Two men rob a bank. They are arrested by police, but unfortunately for the authorities there is insufficient evidence to prosecute them for a proper sentence, unless one of the criminals dobs the other in. The police separate the men and interrogate them individually. If neither man dobs the other in they will both end up with a maximum six months jail (for a lesser charge). If only one man becomes an informer he will walk free, but the other man will spend ten years in jail. If each man dobs in the other they will both spend five years behind bars. So what they should do? If we look at the situation of one of the men (lets call him ‘Man A’) individually then the rational choice seems obvious: if Man B dobs him in, then Man A will receive a five year sentence, whereas if Man A had remained silent he would have received ten years. If Man A dobs in Man B and Man B remains silent then Man A walks free. In other words, it is a logical, rational and sensible choice to defect (dob in the other man). The problem? It is logical for both men to defect. Therefore they will both spend five years in jail, whereas if they had co-operated they would both experience a far more desirable outcome (just six months in jail).
“What does this have to do with anything?” I hear you ask. This situation can in fact be applied to the now notorious Global Economic Crisis. Many large economies are currently undertaking what is called a protectionist approach to this situation- they are trying to look after their own interests. The USA has adopted a ‘Buy American’ policy (which, among other things, includes a freeze on all car imports in to the country), and many large economies (such as Germany and the UK) are beginning to take similar approaches. In a crisis like we have at the moment these decisions can seem logical, rational and sensible. After all, who doesn’t want to look after themselves? Unfortunately this is not the case. Such protectionist policies could ultimately cause the collapse of many smaller economies- especially in the developing nations of Africa- as well as significantly weaken many medium sized economies (such as Australia’s).
In the long term this policy can only be bad for the USA and its counterparts. These smaller countries will no longer be able to import anywhere near the amount of goods that they do now. Instead they will be reliant on aid- aid which will no doubt come from these large countries. Countries such as our own will also be less equipped to trade on a large scale with these big economies. In the long run this means that these ‘economic powers’ will be without many of the exports that they so heavily rely upon. The consequences of this are potentially huge, and some economists (such as Tasmania’s very own Dr. Richard Eccleston) believe they could be enough to push the world back to the brink of another economic collapse.
It is important to understand that isolation strategies have been tried before. In fact in the Great Recession of the 1930s many nations did adopt this approach, and it only served to lengthen what was an already long and awful time. So instead of implementing these protectionist policies, the large economies of the world need to co-operate with each other, and with the smaller economies, to ensure this crisis doesn’t get worse or go for longer than it already will. Everybody may suffer a little bit at first (or ‘receive a 6 month term’), but they will be better off in the long run (they won’t get a ‘5 year term’). Instead of making what seems to be the logical and sensible choice, countries like the USA and Germany need to make a small sacrifice for the long term good of everybody.
Protectionism sucks.
