Globalization

A Power Vacuum Is Killing the Euro Zone

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This article was originally published in The New York Times

As problems mount in the euro zone, it’s increasingly evident that we’ve been witnessing an institutional failure of monumental proportions.

What is to be done about Greece? Simply keeping it in the euro zone won’t help much, even if it’s possible.  The continuing crisis has sapped confidence in banks not only in Greece, but also in Spain, Italy, Portugal and Ireland, though to varying degrees.  Unless there are explicit guarantees to these banks soon, the market will likely take a further turn for the worse.

An absence of guarantees could prompt a broader chain reaction of capital flight and bank collapses across several countries.

The basic problem is that many people won’t keep their euros in a Greek bank, and perhaps not in a Spanish bank, either, when those euros can be moved to Germany or some other haven.

Yet German citizens do not appear ready to guarantee Spanish banks or, by extension, the whole credit system of Spain and the other periphery nations. Guarantees of that scope are probably impossible and may also require constitutional changes in some nations.

We thus face the danger that the euro, the world’s No. 2 reserve currency, could implode.  Such an event wouldn’t be just another depreciation or collapse of a currency peg; instead, it would mean that one of the world’s major economic units doesn’t work as currently constituted.

We are realizing just how much international economic order depends on the role of a dominant country — sometimes known as a hegemon — that sets clear rules and accepts some responsibility for the consequences.  For historical reasons, Germany isn’t up to playing the role formerly held by Britain and, to some extent, still held today by the United States.  (But when it comes to the euro zone, the United States is on the sidelines.)

There appears to be a power vacuum, and the implications are alarming. We may be entering a new world where international cooperative arrangements, in environmental areas as well as finance, are commonly recognized as impossible.  If the core European nations cannot coordinate effectively, what can we expect in dealings with China, Russia and other countries that have less of a common background and understanding?

In the euro zone, we are seeing two refusals to cooperate: Germany won’t renew financial pledges to Greece without Greek compliance on previous agreements, and Greece doesn’t want Germany to control its national budget.  Both seem reasonable positions, and maybe they are, but reasonable positions can apparently destroy an international agreement rather easily.

Is there a way out?  To seek a binge of pro-growth government spending, in the hope of stimulating economies, is to assume what already stands in doubt. The crisis has reached a head partly because the market already lacks trust in the periphery governments to invest money for sustainable economic growth.

There is also talk of forming a true fiscal union, but that seems to be doubling down on a bad idea.  If the euro zone cannot summon enough cooperation now, how is any union requiring tighter cooperation supposed to work?  How would national budgets be set and approved?  A credit collapse remains a real possibility.

Is it too late for monetary policy to make a difference?  The other euro-zone nations might allow Greece to leave, while guaranteeing payments for food and fuel, both of which Greece imports, for a reasonable period.  Higher price inflation might then depreciate the euro, limit the need for difficult downward wage adjustments, and help Spain and Italy improve their competitiveness.  The inflation could come through central bank bond purchases from the troubled nations, thus easing their debt problems.  That may be the only useful option still on the table.

But that’s also not easy.  First, economically healthier nations may be reluctant to accept the inflation, which would represent a rather direct, continuing redistribution of wealth to the troubled debtor countries.

The second problem is that some of the banking systems in the periphery nations may be too broken for monetary policy to take hold.  Imagine the European Central Banktrying to infuse new money and credit into Spain, while bank deposits move quickly to Germany, Switzerland and other safer places.  Again, why would anyone want to keep money in the bank of a fiscally troubled nation?  That loss of confidence will not be easily repaired.

Since December, the European Central Bank has lent more than a trillion euros to euro-zone banks, but that has bought no more than a few months of peace.  It isn’t clear how much more can be done.  It probably is about time to judge the euro zone as a failed idea — and rarely is it wise to double down on failed ideas.

What is most disturbing is that the euro-zone nations are democratic, protective of basic liberties, and have advanced intellectual and research communities. The final lesson of this debacle is that smart nations with noble motives can make very big mistakes.  And that should concern us all.

Never Mind Europe. Worry About India

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This article was originally published in The New York Times

The economic slowdown in India is one of the world’s biggest economic stories, but it is commanding only a modicum of attention in the United States.

It may not even look like a slowdown because by developed standards, India’s growth — estimated by the International Monetary Fund at 6.9 percent for 2012 — is still strong. But a slowdown it is: the economy has decelerated from projected rates of more than 8 percent, and negative momentum may bring a further decline. The government reported year-over-year growth in the October-through-December quarter of only 6.1 percent.

What is disturbing is that much of the decline in the growth rate is distributed unevenly, with the greatest burden falling on the poor. If the slower rate continues or worsens, many millions of Indians, for another generation, will fail to rise above extreme penury and want. The problems of the euro zone are a pittance by comparison.

China commands more attention, but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will continue to grow, so under even modestly optimistic projections the Indian economy will be No. 1 in terms of total size.

India also is a potential force for energizing the economies of Bangladesh, Nepal and, perhaps someday, Pakistan and Myanmar. The losses from a poorer India go far beyond the country’s borders; furthermore, the wealthier India becomes, the stronger the allure of democracy in the region.

Why is India’s economic growth slowing? The causes are varied. They include a less than optimal attitude toward foreign business and investment: recall the Indian government’s reversal of its previous willingness to let Wal-Mart enter the retailing sector. The government also has been assessing retroactive taxation on foreign businesses years after incomes are earned and reported. Another problem is the country’s energy infrastructure, which has not geared up to meet industrial demand. Coal mining is dominated by an inefficient state-owned company and there are various price controls on both coal and natural gas. Over all, the country does not seem headed toward further liberalization and market-oriented reforms.

These problems can be solved. More troubling are the causes that have no easy fix.

Agriculture employs about half of India’s work force, for example, yet the agricultural revolution that flourished in the 1970s has slowed. Crop yields remain stubbornly low, transport and water infrastructure is poor, and the legal system is hostile to foreign investment in basic agriculture and to modern agribusiness. Note that the earlier general growth bursts of Japan, South Korea and Taiwan were all preceded by significant gains in agricultural productivity.

For all of India’s economic progress, it is hard to find comparable stirrings in Indian agriculture today. It is estimated that half of all Indian children under the age of 5 suffer from malnutrition.

Another worry is that India’s services-based growth spurt may have run much of its course. Call centers, for example, have succeeded by building their own infrastructure and they often function as self-contained, walled minicities. It’s impressive that those achievements have been possible, but these economically segregated islands of higher productivity suggest that success is achieved by separating oneself from the broader Indian economy, not by integrating with it.

