Wednesday, April 20, 2005

Does Bush really hate Supranationalism?

Bush imposes huge steel tariffs, gives record farm subsidies, breaks the ABM treaty, circumvents the UN on Iraq, nominates a UN-basher as his ambassador to it, shoots down Kyoto and the ICC. He must have it in for the new world order.

Not so fast. Perhaps he and his team trying to teach the world textbook game theory.

There is no world government. National sovereigns are the highest level of organization which can coerce (using the economics definition of the term). Multilateral and supranational treaties and organizations operate under the premise of persuasion via voluntary participation. To plagiarize NYU professor Israel Kirschner, they "don't have the guns." The only way someone can be forced to abide by rules of these organizations is if powerful sovereigns voluntarily enforce them. Even NATO doesn't have a standing army of its own; forces are contributed voluntarily by member nations. Underpinning these supras, then, is the elegantly simple premise that those who participate agree with the rules; those who don't agree don't participate. This is critical because supras don't have a US-style system of checks-and-balances. Instead, they rely on this game theory-based equivalent which allows participating nations to exert their own persuasion (not coercion) through their participation. In line with game theory, there is no attempt at equality here. As game theory asserts, there should be no presumption that equality is optimal. Rather, the strength of each nation's persuasion should be commensurate with the net present value of all future contributions they can make, PLUS the (absolute value of the deeply negative) net present value of the damage they can cause by opting out.

    Consider the hypothetical Organization of Pig Excrement Countries where we have:
  • Cacastan and Crapola: big producers of excrement and and equally big consumers
  • The Poo: loves excrement, but can't make any
  • Dutyland: Full of crap but with a low tolerance for the stuff
  • Bovinia: Bullshit only please
  • Fartville: Doesn't give a shit
Bovinia and Fartville may be the biggest countries on the planet, with standing armies of 100 million souls each, but they have an NPV of zero to OPEC because they have nothing to contribute (or withold) and nothing to lose (or gain) when it comes to the lucrative pig excrement trade. As our logic gets more sophisticated, this will change, but for now Dutyland has a big positive NPV to OPEC since they make a ton of the stuff. The Poo doesn't contribute much, but, were they to strike a side agreement with a big producer, OPEC would be up shit creek without a paddle. Thus, they carry the potential for a big (negative) NPV. But Cacastan and Crapola are in the best position. They have two "levers" to play with: supply and demand. Thus, they are the kings of OPEC. Their desires carry a lot of weight and, where enforcement is needed, they have to step in. The rest could gang up on them, but they'd have to act as one to counterbalance these two shit superpowers.

If we move to a higher level game theory, we must consider the fact that Dutyland has only have one source of persuasion: restricting production. If we were to add probability math to our game theory computations, we might recognize that restricting production hurts themselves more than it hurts the rest of the world, and thus we would factor into our calculations the scant likelihood that they would use that lever. This would reduce their overall NPV to OPEC and thus their strength in the organization. On the other hand, if they were able to re-direct their resources into the equally lucrative pork chop industry, they might have very little to lose by restricting pig excrement production. This would give them a bigger sway in OPEC.

Enough of that crass example. How does pig crap relate to Bushcrap? The Bush administration's behavior relating to supras may appear disturbingly brash and erratic when viewed through the prism of European come-alongism and stagnation (see my earlier article on inaction). However, when viewed as a game theorist, Bush seems quite savvy and painstakingly consistent. At each turn, he reminds the other members of these supras that the US has the right not to participate. As game theory dictates, each member must anticipate the actions of the other members and design their own strategy for playing the game. As each member makes a move, the other members must re-engineer their strategy. Inherent in these strategies must be a recognition of the NPV each member carries, and thus the power they wield. If the US deems that we have more to lose than we gain with Kyoto, it is entirely rational (in fact expected) that we will opt out. This doesn't mean the other members can't carry on. It just means that they will have to re-design the thing before we feel that, on balance, it is in our interest to sign up. Those like Haiti with very little to contribute or gain from the treaty appropriately have very little say in how the thing is crafted.

So, does Bush hate the supras? Is he singlemindedly trying to kill them off in favor of a unilateralist world? Nope. He loves them. He's just playing the game!

Wednesday, April 06, 2005

FOLLOW UP: Chinese Growth - Who's afraid of the big bad wolf?

By now, it's cliche to say how great China is. You won't be off the plane an hour before you hear that this is Asia's century. And, having recently returned from there, I can concur that the progress, the development, the overall civility there is spectacular. However, I can also confirm what I said 2 years ago before I had visited. Their miracle is going from communist-agrarian to capitalist-urban in 50 years, but it'll be nothing short of a second miracle if they can clean up the mess they've made in less than another 50 years. Specifically:

  • They have set up an industrial complex which consumes their (and others') natural resources at such a rate that they'll be devoid of economically-viable resources within 50 years. They must make friends with nuclear power, non-petroleum plastics, hybrid vehicles, and RECYCLING.
  • Which segues into the next issue: pollution. There must be about 500 trillion pieces of trash on the ground in that country. With a population of 2 billion, I calculate that it will take half of 'em exactly 50 years to pick it all up. Meanwhile, the other half of the population can start straining the crap out of their water supply. At the same time, of course, they're going to start facing the health problems caused by their decadence. Hey you stock-chasers: listen up: buy pharma stocks, buy Gilette. These folks are gonna need lots of Kleenex! Ah-choo.
  • And while we're talking about the population, we might throw in the ridiculously low productivity figure. The population has to be educated, outfitted with new technologies, and taught how to work in a profit-incentivized capitalist structure. This is a generational change, not a 5-year plan.
  • The allocation of capital has been entirely and cronyistic. As such, past and present investments are quite likely to crash and burn. Projects with obviously negative ROIs continue to get money tossed at them while entrepreneurs are trying to get water from stones. Existing investments need to be reviewed and new investment methodology must be totally revamped. How do you say "risk adjusted return on capital" in Mandarin?

FOLLOW UP #2: You've heard of the Illuminati, right?

Six months ago, I singled out one of the 'illuminati' for particular criticism. In the last week, he has been relieved of his job, pushed off his board (and, surely, others will follow), and thrown to the proverbial magnate-curb. As I said before, the roaches can only survive in the dark. Turn on the light and they scurry. Poor Ace Greenberg just had a hitch in his getalong and couldn't scurry fast enough. If you ever need an affirmation that perfect information is contributory to perfect capitalism (which, IMHO, is the economic ideal), here you have it!