John Nash Equilibrium & G 20 Meeting

T. C. A. Srinivasa-Raghavan has article in the Business Line, as usual his writings are interesting and informative except few other times. 

For a young economics learns like me is really fascinating to read this article simple and to the point but of course much has been said other side also. Particularly the notable are: 

“The most important of these men is John Nash, a mathematician, whose work was first adopted and then extensively adapted by economists. In 1951, extending work done earlier, Nash made what now seems like a simple point — but which required some heavy-duty maths. 

This was that when several people (or nations), who intrinsically believe that they gain only at each other’s expense, chose to cooperate their cooperation will continue only for as long as one of them does not begin to think that he or it will gain more by not cooperating. This came to be known as the Nash Equilibrium, for which he received the economics ‘Nobel’ in 1994. 

It consists of being able to devise a strategy or set of strategies where no one player has the incentive to unilaterally change his own strategy. Also, a key requirement for cooperation is that everyone must know the other participants’ strategy or strategies.

But this knowledge, which is so essential for cooperation, also leads to another question which each player would eventually ask himself: Now that I know what the others will and will not do, will I gain by breaking the rules? If the answer is yes for even the most miniscule change in a player’s strategy, that player will change his or her strategy. We see this happening everyday, everywhere. The key point about this was not that there will never be any cooperation but that it would break down very soon. 

What’s worse, such abandonment would necessarily take place because, by definition, cooperation yields less than the maximum possible payoffs for each individual player. So even if they maximise the collective payoff, individually there is always an incentive to break ranks, either singly or in a sub-group. We see this happening all the time, as well. Constituents of ruling coalitions nearing an election provide an excellent example.

There is another reason that militates against long-duration cooperation: For the system to work, cooperation has to be voluntary and self-enforcing. The practical problem begins with the obverse of this, namely, that for continued cooperation there must be an external enforcer. 

But now that even that system is close to breaking point, the trillion-dollar question before the world now is whether the US can (should) continue to be the enforcer or does it need to be replaced? All the talk about ‘democratising’ the Bretton Woods institutions is just this: How to replace the US or at least reduce its power. 

But even if it is desirable to do so — and I don’t think it is because the US remains the country with the most power, both militarily and in terms of knowledge and the two will combine to produce economic power — who will take over? China? Japan? India? Korea? Haiti? Since the others can’t agree on who they want to be the enforcer, they are canvassing collective decision-making. But that, as we all know, is as good as having no enforcer”.  

India and the G-20 Washington summit

Yele University Professor T.N. Srinivasan suggests some of the following ideas that India may consider in the forthcoming Group of 20 Countries meeting on the issues of present financial crisis.

• The most important reforms in my view would be first to restrict the mandate by the IMF to maintaining the stability of the global financial system with the definition of the financial broadened to include the fiscal, monetary and exchange policies as well as global markets for trading financial claims. The involvement of the IMF in the largely domestic policies of its developing country members which have no cross-border externalities through its insistence of the Poverty Reduction Strategy Papers from those seeking its assistance should be stopped forthwith. India should strongly advocate both these reforms. 
• It is likely that the summiteers may not be able to resist pressures to discuss regulatory reform and, in particular, the boundary between regulation and markets. Such a discussion can be meaningful only after we have an adequate analysis and understanding of the relative contribution of failures of each to the current crisis. In its absence, I would urge India not to take an ideological posture on the issue but to simply emphasise that it would be counterproductive to suggest a “one size fits all approach.” Instead, the search should be for a solution that leaves adequate and appropriate room for markets and regulation. Another reform issue that should be postponed for a later occasion is the reform of the World Bank. It certainly is in need of a significant downsizing and restriction of its engagement through its lending and free policy advice only to those countries for which external resource and policy making capacity are serious constraints on development. There is no rationale any longer for the Bank to be lending, for example, to Brazil, China or India. All three should be charged a fee for the Bank’s advice if they seek it.