India also has one of the world’s most unwieldy legal systems, and one that seems particularly hard to reform. On the World Bank’s Doing Business Index, the country ranks 132 out of 183 listed countries and regions, behind Honduras and the West Bank and Gaza, and just ahead of Nigeria and Syria. One undercurrent of talk is that the days of “the license Raj” have returned, referring to the country’s earlier subpar economic performance under a regime of heavy government regulation.

On the positive side of the ledger, the country retains a population with remarkable talent, energy and entrepreneurship. It has worldwide networks of trade and migration, and world-class achievements in entertainment and design, among numerous other strengths. Nonetheless, the previous pace of progress no longer seems guaranteed.

India may not be alone in this slowdown. There is a more general worry that the grouping of disparate giants known as the BRIC nations — Brazil, Russia, India and China — has, for some reason, lost much of its previous momentum. Last year Brazil grew at only a 2.7 percent rate, down from 7.5 percent, and Chinese and Russian G.D.P. growth are slowing too, to an unknown extent and duration. In the past, many countries engaged in catch-up growth have suddenly slowed and hit plateaus, although economists do not have firmly established theories as to when and why this happened. In any case it remains a real danger.

In the short run, we often focus on headlines, elections and fights between personalities and political parties. But the world is shaped by deeper structural forces, such as resources, technologies, demographics and economic growth rates. We ignore India’s troubling trends at our peril.

The Wilson Quarterly: The New Invisible Competitors

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This excerpt from an article by Tyler Cowen appeared in The Wilson Quarterly on January 22, 2008. Please go to the website to read more.

Remember the Archie comics? Archie and his conceited rival Reggie battle for the affections of Betty and Veronica, and the two girls, though they are best friends, jockey for the attention of Archie, the affable ­all-­American boy. They have been at it for more than 60 years, and in the early days the basic situation wasn’t far removed from the experience of many Americans, especially in small towns. Indeed, cartoonist Bob Montana based the Archie characters on people he knew from his high school days during the 1930s in Haverhill, Massachusetts. Most romantic competition occurred within small groups of people who knew one another. The girl or guy would choose, perhaps the couple would marry and settle down, and often the loser ended up living down the street or across town. Romance was full of heartbreak and anxiety, but at least you knew who your rivals were and who was beating ­you.

The Wilson Quarterly: The Micromagic of Microcredit

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This excerpt from an article by Tyler Cowen and Karol Boudreaux appeared in The Wilson Quarterly on January 12, 2008. Please go to the website to read more.

Microcredit has star power. In 2006, the Nobel Committee called it “an important liberating force” and awarded the Nobel Peace Prize to Muhammad Yunus, the “godfather of microcredit.” The actress Natalie Portman is a believer too; she advocates support for the Village Banking Campaign on its MySpace page. The end of poverty is “just a mouse click away,” she promises. A button on the site swiftly redirects you to paypal.com, where you can make a contribution to microcredit ­initiatives.

Is Globalization Changing The Way The World Eats?

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Tyler Cowen gave this address to the International Association of Culinary Professionals in April of 2004.

Thank you all, and good morning. Let’s start with slide one. That’s me, the obsessive, and obsessive is the key word here. I’m food obsessive. I have several obsessions actually, but today we talk about food. When I get home, my wife will ask me, “how did it go?”, and my answer will be, “the breakfast was excellent!” So I travel a great deal, I cook a great deal, and I write an on-line dining guide. I’m one of those people who lives to eat. For a long time now, I have been writing about culture, and creativity, and diversity, and now I am writing about food. And my interest in food really stems from my life, and that is from my obsessive nature. I wanted to be going out there, eating in the best places possible. With this attitude every meal counts. But if every meal is going to count, you have to know how to eat.

So let’s go to the next slide. I have a theory of food. It’s a fairly simple theory, it’s not perfect, and there are some exceptions. But what makes for great food? Three items: You need competition, experimentation, and pride. Competition – if you are in a strange city, or strange country, and you want to know where to eat, go to the cuisine that is represented by the greatest number of restaurants. That is your best guide as to where to eat. You know they are competing against each other, they are drawing upon a common pool of workers, because they hold network for that cuisine, a whole supply network. Experimentation: cooks need new ideas, food should not sit still. And the third element, the most intangible, is this element of pride. So there are some cultures out there in the world, French culture, Chinese culture, Mexican culture. Everyone in this place loves food, loves to talk about food, loves to think about food. Some of my Chinese friends have told me that the greeting in Chinese translates roughly as not “hello”, but “have you eaten?” That’s how you say hello to people. So these are the basic elements. Competition, experimentation, and pride, and if your looking for good food, essentially look for those elements. And as we will see, our globalized world, for the most part, is strengthening, not weakening in these elements – competition, experimentation, and pride.

Now let’s start with the United States. Let’s start with what some people call the down side. Here we have. “Fast Food Nation”, a best selling book. It is often the way the United States is characterized, or I would say caricatured. It is well know that there are more fast food chains in the United States than ever before. That being said, I think we are now living in a wonderful time to be eating, either in this country, or in the world more generally. If you want to know what is the best answer to this vision of fast food

nation, well I don’t have a slide for it, but look on your plate. What was served to you this morning? Wisconsin Manchego cheese Tex-Mex. The cheese is from Wisconsin, the cuisine is Tex-Mex which spans two countries, and the kind of cheese, Manchego, as you all know, comes from Spain. What we have is a world where these is more food than ever before. Food is more diverse than ever before. And if you are going to have more diversity, that also means your going to have more bad food than ever before. But the point is, you don’t have to eat the bad food, you can eat the good food. One or two more points on fast food. First, fast food is actually getting a lot better, and it’s getting better pretty rapidly. I actually eat that Chipotle. I think its pretty good. Chipotle is partly owned by McDonalds. It’s fresh Mexican food. You go in and order, put together your own meal. It’s not the very best restaurant in the world. The price is excellent and the service is quick, and it’s very tasty. So one thing to look out for in the future, is that fast food will get much better very rapidly.

Another point to make about fast food, let’s consider Pizza Hut. Pizza Hut informs us that the two busiest Pizza Hut outlets in the world, where are they? Well, number one is in Paris, and number two is in Hong Kong. So the point is this, fast food does not push out slow food. Fast food does not push out gourmet cuisine. What happens is the size of the market is growing , trade is growing, we are getting more fast food, and we are at the very same time, getting more slow food.

Finally, when we ask ourselves, “what have we lost?, what has fast food pushed out?” The big loser has been the diner, not the gourmet restaurant. Now I say this with a tinge of sadness in my heart. I grew up in New Jersey. Some of you may know that if you take New Jersey and put Rhode Island together, not the two largest states in our country, but those two states together have more diners than the rest of the United States combined. So fast food has been growing, but for the most part, it has been pushing out non-chain versions of food that were not always wonderful in the first place.

