The Nash Equilibrium and the Economy: The Never Got It

In contrast to Brussels that shut down its infrastructure under the threat of a possible ISIS terrorist attack, Israeli infrastructure accounts for possible terrorist attacks so that an attack will not shut down services. Israel is in a perpetual state of war. This mindset creates a “life goes on” attitude that is prevalent, regardless of events. While the mindset influences the social, political, and operational infrastructures, it paradoxically does not influence the Israeli economic infrastructure.

The Nash Equilibrium, which is a subset of game theory, is a set of strategies (including decisions and behaviors) that are rationally optimal given every other player’s optimal strategy. Every player knows the strategy of the other players and each player feels that it cannot gain from unilaterally changing strategy. It requires that all players know the rules of the game and understand the utility function. Imagine a narrow, two-way dirt road. Drivers on this road know that if each driver drives regularly then cars heading in opposite directions will crash head-on. Therefore, each driver will swerve to the right to avoid on-coming traffic. This basic example illustrates the Nash Equilibrium because each driver understands the dangers of a narrow, two-way road so they will rationally use the swerve strategy without unilaterally deviating.

The Nash Equilibrium also applies to economics. Generally, commercial banking is a Nash Equilibrium when we deposit money in the bank because of the belief that banks will repay our deposits upon demand. Such a mindset fuels economic growth. If, however, people lose confidence in an economy they often will withdraw money from their bank accounts because they question whether the bank can fulfil its obligation to them. They react this way because they optimally fear that the bank-whose business is lending long by borrowing short from depositors-will not recoup its outstanding loans. This would also be a Nash Equilibrium, in a negative way, because everyone withdraws their bank accounts due to banking fears. Such a mindset fuels economic collapse.

At its core, Israel is a socialist country. The original Zionists sought to create a worker’s utopia. They shed the shtetl life, put on overalls, and went to make the desert bloom. These men worked in the hot sun, drained swamps, and then planted and harvested their crops. They did most of this work collectively on behalf of a Kibbutz. Once harvested, the Kibbutz took its produce to sell to its customers. Those customers included local Arabs, who would purchase the perishable products. If some Arabs feel threatened or hatred towards the Israelis then many will cease or temporarily suspend economic trade with Israel. The equilibrium amongst the Arabs, either purchasing or not purchasing, was based on whether they had anger towards Israel. Anger=slower trade with Israel; no anger=stronger trade with Israel.

For many years, Israel either ignored or did not understand this equilibrium. Israel, feeling compelled to retaliate against Arab aggression, would fire back at terrorists without economic consideration. When considering national security and your own survival, economic concerns are irrelevant. However, unlike other areas of infrastructure that absorbs minimal shock when Israel retaliates, the Israeli economy absorbs significant shock when Israel retaliates. Terror minimally interferes with buses, trains, and construction; terror significantly interfered with Kibbutz economic activity.

Recently, Israel changed its economic model. To the chagrin of early Zionists, modern Israel shed its Marxist past by devaluing its currency to boost exports. Those exports are largely white-collar technological products, not agricultural products. As a result of the change, Israel prophylactically started to build an economic infrastructure that is minimally affected by terrorism. However, the continued stress on tourism dollars is susceptible to terrorism wherein terrorism also batters the tourism industry.

It seems that economic factors were the basis for the move to capitalism. By devaluing the Shekel, Israel tapped into its export market, especially through development of the hi-tech sector. It is an open question why Israel understood the Nash Equilibrium vis-à-vis its social, political, and operational infrastructures but not for its economic infrastructure. The old time, idealistic Zionists held the Kibbutz life as the cultural elite; they looked down at those who worked desk jobs. Possibly, this attitude inhibited Israel from understanding the Nash Equilibrium regarding economic infrastructure, whereby the Kibbutz ideal harmed Israeli national interests. Sad.

About the Author
Ari Mushell works in the banking industry.
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