There’s little doubt that there’s one mathematical theory that seems perfect for analysing Britain leaving the European Union and that’s Game Theory. Or more specifically will the UK get a good or bad deal at the expiration of Article 50.
As per usual in politics there are two opposite views which can be used to look at a solution. Those who wish to leave argue that in the end, Europe need us more than we need them so there was always going to be a good deal offered. On the opposing side the ‘remainers’ point to the fact that there are huge political considerations which this ignores, anything which looks beneficial could lead to the gradual dissolution of the Union as others leave. We all probably have our own opinions on who is right about this. However in order to properly analyse the situation, economist needs you to put these aside and analyse the situation by proxy from a distance.
If you look at this from an economist point of view, game theory looks perfect for analysing the possible outcomes. It’s a branch of economics (or perhaps mathematics) which was created by John Nash, the Nobel prize winner. If you’re not familiar with the story, seek out the film – The Beautiful Mind, it’s well worth watching. John Nash was the first person to create a formal method of determining logical outcomes when two or more parties are playing a game.
The method relies on the fact that all parties have access to full access to the decision making process and can adopt various strategies in order to improve their position. In the film John Nash, demonstrates the optimum strategy of attracting a beautiful blonde girl in the bar they are drinking in.
Does it work? In some senses that’s actually unimportant, as applying game theory actually is quite useful in analysing the situation. Leaving the EU is actually perfectly suited to using Game Theory, two players with a range of strategies and possible outcomes. The game can be summarized down to the Eu’s strategies – give the UK a good deal or give the UK a bad deal. The UK’s strategies however are best simplified to accepting or rejecting the proffered deal.
Obviously the reality is much more complex than this very simple framework. There are lots of sub-options available to both sides potentially but in order to use Game Theory effectively you have to keep the framework simple.
Without going into the complexities, Game Theory suggests that the European Union would be best to offer a good deal, and the UK would do best to accept it. It does require concessions on both sides, in order to reach this’best case’ scenario.
Unfortunately as soon as you introduce politics into the ‘game’ the solution looks much less simple. The problem is that the economic and political costs need to equal each in order for the calculations to be made. However this is clearly not the case, and you could argue that there are actually more than two sides as the ruling party seems to argue among themselves over the solution. There is an optimum solution in there somewhere, but it relies on minimal political issues and two sides who are equally matched. It is clearly the case that neither of these are true.
The reality is there is a huge in balance and even if you ‘play the game’ from the perspective of the UK having no control it’s still difficult to predict. There are lots of other potions available which in reality will affect the endgame. After all some could argue that the UK could even cancel Article 50 and stay in the European Union.
Biased writer warning – my preferred option was suggested by an article I read somewhere that it would go to the wire but Europe would at the final step offer the UK a ‘great deal’ to stay in the European Union. Whether that’s just the biased dreaming expectations of an aging remainer who want’s to stay, only time will tell.
One of the other advantages of using Game Theory is it can be used to develop strategies for getting your desired objective. There are so many permutations it can get complicated, and I will add perhaps a simple summary to this post using my new video software – it’s actually a sales video creator but it looks perfect for adding a few tables of combination permutations.
Again the problem is that to use the theory you have to put in scores about possible outcomes for both sides. It’s a testimony into how complex this situation becomes very quickly in that ‘remainers’ and ‘leavers’ will offer completely different likelihoods of almost all the possible outcomes.
The most effective strategies work on moving the equilibrium situation of the negotiations. It’s a vitally important concept as it effects completely how each side plays the game. For example if the equilibrium situation involves the EU offering a reasonable deal and the UK leaving then both sides can probably benefit from this situation. However if you look at the political situation in the UK, it’s very easy to imagine now an equilibrium point where the UK decides to not bother and stay in the UK. To achieve this one reading is for the EU to use a strategy of offering very poor deals where both sides are much worse off and in the event leaving is cancelled.
Of course, this might not be economically disastrous but it could well be politically so for one of the negotiators – the Conservative party.
Is all that clearer, no I didn’t think so!