Now last year I was sitting around with some of my “foodie” friends, this was at Brown University, and we asked ourselves the question, or rather I asked them. I pushed them, and I said, “what for you is food paradise?’ I think it is a very interesting question to ask ourselves. And one fellow said, “well for me, food paradise is to go to Parma, Italy and eat ham and cheese. Very good answer. Another fellow said, “for me, food paradise is to have a car, a Michelin guide, and be in the south of France. This is also a very good answer. And I thought for me, what would be food paradise?

I’m going to talk about this for a moment. For me food paradise actually is regional Mexican cuisine. If you go to Mexico, here’s a picture of Mexican food, but I mean something really more particular. In Mexico, they are called comedores, and comedores are very small, if you would call them restaurants, are more like food stalls, typically the cook is a grandmother, and most Mexican cities have these comedores, and they serve food very cheaply. Essentially, it is the recipes of the grandmother, served to people during the day who are in the middle of working, and they don’t have the time or the ability to get home for a home cooked meal. So, they go eat at a comedore. A single dish would cost maybe a dollar, or dollar fifty. And I’m a crazy man, I’ll go into the comedores and order five dishes. They look at me like I’m crazy, or they think, when is your family coming. But family is not coming, sometimes it’s just me. I order my five dishes, I don’t finish them all, but I have had a really remarkable meal for five to ten dollars, and that, to me, is food paradise, this idea of Mexican regional cuisine. If we looked at what went into regional Mexican cuisine, we find that it is competition. So these comedores, there might be dozens, or a hundred or two hundred under the same roof, we’ll find that there is experimentation, and also in Mexico we will find that there is very much pride. The consumers in these comedores are ordinary Mexican families, who are typically not wealthy, and the cook, of course, tends to be Grandma or the mother.

It’s interesting how different comedores are from Mexican food in this country. If you look at the Mexican food in this country, a lot of it, of course, is not eaten by Mexicans at all. It is eaten by Americans. But consider the Mexican food eaten by Mexicans. Well, who are the Mexicans, for the most part, who are currently coming to America? They tend to be fairly young, and they tend to be male. So take a group of young men, say ages eighteen to twenty five, put them together in large numbers and let them eat. What do you get? Well, some of it is quite excellent, some of it is not so great, but you get something very different than the native cuisine. Let’s say you performed this thought experiment with France. Take a million Frenchmen, male, ages eighteen to twenty five, bring them to the United States, let them loose, have them eat. You are not going to get classic French cuisine. So actually this kind of migration is a way that diversity spreads. Mexican food in this country, is very different from Mexican food in Mexico. In Mexico, every region is different. There are dishes that will be in one village that won’t be in the next village. And even in different parts of the United States Mexican food is taking very different paths. But anyway, that is my idea of a food paradise.

Let’s look at another vision of food paradise. We go now to the red guide for France. I was in Paris about a month ago. My flight got in at 6:30 a.m., and by 8:00 a.m. that morning I had managed to purchase a copy of the Michelin guide. When I’m in Europe, typically I go around with the guide and try to eat as well as I can. I’m very much an admirer of French food, and I think it’s the place in the world where food is respected the most. The market is very competitive, and you can simply have a high quality of meal almost anywhere any time. So we turn to what we might call traditional cuisine. The old culinary world. If you want to eat something like this, there is no doubt in my mind that France is the best place to go. With that being said, I have some reservations about how food is being developed in France. I think there are a number of problems. One problem, I think, is the Michelin guide mentality itself, which I love, but there is very much a hierarchical ranking. What are the best restaurants in France, what are the three star restaurants. There is one chief that lost his third star, literally, he killed himself. I think another problem in France, also, is labor regulation. Many of you are in the restaurant trade. It is very hard in France to work your employees more than thirty five hours a week, for legal reasons. So imagine trying to run a top restaurant, but a lot of your key people are only with you thirty five hours a week. And also, sometimes it is hard to fire them. And I think another problem is the rate of taxation is very high. So France still has the very best food in the world, probably, but it is losing ground. So the old French food market, Les Halles, is now a shopping center. This is not a picture of a food market at all. And if you look at what are the countries that are the up and coming places for food, I think a lot of people would say Spain, but oddly enough one pick is London, and England. If you want cutting edge cuisine, a lot of the best places to go are actually in the Anglo-American world. Go to London and get nouvelle fusion. Go to New Zealand and eat in the bistro’s. Go to Sydney or Melbourne in Australia. Go to Canada. I love the food in Canada. I’m going to Canada next week, and being an obsessive as I am, I’m looking forward to it just for the food. These places, the up and coming, what is it that they all have in common? Well, going back to the basic theory, they have competition, they have experimentation, and they don’t take anything for granted. They don’t think of themselves as sitting on top of the market. And they are also beginning to have this element of pride, which I think for a long time, arguably, was lacking in Anglo-American food. But the fact that we are all here is a sign that the English speaking cultures are beginning to take a lot more pride in their food. I have a saying, and it goes, “all cuisine is ethnic cuisine.” In the introduction it was noted that my specialty is ethnic food. This is true, but I also have the sneaky view that all food is ethnic food. I have another view. All food is fusion cuisine, you just may not know it yet. But everything is a mix, everything is a blend. So right now we are seeing the culinary world being turned upside down. Countries that have not been leaders, are innovating. If you go to Vancouver and eat, go to Toronto and eat, go to Wellington, New Zealand and eat you will get fantastic meals for really very affordable prices, twenty, thirty, forty, fifty dollars, you will have a meal to remember for a long time. And it is because of this competitive element.

Now let’s talk about globalization a little more explicitly. We talked about experimentation, and I said that all food is fusion cuisine and all food is ethnic cuisine. Let’s look at a very simple picture of the tomato. It’s hard to imagine Italian food without the tomato. Similarly, it is hard to image a lot of Asian food, Indian foods without chili’s. But in fact the tomato, as you know, came from the new world. It came from Mexico, and the old world has only had the tomato, actively in their cuisine’s for a number of centuries. So what we see most of all, is yes, trade spreads McDonald’s around the world, maybe not all of us love this, but more importantly, trade spreads new ideas in a globalized world. A globalizing world, is a world where people are experimenting and they’re trying to get to the top, to be known as having a better product than the next restaurant or next chef. If I ask myself, “where’s my favorite restaurant in the world, right now”, I would suspect that none of you, maybe one of you, would guess the answer. My favorite restaurant in the world is in Stockholm. It is a place called Paul and Norbert’s. I have eaten there several times. And to think that it is possible that someone’s favorite restaurant is in Stockholm, is showing how much change we’re seeing, how many benefits trade is bringing us. So all food is fusion cuisine. It’s known in this country as Wolfgang Puck. He of course is from Austria. He set up numerous restaurants around the world, there is one in Mexico City, a famous one in Los Angeles, and it’s called Chinois on Main. It’s a kind of Chinese food, it’s fusion cuisine. The name of the restaurant is in French, it’s in Las Angeles, and the cook is Austrian. What does this mean, but you all get the point. All food is ethnic food. All food is fusion cuisine.

