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The International Economic Policy Game

All human interaction is characterized by a mixture of competition and cooperation, and that extends to international trade and monetary policy. Which approach is preferable depends on the context, including what the other players are doing.

TOKYO – Until relatively recently, specialists in international relations had little interest in game theory; some were even “frightened” to hear the term, as the chair of one of my presentations put it to me several years ago. Today, many are better informed about the strategic analysis of political actors’ behavior and decision-making. The relevance of such analysis for economic policymaking is no less obvious: each player on the world stage is not acting independently, but rather considers other players’ possible reactions to his or her action.

All human interaction is characterized by a mixture of competition and cooperation. Competition among individuals, businesses, and countries advances human welfare by creating incentives to work hard, innovate, and excel. Cooperation does so by harnessing the strengths of different actors to drive progress toward shared objectives. Which approach is preferable depends on the context, including what the other players are doing.

The mathematical foundations for analyzing both cooperative and non-cooperative interactions among rational agents were developed by the late Nobel laureate John Nash. When there are a large number of participants, and none has a monopoly on power, non-cooperative behavior by many actors can lead to optimal performance. In trade, for example, free competition among economic agents can produce “Pareto efficiency”: resources are allocated in such a way that any reallocation to benefit one actor would hurt at least one other actor.

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