Nov. 16
Wednesday, November 16, 2022
17:07
Prisoners’ Dilemma:
- Rational choices by individuals can lead to socially suboptimal outcome
- There is a difference between what is good for the actor, and what is good for society as a whole
Financial Crisis
Possible strategies:
- Protect domestic market: building a financial policy wall
○ Protectionism: tariffs, subsidies
○ Devalue currency (move competitive exports)
○ Less access to foreign borrowers
- Beggar-thy-neighbour (Adam Smith)
○ Beneficial if only one country is adapting this strategy
- Strategic choice: protectionism/openness
B: Openness (C) B: Protectionism (D)
A: Openness (C)
3, 3
1, 4
A: Protectionism (D)
4, 1
2, 2
Kindleberger’s Spiral - decline in world trade 1929-1933
- Countries become more protectionists as time went by
○ This made many countries worse off during the Great Depression than better
Solutions to Prisoners’ Dilemma:
Hegemonic Stability Theory (Charles Kindleberger)
- If someone can force us to corporate, then we can escape DD (defect, defect)
- A hegemon can:
○ Prevent “bagger thy neighbour” policies
○ Coordinate and enforce rules
○ Maintain an open market
○ Lender of last resort (last person to lend resources when others can no long do so)
- Hegemon -> stability
- No hegemon -> volatility and more crisis
Can Hegemonic Stability Theory explain climate change?
Policy Reform:
- Preventing disasters and mitigating the effects of crises almost always requires changes to the status quo
Recognition -> Prioritization -> Mobilization
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Problem of exponential growth
The paradox of preparedness
The J-curve
Moral Hazard
Greed
Bad ideas?
Problem of Exponential Growth:
- Ex. Consumption, population, pollution, pandemic
- By the time you can justify the problem, it is already too late
- Hard to mobilize political capital in time
- Thomas Malthus
○ Population grows exponentially, while the production of food is increasing linearly
§ The point where population is higher than food production, it is a time of crisis
○ Neo Malthusianism: fear that population growth will lead to ecological catastrophe
§ Is the problem population or inequality and poverty?
§ Is the problem population or is the problem consumption?
§ Defining the ‘problem’ affects our choice of acceptable solutions
§ How to assess failed predictions? Was Malthus completely wrong?
○ A Modest Proposal (1729):
§ Poor people will cook their child for food ???
§ “A young healthy child well nursed, is, at a year old, a most delicious nourishing and wholesome food
whether stewed, roasted, baked, or boiled, and I make no doubt that it will equally serve in a fricassee, or
ragout.”
The Paradox of Preparedness:
- The more prepared we are, the less the probability to see the actual disaster; in hindsight, we would think there is no
point to prepare and would think is an overreaction
○ Often halt politicians to prepare because they would not get any critique
- Politicians would rather act when a problem occurs than to prepare before to avoid public critique
The J-Curve and Challenge of Policy Reform
- To achieve a better status quo, the first step is painful
- Ex. To build more subway stations, we will have traffic jams before the construction is complete
- The more time spent at the valley of death, the more the public will press the government to question why moving to
the new status quo; will return to the original status quo
○ Policy reversal requests by the public
- Successful Reform:
Depends on:
○ The shape of the J curve (short term cost/long term gain, time)
○ The type and strength of political institutions
Moral Hazard:
- Occurs when actors have incentives to increase their exposure to risk because they will not pay the cost of failure
- Ex. Fully covered insurance for a rental car -> you would treat this car very poorly, not like how you treat your own car
- Anything that generate an insurance could have an underlying moral hazard
- With an insurance, people will not react sustainably, and therefore, carelessly, assuming that they are insured
- Greed: A Deadly Sin?
○ Can society operate without greed? Especially in a capitalist society?
○ How can we include greed (and other human behaviours) into our models?
§ When greed is out of control, it will result in crisis
○ What institutions can we design in order to police greed?
○ Is there a connection between greed and power?
§ Those who are in power, are the ones who are greedy