Now let me go to investment tips. I’m obsessive about food, and cooking, and dining, and travel. But I’m also an economist, and when I speak at places, people often ask me, do you have any investment advice? Let me show you my investment advice. This is sushi. No I’m not saying you should buy sushi. I don’t deal in sushi. But think about sushi, what does it mean? Last summer I went to Moscow, I went with my wife who is Russian. When we got off the plane we were hungry. The first place we went to eat, we went to eat sushi. And one reason we ate there was because we got in pretty early, and we were very hungry, and a lot of the Russian restaurants were not open yet. There is still a bit of the old mentality where you don’t always take the greatest care to serve the customer. It was about ten thirty in the morning, we were starving, a long plane flight, so we went to eat sushi. The restaurant was open, the food was quite good. So you might ask yourself why you might eat sushi in Russia? And I think the key question, when you look at sushi, sushi is all about trust. You don’t eat sushi unless you have a certain amount of trust, in the chef, the restaurant, the country, whatever. Sushi requires trust. So here is my investment advice: if there is a country, and you have seen that sushi has just come to that country, and is doing okay, that’s a sign that people in that country are starting to trust each other. My investment advice is buy shares in the stocks of that country. Sushi being the sign of trust. So that’s my tip of the day. I had the sushi in Moscow and it was quite good. When you go to Mexico City it is quite easy to get sushi there. I think sushi also gives us a broader lesson about globalization. People say that globalization is making all the world look alike. And there is some truth to this, but think about what this means. If all the world looks alike, it means that you can buy sushi almost anywhere. So I was a student about 20 years ago. I lived in Germany for about a year in 1984, and in 1984 it was very hard to get sushi in Germany. You could get it in Berlin, you could get it in Frankfort, Dusseldorf of course, the Japanese community. But for the most part, mid-sized German cities did not have sushi. Most of France did not have sushi outside of Paris. Today about any mid-size German city, any major city in Asia, Austrasia, North America, now Latin America, you can get sushi. So yes, the world in this way is starting to look more alike. The world is more alike in the sense that you have more choice everywhere. The commonality means the commonality of diversity. Anywhere you go you can get sushi, you can get some version of Mexican food, you can get some version of Chinese food, Indian food and so on. And that in my view is a good thing. So when people say the world is looking more alike, borders don’t matter anymore, it’s not the case that every country all they have is McDonald’s. That is the opposite of what is happening. It’s that every country is offering you more choice. If I think about where I live, Northern Virginia, it’s about an hour from here, that to me is close to a food paradise. I have my choice of regional Bolivian cuisines. So if I want Bolivian food, I just don’t say hey, “do you want Bolivian food” to my wife, I say “ would you like Bolivian food from Cochabamba, or how about a dish from La Paz?”

And this to me is a kind of miracle. That is what choice is about. That’s what it means when parts of the world in this way become more alike. One other example of globalization, this is tempura. Everyone thinks about tempura being Japanese, and of course it is Japanese. But where does tempura come from? Tempura actually comes from Portugal. It was transferred to Japan in the late 16th century, and the word in Portuguese for cookery is tempora. It is now called tempura. You think of tempura as Japanese. Is it Japanese, Portuguese, is it fusion? And my point is this, when it comes to food, don’t worry about national pride. Just eat well, cook well, make food well, and sell food well. That national pride issue is a mirage. Whatever you’re eating, wherever you’re eating it, it is a synthetic product, it is a blend of many cultures. The Portuguese can be as proud of tempura as the Japanese are, and every country in the world and every region in the world have great food. That is the bottom line. Everywhere should be proud, and be proud of the entire menu, and don’t worry about someone else’s food pushing out your food, or whose food is taking over the world. Those are moot points. Don’t worry about them. Just go and buy the best tempura you can.

Now let’s go back to the United States and think about some possible, what I would call strategies, for eating in this country. Many of you, in your respective areas, are greater experts than I am. But let me tell you how I think about food in this country, what I’m going to eat in America. I go back to that simple model. I look for competition, I look for experimentation, and I look for pride. And that’s how I decide where to eat. So if we think, where in America are the places that have competition, experimentation and pride, well of course there are a lot of fine restaurants. Many of you may have read in the New York Times yesterday, that Charlie Trotter of Chicago, he is in Europe with some other notable American chefs, and he is speaking to the Europeans on what makes American food great. And the top European chefs are serving American food. And if you can believe the New York Times, the Europeans are very impressed. That’s all wonderful, simply that the algorithm spend as much money as possible, it’s not actually a bad way to eat. You won’t go that badly wrong in your stomach, it will hurt your pocketbook, but you’ll have some delicious meals. One of the other ways of thinking about how to eat, and again go back to competition, experimentation and pride, is to look for networks. And here is one of my favorite ways to eat in America, and that’s barbeque. You have to be very careful where you go. I would say only eat barbeque when there are a large number of restaurants around. So this means Kansas City, this means Texas, this means parts of North Carolina, parts of Tennessee. What I will do if I have a speaking engagement in those regions, if I can, I’ll take an extra day, rent a car, I’ll just drive around and eat barbeque. And let me tell you, a good barbeque meal, the best barbeque meals I have had, I worship. I enjoy those every bit as much as my good Michelin meals I have in France. Good barbeque is brilliant, superb, it is a true craft, and it is one of America’s greatest contributions to cuisine. So I would say all for barbeque, and as you all know, it is hard to spend more than twenty dollars in a barbeque restaurant even if it is top of the line, for the most part.

