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I’m a proponent of the value of free markets and their ability to enrich people. The problem is that the free market only works in a closed system, in other words a free market is not favored when intersecting with markets which are being manipulated. The issue of how to compensate for intersecting our supposedly free market with other markets which impose duties and protective tariffs on imported good led me to think of the Prisoner’s dilemma from game theory.
Briefly, the prisoner’s dilemma is a situation where the results of your actions will vary depending on the actions of others over whom you have no control. If one market imposes tariffs and the other does not the market with tariffs benefits at the expense of the other market. If both markets impose tariffs then the playing field is level, but both are worse off than if neither of them impose tariffs.
Thankfully there may be a solution to the problem by studying the prisoners dilemma. Our economic interactions specifically resemble a specific form of the prisoner’s dilemma called The iterated prisoner’s dilemma. Under this specific variation the interactions are repeated so that the participants have a history of interactions. In a competition of computerized players the winning algorithm was one called “tit for tat” (later improved versions have been classed as “tit for tat with forgiveness”). This kind of a strategy encourages others to play nice without simply being a doormat for those who wish to use tariffs.
Does this sound like it would work in international economics?
5 replies on “Free Marketer’s Dilemma”
True free market proponents would disagree. They would suggest (and present copious data as backup) that tarriffs actually harm the nations that impose the tarriffs. It may not look that way in the short run, but they say it works like that in the long run.
I agree with the free market proponents that protective tariffs hurt the nations that impose them in the long run. The thing is, most people don’t think of the long run. In the short run those nations collect the fees from tariffs and protect their local economy from level competition. If there was a way to make the short term payoffs for those nations less apparent then they might wise up and drop the tariffs (wishful thinking in most cases – I know).
It is important for the free market advocates to acknowledge that paying lip-service to the ideas of free markets does not mean that we really have free markets and that even if our own market is free it does not make us immune from the disadvantages of manipulated markets that we interact with.
Most libertarian leaning economists will tell you that the actual cost to the free market nations that refuse to implement protective tariffs is nothing compared to what they gain. If we respond to tariffs by implementing our own, we are cutting off our nose to spite our face. Check out http://cafehayek.typepad.com/hayek/2007/11/we-wont-stop-ma.html and http://cafehayek.typepad.com/hayek/2007/03/paper_principle.html for example.
Thanks. I’ll go have a look at those links.
I really liked the second link. After reading that I have to say that we have nothing to gain by a “tit for tat” approach. Even if other nations subsidize their industries to compete with our market that just means that we have the option for cheaper goods if they can price things below what we are able to achieve.
The only place that doesn’t really apply would be national security goods such as military technologies where it is better to pay more to keep those technologies in-house.
That pretty well ends this question for me.