and the other PIGS nations could have been easily solved had the nations like Germany, which hugely benefits from the weakness of its neighbours (The trade deficit of the Greece, had it been a sovereign nation with independent monetary policy would have been reduced by the depreciating Drachma. Necessarily, the Euro is kept undervalued by the trade deficit nations and the Germany being part of this monetary Union is enjoying the undervalued Euro posting trade surplus) supports with a loose monetary policies. These exemplifies where the focus of the nations are. It is more inwards than outwards. This also explains the huge for-ex reserves to be maintained by many nations.
Another thing to consider is the movement of resources across boundaries. Here I don’t mean the natural resources. Rather the human resource. This is where the European union has failed where the “United States” of America succeeded. Mobility of humans doesn’t happen just with the needs. Culture, language and lot other forces act as “transaction cost” in movement of labor forces. Despite major policy changes to allow free labor movement, Europe is not able to achieve what U.S had. Though Europe had achieved (to an extent) as a monetary union, it failed as an economic union. This is another impediment to achieve free mobility and perfect markets and the ideal capitalism.
The self-controlling arm is hugely restrained by the government policies, both internal (like wage protection) and external (currency manipulation and trade barriers). If capitalism is at the core of the policies and when “I” gets more preference, how else can we expect the nations to behave? As it goes with the prisoner’s dilemma, nations don’t have enough trust in its trading partners and the government’s are more bothered about the interest of its people and firms.
“All these are well known!! Of course, the governments are meant to be more concerned about its own people rather than its neighbors”. Yeah! True. That is why we need to look at the free market and trade theories under the lens of the human psyche’s manifestation as a nation. Is the modern “Behavioral economics” considering the behavior of the nations or is it stopping with just individuals and firms? Wikipedia explanation doesn’t look encouraging.