What’s another way you might think of eating, looking for a network with competition, experimentation and pride. Here’s my next suggestion, and that is do the roadside meal in Louisiana. And I will tell all of you this, and I’m sure that many of you have already done it, but if you have not, make it your next vacation. Go to Louisiana, and no I do not mean New Orleans, yes fly into New Orleans or fly into Houston, and then rent a car and go to southwestern Louisiana, and you will see a network of cooks there. It’s interesting, almost all of them are men, and they don’t even have what you might call a restaurant. I think of them as shacks. You are in rural Louisiana, you’re driving around, and you will see a shack, and there will be some words painted, or scrolled, like boudin blanc, or shrimp/seafood. The sloppier the handwriting, the more urgent it is that you stop and eat in that shack. You will go into the shack and look around, and you will think, what did he tell us. There will be two tables, at least one of them might be a little dirty. There will be one person, not a staff, the cook is the staff, and it might not be open. It will be open if the cook is at home. There won’t even be a menu, there might be a chalk board, or there will be one or two items. But some of the best American meals I have ever eaten, I have eaten in this environment. With a lone chef, eating in a shack, order sausage, get the spicy crawfish, whatever, it will cost you ten dollars. It is a meal you will never forget. When you track these things down, it is competition, experimentation and a real pride in the food. And I am telling you, as you go through life, let nothing stop you. Make this trip, make other trips. I was in Guatemala last year, giving some talks, and I had a difficult situation. My hosts were so nice to me, they did everything for me. I’m not sure I’ve ever had host who were nicer. They took me around, and I wanted to go eat in the comedores. They have these in Guatemala, like they have them in Mexico. And my host said, oh no, we can’t bring you there, you might get sick. They were afraid of eating in the comedores. They were afraid they might get sick. They were people that grew up in wealthy families, my host, and it was simply not something they were accustomed to doing. And I got really quite desperate. They would want to take me around to very nice Italian restaurants, excellent food, no complaints, but I wanted to break loose and eat at the comedores. Finally, I literally had to break away from them . I was walking with them in the city. I had to break away and run to the comedores and order something. And they all watched me, and I said it’s my treat. They wouldn’t eat. I didn’t get sick, I never do, and now I am somewhat renowned in Guatemala who came and ate in the comedores. But the point is this, if you want to eat well, have new experiences, yes you have to take some chances, but most of all you have to get your body out there on the front lines. You might need a car, you might need to go somewhere strange, you just need to get out there and do it. So drop whatever excuses you have for not doing it. Get out there and do it, and be a food obsessive. Go to strange places, eat strange things. They will be some of your most memorable experiences. Southwestern Louisiana would be one of my tips in this country.

But let’s say you’re not there, let’s say, like most of us, you live in the city or you live in suburbia, how should you think about eating? Let me draw a contrast here. Shopping malls and strip malls. Let’s look at the shopping mall. Here’s a shopping mall, my hotel is connected to a shopping mall. Now I’m a little reluctant to make my comments here, because probably some of you make food in shopping malls, or supply people who make food in shopping malls, and in fact, I myself have had some excellent meals in shopping malls. Most of all in California, or Las Vegas where the notion of great food and mall is not a contradiction. But that being said, not meaning to offend any of you, but overall, going to a shopping mall is not my recipe for how to have great food. A shopping mall typically has good food, not great food. It has predictable food. It has food that a lot of people like, but it does not have this notion of food as adventure, food as obsession. So you go to a shopping mall, the rents are typically high. You need high traffic stores. And you need stores that will appeal to large numbers of people. And you want stores that have brands that are predictable, so you will see a lot of chains and outlets in shopping malls. And in general if you on a street or a place where people go for tourism, you have to worry about the food, because the people who are eating are not that well informed.

So if you live in suburbia, my alternative recipe is not the shopping mall, but the strip mall. Now a lot of strip malls look like dumps. You think, ugh, strip mall, Wal-Mart, or PhotoShop, or gee, there are seventeen places in my strip mall and I don’t even know what they are, why do I go there? But I will go out on a limb and make a prediction, that the future of American food lies in the American strip mall. Not in the elegant street, not in the shopping, but the future of American food lies in the strip mall. And what does a strip mall have? Because it is ugly, it has low rent. It is not a closed market. There is no Michelin guide for the strip malls. It is an open market, so when immigrants come to this country, they want to start a restaurant, they don’t have a lot of money, where do they look? They don’t look to the shopping mall, they look to the strip mall. So if I asked myself, where I live, what are my two favorite restaurants? They have both opened in the last year. One is a Cantonese restaurant, the other is a Szechuan restaurant called China Star. They are my two favorites. It’s real Chinese food. It’s not beef with broccoli and all the rest, it’s superb Chinese food with serious cooks. Very cheap restaurants, fantastic food. They are both in strip malls. Not only that, they are in ugly strip malls. One of them is next to a Kinko’s. The Szechuan place. The Cantonese place, what is it next to? Well, it’s interesting what proliferates in these strip malls. There is a restaurant next to my Cantonese place, the sign is in Vietnamese , and then there is an English version of it, none of which I can understand, and except for the one word tofu, there are three other words, I’ve no idea what they mean. But I know this word tofu, and I went to this restaurant, I’ve gone twice in the last month, and it’s actually the best tofu I’ve ever eaten anywhere in the world. You might think, oh tofu. Tofu and rice, tofu and pork, tofu and whatever, no. I don’t know what those other three words mean, but they are not food words, because all this restaurant has is tofu. And they have tofu four different ways, and everyway is fantastic. I spent twelve dollars and walked away with about 35 pieces of tofu. You would think I would know better. I walked in and really didn’t know which tofu was which, so I said give me twelve dollars worth of tofu. I thought, well I’ll get a few pieces of tofu, take it home for the family, we will have a nice dinner. She keeps piling on the tofu and I repeat, twelve dollars of tofu. She nods and smiles, keeps piling on the tofu. I bring the tofu home. I have this huge mound of tofu. It’s still in the refrigerator. My daughter says what’s for dinner tonight? I joke with her and say, tofu. And this is a great restaurant, if you can even call it a restaurant. It’s really take-a-ways. There are about four tables. And this, I think, is one vision of the future of American food. A lot of places that double as take away, they are not fancy, they’re very cheap. I think a lot of people are sick of paying a lot of money for fancy tablecloths, and décor. And the creative spirit, the competitive element, the people experimenting, people with pride, very often they are immigrants , and if you want to find their restaurants, don’t go to the shopping mall, go to the strip mall. Don’t be put off. Again, get your body out there. Last year I was in Florida, with a friend of mine, we were making a trip, visiting a donor to my university. This friend of mine, his eating is fairly conservative, so he says, what should we do? And I said, well let’s get the rental car, and talk to the man at the rental car booth, and ask him where we should eat. Wherever he tells us to go, we’ll go there. We will eat the cuisine of his country. My friend’s like, “well okay.” I said, yes let’s do it. He works for me so he had to say yes. So we get to the counter, we have the rental car, this is near Miami, and the fellow there was Haitian. So I said where should we go for Haitian food? He tells us a place to go that’s pretty far away, we have to track the place down. My friend and I show up, we both had suit and tie on, and the two of us of course are white. We show up at the Haitian restaurant and there is a sense of panic having gone off. There is a feeling that we must be from the INS, or perhaps even worse the IRS. These two white guys with suits, but we had a fantastic meal. And at a Haitian restaurant in Florida, typically it is a mistake to ask for the menu. The question is not what’s on the menu, but what do they have in. So just go in and say, bring me what you have, bring me some food. Always order more than you will eat. You’re ordering for diversity. It’s not that I’m telling you all to put on weight. If you’re at a place where you’re not going to be anytime soon, and say you’re only two people, you should order six dishes. Don’t be afraid to order six dishes, because the real cost, when you take into account the cost of transportation, ordering six dishes, you are saving money. The only problem with ordering six dishes, is that you will have to explain to the cook, who has pride, why you didn’t eat it all. And it’s important that you give a very good explanation. I wanted to try your food. I cannot eat all of your six dishes, but it all was wonderful, thank you. So in terms of tips to eat, shopping mall versus strip mall, go to unusual places. American food is very much in flux. It is a very vital time to eat. It is a very exciting time to eat. It is a time often where the people eating, the people eating, are ahead of the critics. It’s a time when you can take a lot of chances. A time when you can learn a lot of new things. My area, Northern Virginia, I first lived there in 1980, that’s now 24 years ago. At that time ethnic food meant pizza, or maybe Chinese food. Now the alternatives before me, I mentioned regional varieties of Bolivian food. There will be Ethiopian restaurants and Eritrean restaurants, and you better not tell them the name of the wrong country, or they will be upset and correct you. There are forty places that serve pupusas from El Salvador, and they put different herbs in the papooses. They compete to have the best pupusas. A pupusa costs a dollar fifty to two dollars, and you put the spicy cabbage on it, you have the sour taste, the cheese inside, you have the herb loroco, you have some pork checkaroam with your papossa with fried pork. It is a delicious meal, fantastic. It’s all over the place now. So you all live in different parts of the country, some parts have more choice than others, but fear not more choice is on its way, pretty much no matter where you live.

