EconAir

There is a story, possibly true, that when the British surrendered to American and French forces at Yorktown, effectively ending British rule of America, someone in the British army sang or played an old English folk song, “The World Turned Upside Down.”    (See https://en.wikipedia.org/wiki/The_World_Turned_Upside_Down ) I think I know how the British felt.   Many of the assumptions economists have made about economic reality and economic policies now seem out-of-date or even reversed. UNITED STATES The Fed fought inflation; now it sets inflation targets when there is no inflation. The Fed worries about deflation even though the major source is a fall in energy and commodity prices. Another source is the fall in the prices of technology products. There is a large increase in the money supply, large government deficits, a large trade deficit, and a large decrease in the unemployment rate. Economic theory and past experience says that there should be an increas

INTRODUCTION For background, see prior post on The Limits of Negotiation . ECONOMIC NEGOTIATIONS Basic game theory works best in economic negotiations.    The players have the same assumptions (act rationally, make money), enter into the negotiations voluntarily and negotiate which positive payoff matrix they will agree on.   Economists usually assume that people are playing a positive sum (win – win) game.   That is, how to divide up the monetary or utility gains. Game theory indicates there is a better chance at cooperation or reaching good faith agreements if the players know they will be playing the game repeatedly or if both players see an advantage to a long-term agreement. Economic rationality implies that an agent will not agree to an outcome if the individual will be worse off than not negotiating.   The alternatives are not to negotiate or find another party with whom to reach a positive or better agreement.   A competitive economy, however im

INTRODUCTION Much of the political news is about negotiations.   American politicians, in both domestic and foreign disputes, don’t seem to know much about negotiation strategy.   Maybe a little applied game theory would help. IS NEGOTIATION POSSIBLE?   The first question is whether or not negotiation is possible or just a waste of time and effort. Negotiations will be fruitless if at least one party believes there are no possible outcomes that are better than not negotiating.   Compromise is impossible.   Fanatics, true believers, proponents of “Victory at any cost” or “Give me victory or give me death” or parties who believe their opponents are evil are not likely to negotiate. Sometimes leaders act to limit their options or those of their followers.   The famous historical example is when Cortes burned his boats that brought him and his men to Mexico.   Returning to Cuba was no longer an option.   Cortes forced his men to make the “credible” commitment to conq

Introduction The United States has been the world’s only superpower since the collapse of the Soviet Union in 1991.   In some ways it is more difficult to manage foreign policy without concentrating on one big rival. The United States is vastly stronger in military strength than any possible coalition of enemy forces.   But since 9/11 we are feeling less secure despite huge military and domestic security expenditures.   Our military and national security expenditures of around $1.1 trillion are greater than the military expenditures of next ten countries combined (and most are allies).   This is a consequence of a professional military, a result of eliminating conscription after the Vietnam War, and the highly technical (capital intensive) nature of American military forces and strategy.   There is almost no national debate on U.S. military interventions in other countries.   One reason is that most Americans have no direct involvement; they see the professional m