Economics, War, Peace and Games-playing

War and peace as an economic problem Over $1 trillion spent on the military in 2004 – about 2.6% of world GDP). (SIPRI) War disastrous for economic and human development: –Destruction of property and infrastructure –Huge numbers of refugees and displaced persons – cut off from land, work, education, etc. –Loss of investment, tourism, etc. –Appropriation of resources by warring parties War also has economic causes. But economics of conflict, defence, peace, security, a marginal branch of economics. Military spending data: Stockholm International Peace Research Institute,

A resource allocation problem Neo-classical economics deals with rational economic (wo)man – war often seen as a failure of rationality: insane dictators, ancient ethnic hatreds, etc. But armed conflict can be seen in terms of most basic idea of economics: allocation of scarce resources. Two ways of obtaining resources: –Production and exchange –Fighting Production or Predation (Hirshleiffer, 2001) History suggests second highly significant – but economics concentrates almost entirely on first. Also can apply to crime, political/industrial conflict, etc. Jack Hirshleiffer, The Dark Side of the Force: Economic Foundations of Conflict Theory, CUP, 2001.

The Production vs Predation choice Nations, individuals, groups have choice of allocating resources to productive activities, or to predatory activities (or defence against such). Each choice involves an opportunity cost Civil war far more common in poor and economically stagnant countries: lower opportunity cost for engaging in conflictual activities. Strong link between unemployment and crime: unemployed have more time available, less to lose if caught. Choices (e.g. for nations) interdependent: what I do affects my neighbours choices, and vice versa. Resources devoted to predatory activity reduce total available to everyone – so leads to pareto inefficiency.

Conflict and interaction : game theory Analysis of conflict, military spending, arms races etc. frequently makes use of Game Theory – also used for study of oligopolistic markets Common feature: each party must make decisions taking into account the likely responses of others. Prisoners Dilemma model widely used to model arms races, and oligopoly pricing decisions. Two prisoners interrogated separately: if both remain silent, only enough evidence for lesser charge: 2 years in prison each. If one confesses, other is silent, good prisoner gets 1 year, other one gets 5 years. Both confess: each get 3 years.

Prisoners Dilemma Choice for A: if B talks, then A can talk and get 3 years, or stay silent and get 5. So better to talk. If B stays silent, A can talk and get 1 year, or stay silent and get 2. So better to talk. So either way better to talk! Same for B. But both would be better off if they stayed silent. Prisoner A Prisoner B Silent Talk Silent (2,2)(5,1) (1,5)(3,3)

Applications of PD Oligopoly: firms face choice of collusion or competition – maintaining high prices (stay silent), or price war (talk). Incentive to choose low, to gain competitive advantage, or not to lose out, though both do better with high prices. Rival nations may choose high levels of armaments (talk) or low (stay silent). Incentive to choose high arms to gain miltary advantage, or not to fall behind, though both do better with low arms. A lot of study of repeated game – if interactions are repeated, players may choose to co-operate rather than defect – potential for reward/punishment strategies, etc. (E.g. Axelrod (1985)). Robert Axelrod, The Evolution of Co-operation, Basic Books, 1985.

Games in the classroom Prisoners Dilemma easy to simulate, fun, and (I find) educational. Give each student a number of counters. Keep a large reserve. Each student finds a partner. On count of 3, each player shows the other either an open hand (co- operate) or a fist (defect). If you show a fist, you get to take a counter from your partner. If you show an open hand, your partner gets to take a counter from the pool. Effects add up. (e.g. two fists cancel out). Two versions: change partner each round, same partner for large number of rounds.

Production vs Predation game Each player has ten counters to play with. Each round, each player places counters into one of two piles: Production and Acquisition. (At least one in each). Total counters in production piles for both (all) players gives total output. Each players Acquisition total determines their share of the output, used to give score. (Need calculators!) E.g. Player A puts 3 in Acquisition pile, player B puts 1. Total output is 16. Player A gets ¾, or 12, B gets 4. Open to many variations. (E.g., 2 or more players; single or repeated interactions; unequal resources; scores from each round available for future production/predation or just banked).