So with that I will close my formal remarks. Here are my concluding points. The food world is a wonderful place to be, in this country and around the globe. There is diversity. Globalization is bringing far more benefit than cost. The world is not being taken over by fast food, either in this country or abroad. There is a recipe for eating well, it involves some effort. You have to get out there, you have to try things. Look for these recipes of competition, experimentation, and pride. In your work, in the role that you have, be a part of this movement. Help me eat better, because like you, I’m a food obsessive too. Thank you all.

A Road Map to Middle Eastern Peace? – A Public Choice Perspective

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Tyler Cowen wrote this short paper on the economics of war and the logic of conflict on July 5, 2003. This paper has been reformatted for stylistic reasons and some content, including footnotes, has been removed. Please download the PDF to read the paper as it originally appeared.

Why is peace between the Israelis and the Palestinians so difficult to achieve? Does Bush’s “road map to peace” stand a chance?

To address these queries I will step back and ask some fundamental questions about war and conflict,from a public choice point of view. I will consider why we have wars in the first place and why countries negotiating for peace often fail to capture gains from trade. Commentaries on the Middle East, or many other questions of foreign policy, typically look at the trees rather than the forest. Being an economist, I do not seek to match the institutional expertise of a historian or Middle East scholar, but instead focus on some basic conceptual matters.

Trade and the Coase theorem

For an economist, the central question in any foreign conflict is why the Coase theorem does not hold. The Coase theorem suggests that war should be unlikely. Rather than fighting, the two sides could strike some mutually advantageous bargain. After all, the relevant parties could live at peace with a higher standard of living and fewer deaths. Or if the would-be conflict is truly lopsided, one side should surrender rather than fight.

With this in mind, let us consider why the Coase theorem might fail to hold, with some speculation as to how those reasons might apply to international conflicts. Keep in mind throughout that conflict, not peace, has been the more common condition throughout human history.

Transactions costs

The classic rejoinder to the Coase theorem notes that transactions costs often are high. If the two parties cannot get together to trade, no bargain can be struck. In the case of the Middle East, however, this does not appear to be the fundamental problem. The parties to the conflict have the option of meeting frequently.

Lack of binding enforcement or commitment

The Coase theorem can fail if the two parties cannot write binding contracts. Poland, for instance, could not have paid off Hitler not to invade. Hitler could have taken the money, and then broken his promise and invaded anyway.

This problem is a real one, but it is not obviously central to Israel and the Palestinians. First, if the parties really do face a mutually advantageous agreement, an outside party may be able to enforce the deal. Arguably the United States has fulfilled this role with Israel and Egypt, including the necessary side payments. Second, “tit-for-tat” behavior often substitutes for a literally binding contract. Yet the history we observe in the Middle East does not match the model of parties trying to cooperate around a mutually beneficial tit-for-tat game.

Infinite compensating variations?, or not everyone wants peace

Trade can be difficult when the parties are unwilling to make marginal trade-offs. Many people, for instance, would not give up their ideals, their country, their family, or their religion for any amount of money. Many parties may feel this way about Jewish settlements on the West Bank, the status of Jerusalem, or the “right of return” for the Palestinians. Almost everyone wants peace on his or her terms, but for many sets of preferences the offer curves do not intersect.

The values need not always be infinite in importance. Sometimes the compensation variation will be infinite (or undefined) because the parties do not like the idea of paying cash for certain values, or do not like the idea of trading those values through a more complicated form of barter. Perhaps many Palestinians feel this way about the right of return. The right of return is not literally of infinite value to them (suicide bombers aside, most of them will continue to live without such a right). Yet at the same time they may be unwilling to trade away that right, as they do not like the idea of selling their perceived birthright.

In some cases the value itself is incompatible with the idea of trade. Many people want respect, for instance, but by its nature respect cannot be traded. A bought respect is no respect at all, and the gains from trade model will fail in cases of this kind.

That being said, while this problem is a real one, it is unlikely the fundamental obstacle to peace. First, even if many Israeli and Palestinian citizens hold such infinite values, leaders and decision-makers tend to be more pragmatic and flexible. Most Israeli and Palestinian politicians have changed their minds and public pronouncements more than once; witness Sharon’s recent admission of the Israeli “occupation” of Palestinian territory, an expression he never would have used until recently.

Second, there is arguably a “silent middle” among both the Israelis and Palestinians that favors peace above such partisan ends. The strength of this middle, combined with the pragmatism of leaders, would enable a peace agreement, even if a minority were to engage in terrorism in response.

