Res Politica versus Res Economica

O Tennet

Oct. 9, 2011, 3:26 a.m.

John explanation about nationalism vs bargaining is new (for me), very smart, and certainly a good idea. Thank you John.
But as a former lawyer, my words for China economic policy are : unfair competition.
And I mean that WTO would surely agree to taxes on chinese products.
Unfortunately no one claims for that ! Neither consumers looking for low prices, nor States looking for sales of airplanes, nukes, or ...

Finally, I do not believe that “at the beginning, crude oil prices were fixed by the market” : at that time, Middle east was occupied by british and other foreign troops, and artificially divided in “nations”, to serve the interests of western companies, and to fix a very low price.

Malcolm Payton

Sep. 26, 2011, 3:02 a.m.

I think this is a really interesting and insightful article, but I am not sure I agree with the editorial abstract that suggests,

“our important economic decisions are increasingly being made by politicians (who are not particularly well-schooled in either economics or political science)”
Source: JohnMauldin.com (http://s.tt/13igT)

The way I read it, I think the article argues the opposite - that decisions are being made by politicians who are schooled in economics, but that this is in fact a mistake.  The reason politicians use economic theory is not because it is the correct theory to apply, but because it has a useful set of analytical tools, so appears credible.  They do not use political theory, as they do not know of any robust analytical political tools.

Whether or not you think the suggested political analysis tool (NHS) is ideal, I would suggest that saying the article implies that “our important economic decisions are increasingly being made by politicians…” has this the wrong way round - the article argues not that economic decisions are being made by politicians but, on the contrary, our important political decisions are being made by economists.

Duncan Hume

Sep. 21, 2011, 1:12 p.m.

This paper is a theoretical backdrop for the science of negotiation. There are plenty of people in the US who know how to negotiate and many large industrial concerns have structures to support their negotiations. Problem in the US is that we have not been able to elect politicians that have a vision. If you do not know what you want then negotiating skills are not going to get you anywhere, and if there is another side that has clear objectives (China), then you will lose. America is losing.

DAVID COOPER

Sep. 21, 2011, 8:31 a.m.

Very interesting and useful.  Thank you.

Russ Abbott

Sep. 20, 2011, 11:59 p.m.

This approach suggests that the player who is willing to play chicken wins. If I say that no amount of pie less than 99% is worth anything to me, then assuming the other player isn’t equally crazy, the optimum division will be that I get 99%. Isn’t that what the model says? What then. One is always vulnerable to the threat of mutual destruction from a nihilist. How do you deal with that?

Harry Moser

Sep. 20, 2011, 8:36 p.m.

I agree with John’s analysis and conclusions.  While we work towards those actions, we can improve the trade deficit by aggressively promoting and implementing reshoring.  Boston Consulting Group recently forecast that by 2015 many products would be more economically produced in the U.S. than imported from China.  For the economic trends to have a rapid impact on the behavior of major U.S. companies, however, the companies will have to calculate their total cost of offshoring.  Unfortunately, most companies’ calculations are rudimentary, rather than complete, mainly comparing prices rather than the entire cost of offshoring, as reported by Accenture and Archstone Consulting.  As a result, companies have offshored more than is in their own self interest.
To help these companies make better sourcing decisions the non-profit Reshoring Initiative, www.reshorenow.org, provides for free a Total Cost of Ownership (TCO) software that helps them calculate the real offshoring impact on their P&L.  With clear evidence of the fragility of global supply chains, Chinese and other LLCC (Low Labor Cost Country) wages rising rapidly, the U.S. $ declining and oil soaring, this is the perfect time for U.S. companies to reevaluate their offshoring strategies and bring some of the sourcing home.
Readers can bring back jobs by asking their companies to reevaluate offshoring decisions. Suppliers can use the TCO software to convince their customers to reshore. 
You can reach me at harry.moser@comcast.net.

Martin McCombie

Sep. 20, 2011, 6:59 p.m.

The context for this is interesting. The USA has (and when it can, is) practising the same sort of economic imperialism being railed against here. Witness the ongoing lumber disputes with Canada in which international resolution mechanisms are ignored routinely as an example.
To say that these have been settled in a co-operative way is to ignore reality.

This is not to say that there is no merit to the model, but more than one selective circumstance with an academic solution is needed to prove the efficacy.

Nick Jacobs

Sep. 20, 2011, 3:17 p.m.

This article assumes that people and groups are always motivated by the crassest greed and selfishness (for the math to work, the utility functions have to be strictly monotonic). This is a common character flaw among today’s Americans, but fortunately, it is not universal. For example, Warren Buffett recently wrote an article in the New York Times arguing that people as rich as he is should pay more tax. In other words, he would prefer to have less money so that some other people could have a little more (his utility function for money is not monotonic).

John Rickard

Sep. 20, 2011, 12:59 p.m.

This article provides a layman’s introduction to the mathematics of cooperative games.  The fundamental problem with applying this to real world political/economic decisions is that the utility functions are unknown and thus cannot be quantified.  Assuming some functional form for them is an analytical convenience analogous to assuming a Gaussian distribution for some variable, when in fact its true distribution is unknown.  Furthermore, real-world utilities are always multi-dimensional, and the dimensions are not independent, which further frustrates any attempts to estimate a utility function.  Austrian economists have long recognized that the best one can do is to assign an ordinal ranking to the different possible combinations of dimension values.  However, this does not lead to a nice analytical solution such as maximizing the product of utility values.

Larry Brown

Sep. 20, 2011, 11:55 a.m.

In dealing with China we must remember (at least) three things:

1.  China has a 100 year plan which they will always try to follow.
2.  At its core China has a totalitarian government.
3.  China regards the USA as its MAIN enemy.

These three should always be considered in our dealings with China.