Lecture 23

Political Economy

I. Cooperation, Government, and Violence • Cooperation and violence

• Cooperation and public goods • Cooperation and transactions costs (standards) • The role of the state (locus of legitimate violence)

• Global governance when there is no supra-national sovereignty

Arms raceEach side begins with 8. Costs 5 to arm. If one side arms and the other does not, it captures the 8 of the other side, and ends up with (8-3) + 8. If both arm, each ends up with 3 (=8-5). If neither side arms, each ends up with 8. The “payoffs” can be represented in a table as follows? The table lets you see what strategy would be best for each payer conditional upon the actions of the other…

Agent 2 Arm Disarm

Arm

3

3

0

11

Agent 1

Disarm 11

0 8

8

Thus: If Agent 2 arms, the best response of Agent 1 is to Arm If Agent 2 disarms, the best response of Agent 1 is to Arm  If Agent 1 arms, the best response of Agent 2 is to Arm If Agent 1 disarms, the best response of Agent 2 is to Arm

The expected outcome? Both sides arm even though both would be happier if Neither armed. This is an example of the Prisoners’ Dilemma .

Aside: The story behind the Prisoners’ Dilemma game.

Two prisoners are arrested. For lack of evidence, the police can only put them away for 1 year each for some minor offence. If they had some evidence on a major offence then the police could put the prisoners away for an additional 10 years. So, the police make each prisoner the following offer:

– if you squeel on the other prisoner and give us evidence leading to conviction of the other prisoner for the major offence, then we will forget the minor offence.

So: If both Prisoners squeel then they each get put away for 10 years. If one only squeels, then the “squeeler” walks free while the “sucker” gets 11 years. If neither squeels then they get one year each.

Will they squeel?Will the outcome depend on whether the players play at the same time of if oneobserves the actions of the other before playing?

Two more examples of the Prisoners’ Dilemma game:

I. Aid and Adjustment: the role of Aid Conditionality.A similar game is played if countries do not like adjusting their policies and ceteris paribus, the World Bank does not like giving loans. It may be the case that both parties would be happier if there were loans and the country adjusts, but the logic of the game may result in no loans and no adjustment.

Government Don’t Adjust Policies Adjust Policies World Bank

Don’t Give Loan

0

0

-10

20

Give Loan 20

-10 10

10

Note that this outcome does not depend on who moves first – that is, it does not matter whether the World Bank has to give the loan before or after the country adjusts. What would provide a (happy) solution to the game is if one party is able to commit credibly to some conditional action. For example if the World Bank can commit to giving a loan conditional upon a country implementing adjustment, or, if the country could credibly commit to adjust given that the World Bank gives them a loan.

II Sharing an the costs of providing a public good: an irrigation project on neighboring farms. If nobody invests, they each earn 3. If anyone invests, the cost is 5, the return to each party is 4. Therefore, the private return is –1, the social return is 3. If both invest, the cost is 5, the return to each is 8.

Agent 2 Don’t Invest Invest

Don’t Invest

3

3

2

7

Agent 1

Invest 7

2 6

6

Note: This is also a Prisoners’ Dilemma game and the expected outcome is that neither party invests even though it would be better for all if all parties invest. If instead the return to each party when one party invests were 6, then this game would be strategically like a game of Chicken (like the car game). In a game of Chicken, even though it is in each person’s interest to invest (“swerve”) if the other does not, each would rather not invest and for the other player to invest instead.

Agent 2 Project 1 Project 2

Project 1

1

1

0

0

Agent 1

Project 2 0

0 1

1

 • Metric versus Imperial measurements• What side of the road to drive on• Daylight saving time• VHS versus Betamax

The coordination of expectations

II. Democracy and Development • The problems of limited government and the rule of law:

• Constitutionalism, Individual Rights, and Democracy • Effects of Democracy on human well-being: stability,

internal violence, economic development • development (rule of law vs. democracy?)

• Causes of Democracy. Barro’s results: economics, health,   gender inequality

• Is there a “Third Wave”?

III. The Risks and Reasons for State Collapse • CIA Task Force on State Failure:

• Openness, Democracy, Infant Mortality as key predictors

IV. International Institutions 

The Role of International Cooperative Regimes 

The United Nations and National Sovereignty

IMF: Initially 29 members, now 183 members

WB: Initially 38 members, now 183 members

GATT/WTO: 23 countries in first trade round, now 142 members

Source: Maddison

Western Europe

Western Offshoots

Latin America

Asia & Oceania

Africa World

1820 1292 1205 679 550 450 651 1929 4385 6653 1832 858 660 1806 1998 17921 26146 5795 3565 1368 5709 1998/1929 4.1 3.9 3.2 4.2 2.1 3.2

Per Capita GNP, 1990 International Dollars

Can the World Solve the “Economic Problem”?

Can the World Solve the “Economic Problem”?

Life Expectancy at Birth, 1970-75

Life Expectancy at Birth, 1995-2000

Infant Mortality Rate, 1970

Infant Mortality Rate, 1998

Least Developed Countries

44.2 51.6 150 104

Low-Income

54.6 63.1 114 72

Medium-Income

64.2 68.6 82 34

High-Income

72.0 77.7 21 6

Keynes on Marshall, Essays in Biography