Third, the general citizenry is often quite flexible, as time passes, as to what is possible and what is unacceptable. Both Begin and Sadat took steps that were once radical, perhaps regarded as “unthinkable,” but rapidly became an accepted part of the status quo. The Palestinians today care greatly about Jerusalem, but as late as the mid-1970s did not devote much attention to the issue. Much earlier the conquest of Jerusalem by the Christian crusaders was met largely by Muslim indifference (Wasserstein 2001, pp.11, 250).

For these reasons, infinite compensating variations may be an exacerbating factor, when other preconditions for peace are not present, but I do not regard them as the fundamental reason why no bargain is struck.

So having downgraded some potential explanations of conflict, let us move to more plausible contenders.

Reputation

Parties to conflict often invest in tough behavior to build up a reputation. They face a broader game than the particular struggle before our eyes. This broader game may involve future dealings with the current disputant, or may involve future dealings with other parties. In this case, it is often more important to stand tough than to cut a deal, even a fair deal.

Under this hypothesis, the difficulties in the Middle East resemble the difficulties in many marriages. We might ask if the Coase theorem is so applicable, why is the divorce rate so high? Why are so many marriages, whether they end in divorce or not, so acrimonious? For that matter, why do parents and children bicker so much?

Married parties bicker, in part, because they are concerned with their future share of the cooperative pie. For instance, assume that a husband and wife consider an agreement on some matter of dispute, but the husband would receive only an epsilon of the resulting cooperative surplus. The husband might prefer to hold out and stop the agreement, even if he otherwise gets nothing at all. If the husband agrees to only an epsilon of surplus today, he is weakening his bargaining power for the future. Why not turn down today’s epsilon for some chance of a greater share in the future? The wife of course may feel the same way. Even a fifty-fifty deal may meet with resistance. After all,why take fifty percent today,when you have some chance of getting ninety-nine percent tomorrow? So the two will bicker rather than settling all of their disagreements. Here the difficulty arises precisely because there will be future transactions, and not because transactions costs are too high (in fact we might get a better outcome if trading costs eliminated the possibility of future transactions). Similarly we get a bad outcome precisely because future gains from trade are high.

Such a logic might apply to the current conflict. The parties could, in principle, reach an agreement today. And perhaps that agreement could be enforced. That being said, the two parties may try to hold out for a higher share of the total surplus. In the process both will act so as to shrink the total surplus available.

Note that this mechanism, taken alone, places a limit on how bad things can get. Return to the marriage analogy. No party will find it worthwhile to seize so much surplus that the other party walks away from the relationship, assuming that gains from trade remain in principle. But in the political context, total divorce is not so easy. We cannot imagine either the Palestinians or the Israelis moving en masse to Nebraska, so it is harder to define the relevant threat point for walking away. The mutual difficulty of walking away, however, tends to lower expected levels of cooperation, rather than to raise them.

Nested games

The marriage analogy illustrates only the intertemporal aspect of the problem. Both the Israelis and the Palestinians face a game with several potential opponents, not just each other. So the necessity to stand tough is greater. Both the Israelis and Palestinians have had to deal recurringly with various Arab nations, and not always on very friendly terms. So each group may be investing in a reputation for toughness, again with an eye on its overall reputation with other parties.

More generally, the Israelis and Palestinians are far from united parties, but rather face internal conflicts about how to deal with the other side. We can see numerous games being played simultaneously: Israel and the Palestinians, Israeli politicians with Israeli voters, Israeli moderate politicians with Israeli extremist politicians, Israeli politicians with West Bank settlers, Hamas with Arafat, Abbas with Arafat, Abbas with Hamas, the Palestinian citizens with each leader, and soon. Various parties are involved in playing a game with the United States as well.

The resulting meta-game is too complex to allow for a simple solution or characterization. Nonetheless the nested or embedded mini-games may constrain the actors from settling the larger Israel-Palestinians game. For instance, Palestinians who defect to a peace movement face the risk of assassination from the more radical factions of the pro-Palestine movement. They may be safer confronting the Israelis than negotiating. Similarly, an Israeli politician who offered too easy a peace would lose support from the more extreme religious factions in Israel, and perhaps lose power in the process. In essence ,various parties can shift the risk of their “defect” strategies onto other parties, at least for some period of time.

Behavioral economics

The standard economic model suggests that people are rational, and capture all available gains from trade. Yet this central postulate of economics has come under increasing question. In a variety of contexts people appear to turn down gains from trade, instead following some (faulty) psychological model of how the world works.

For instance, economists have long wondered why there is involuntary unemployment in relatively free labor markets. Rather than laying off workers, why do employers not negotiate downward wage reductions with their employees? At a lower wage the employer could afford to keep the worker, and the worker would rather have less pay than no job at all. In other words, why not use gains from trade to solve the unemployment problem, just as we might use gains from trade to solve the peace problem?

Related questions have commanded an enormous literature, but we understand at least one reason why such wage reductions do not take place. Employers fear that workers, after their nominal wages are lowered, will engage in sabotage and uncooperative behavior. It is then better to fire the worker than keep him around.

The relevance to international peace is clear. When people are forced to accept agreements that give them less than they had once expected, or less than what they feel they deserve, they sometimes behave very badly. Often they behave so badly that the other party will be reluctant to offer the agreement in the first place. Or each party may refuse the agreement out of spite. Rather than offering agreements with the equivalent of “wage cuts,” both the Palestinians and Israelis (or at least one side) may prefer to have no bargain at all.

Returning to the labor market context, many workers will quit once they receive a nominal paycut. In similar fashion, peace negotiators (or more generally the citizenries that employ them) may walk away from the bargaining table when they are hit with an unpleasant shock. Evidence from experimental economics shows a strong tendency to “punish cheaters,” even when the behavior is self-destructive. We may be emotionally or biologically “programmed” to react in this fashion, whether or not it is rational in each particular instance. And of course various historical and religious beliefs can shape a context that makes these reactions even less rational.

The literature on behavioral and experimental economics tries to isolate exactly which sorts of adverse changes set off destructive reactions. Workers, for instance, seem to mind small nominal pay cuts more than they mind small real wage cuts. Or a nominal wage cut offends less if it can be described as “fair,” or if it is seen as part of an overall process affecting everyone’s compensation. Many of these results are context-dependent rather than general, nonetheless they suggest that the degree of resistance will depend on packaging and symbolic values. It also suggests that experimental and labor market research may teach us something about the causes of war.

Note that terrorism interacts with behavioral factors. Imagine the Israelis and Palestinians moving toward some kind of peace agreement, whereby each side offers some painful concessions to the other. Just as each side is trying to accept what it must give up, some form of terrorism strikes. A Palestinian, for instance, might blow up a bus in Jerusalem. This kind of behavior makes it harder for the Israelis to accept their “wage cut” as they will feel more aggrieved than before. Terrorists, knowing this, may choose to strike at precisely at these times and aim to reopen the appropriate wounds, all to prevent peace.

