Friday, July 1, 2016

How "the Ultimatum Game" explains the Populist backlash to Globalism

 - New Deal democrat

All over the developed world there has been an erupting surge of both left-wing (Sanders, Corbyn, Syriza in Greece, Podemos in Spain) and right-wing (Trump, UKIP, France's LePen) populism.  The global elites recoil in horror.  According to most tellings of mainstream economic theory, aren't free trade and globalization supposed to benefit everybody?

The latest and most bracing example of populism in action was last week's Brexit vote, which has served to concentrate a lot of minds.

I wanted to share excerpts of several articles I've read in the alst 24 hours that taken together make for an AHA!!! moment.

First, here is an opinion piece from Ireland (I'm summarizing but I strongly encourage you to click through and read the entire article):
There is a lot of data suggesting that ‘immigration’ was the dominant concern for those who voted to leave the EU. This should not be too surprising. In the latest Eurobarometer data, immigration was cited as the main concern of UK citizens . . . . 
According to YouGov data, which is more revealing, income was the best predictor as to whether someone intended to vote to leave or remain. Basically, the lower your income, the more inclined you were to vote leave....
The precise data on how particular communities and constituencies across England voted is perhaps most revealing. The poorest twenty districts [those with the most wage stagnation] in England overwhelmingly voted to leave the EU. . . . 
Brexit ... was a counter-reaction to a political economic system that is perceived to be designed in the interest of the comfortable elite.
So why did Britain's lower classes vote for something that almost surely will harm their economy in the aggregate?

Because human beings are hard-wired for strong reciprocity, i.e., most people will do some harm to their own situation in order to inflict an even greater loss on someone who is perceived as not being fair.

And here, as I've read in several articles this morning, is where the ultimatum game  comes in. In the Ultimatum Game, one player is given $100 with complete discretion as to how much to share with a second player, whose only power is to accept or reject the division. While a strictly rational economic player would accept even a $1 share, in real life most people reject any share under $30.  In so doing they harm themselves, but inflict even more harm on the greedy player, enforcing altrusim over the longer term.  And so:
 These votes on Brexit and Trump that are being so widely decried need to serve as a wake up call. Yes, trade, globalisation, immigration are good things. They have grown the pie immeasurably. 
But playing the ultimatum game and screwing the second player — those folks being screwed won’t care how much the pie is being grown if they feel they’re not getting a fair slice.
And there, dear readers, is both left and right wing populism in a nutshell.

In the real world, this game is being played ouit in many rounds by many players, in election after election.  And it looks like it will take many more Brexit-type votes for the mesage to sink in.  The first reaction by mainstream European economists after the Brexit vote was to call for even more austerity! As put by that same opinion piece from Ireland I cited above:

This realisation, however, does not seem to have seeped through to policymakers in  the EU or  Germany, who, despite a near complete destabilisation of the parliamentary party system in Southern, Eastern and Central Europe, remain committed to their failed neoliberal economic adjustment of austerity induced cost competitiveness. 
I do think Brexit and, to a lesser extent, the nomination of Donald Trump by the GOP are watershed moments, where the elites in powerful Western nations have been suddenly and utterly swept aside.  I expect this to be a dominant theme in politics over the next 10 years or more, as the neoliberal centrist consensus is destroyed and the left and right offer competing visions of a New Deal 2.0 vs. neofascism to replace it.