We might, at this point, be wondering why the Israeli-Palestinian relationship is more fraught with conflict than are most neighborly relations. Here the behavioral implications of previous history play a role. Each party believes that the other has violated its rights repeatedly, and thus holds great suspicions.

Lack of meta-rationality

The concept of meta-rationality refers to having a realistic assessment of one’s prospects and abilities. Yet individuals are rarely meta-rational. For instance, most people believe that they are better drivers than are most others, or have better values than most others, yet we cannot all be above the median. Many people also refuse to defer to experts on various scientific matters, even when the expert has superior training and intelligence. Many experts believe their chances of winning a Nobel Prize to be far greater than they are, and soon. They simply refuse to recognize the relevant realities.

Parties to war and conflict are unlikely to be meta-rational. We do not know why, but non-meta-rational behavior tends to be especially prominent in certain areas. For instance, people tend to have especially stubborn and irrational opinions in the areas of religion and politics. Large numbers of people think they are the world’s best judges of truth in this area, but few people have comparable opinions about their relative expertise in building bridges, or in thermodynamics.

Given this tendency, peace negotiators may expect the other party to defer to their positive view of the world. The Israelis will overrate their ability to judge what will work, and the Palestinians will do the same. The general tendency is to think that what benefits one’s own interest also benefits the world at large (Klein 1994, Cowen forthcoming). The two parties will then find it hard to agree, since they do not share the same positive vision of how the world works. Note that only one party need lack meta- rationality for an agreement to be hard to strike.

Summing up, in a nutshell

Writing from my outsider’s perspective, an economist might tell the following game-theoretic “just-so story” about the Israeli-Palestinian conflict. The two sides are locked into a long-run bargaining game, which leads them to struggle for power at each step along the way. Nested games and behavioral factors make it difficult for the parties to make the mutual sacrifices required for an agreement. Furthermore neither party is meta-rational about the points of disagreement. On top of those problems, the minority that does not want peace at all takes actions to exacerbate adverse behavioral and psychological reactions; we can understand terrorism as an attempt to manipulate such behavioral weaknesses. Periodic retaliations from each side then raise the stakes in the long-run bargaining game, and ratchet up the difficulty of earning subsequent concessions from the other side, thus making peace difficult.

Again, I do not pretend to have the kind of evidence for this just-so story that a historian or Middle East scholar would expect. It is simply one way that an economist trained in game theory might view the core problem. It is a set of analytical categories for classifying what we read in the daily newspapers.

That being said, let us proceed with this just-so story on a tentative basis, and see what it implies about Bush’s recent “road map.”

Bush’s “road map”

In game-theoretic terms, how should we envision Bush’s road map? Let us define that road map broadly, so as to include the invasion of Iraq, and the broader exercise of American power in the region.

I view Bush’s road map as comprised of the following elements: 1) Signaling an American commitment to guarantee Israeli security against foreign invaders, most of all from Saddam Hussein but not exclusively so, 2) Insistence that Israel limit settlements on the West Bank, 3) Insistence that Israel recognize some form of a Palestinian state, 4) Insistence that the Palestinian authorities crack down on terrorism, 5) encourage Palestinian democratization, and 6) postponement and obfuscation on some key issues, such as right of return and the status of Jerusalem.

The question is whether these policies will allow the Israelis and Palestinians to reach a stable, ongoing agreement. The case for optimism runs something like the following: the renewed American commitment to Israeli security makes it easier for the Israelis to make concessions to the Palestinians. The Israelis now know all the more, that in the long-run bargaining game, America truly will not tolerate fundamental threats to their security. Limiting West Bank settlements, and precommitting to a Palestinian state, arguably removes the sequestions from the future bargaining table. With less at stake in the future, current bargains might be easier to make. Furthermore, a Palestinian crackdown on terrorism might make the Israelis more willing to deal with the Palestinians. It may not stop or even limit terrorism, but at least the Israelis will feel that the terrorists are not the same people they meet at the bargaining table, again rendering an agreement easier. Palestinian democratization may ease some of the nested games, and make Palestinian leaders more accountable to their citizens. Postponement of some issues, such as right of return, reflects their insoluble nature at the current time. Perhaps those issues can be readdressed more fruitfully at some point in the future, once cooperative relations have been built up more successfully. At that point today’s “political impossibility” may become tomorrow’s “political reality.” The Bush view, however, is to push ahead with the rest of the peace plan now regardless of the remaining (currently) insoluble elements.

So we can at least outline an “existence theorem” under which Bush’s road map will work or at least will improve matters. Given an economist’s view of the matter, the Bush plan at least tries to address the underlying problems.

That being said, we have no guarantee that the Bush plan will work. The Israelis may not feel enough extra security in the long run, knowing that a Bush presidency will not last forever. Both sides will still wonder whether, when push comes to shove, Bush will stand up to his right-wing Christian constituents and stay tough in opposition to West Bank settlements. Is the United States, given its domestic political realities, truly up to the role of playing enforcer? Will the unsettled nature of the right of return question simply keep the whole long-run bargaining game open, thus motivating more non-cooperative behavior? Do the Palestinians have the ability to sustain a democratic culture? And finally we do not know just how many people in each camp truly desire peace.

The case for pessimism becomes stronger when we look to the past. Many previous peace attempts have failed, and the problem seems to be getting worse over time, not better. It is shocking, for instance, to read Milton Friedman’s 1969 commentary on his visit to the West Bank: “Much to my surprise, there was almost no sign of a military presence…I had no feeling whatsoever of being in occupied territory…This wise policy [of the Israelis] involved almost literal laissez-faire in the economic sphere…To a casual observer, the area appears to be prospering.” No one, no matter how naive, could write such a commentary today.

Broader lessons

Whether or not our understanding of the Israeli-Palestinian conflict can draw from public choice, I hope that public choice can draw from our understanding of the Israeli- Palestinian conflict. It serves as a more general example of why politics is not efficient, and why it is so hard to strike good political bargains. The Chicago school is overly optimistic when it applies the Coase theorem to politics. The Coase theorem is a useful foil for figuring out why efficient political bargains are so problematic, but it is not a good description of the real world. We do have unemployment and strikes—not to mention wars and totalitarianism—all because the Coase theorem does not describe the world we live in.

That being said, we can also see a possibility for reform and for political improvement. If the true problems are game-theoretic in nature, wise leadership can have a disproportionate impact on the world. Given that the Bush road map is already in the works, let us watch eagerly and hope for the best.