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"Strategic Thinking: The Games Nations Play" by David Warsh, Boston Globe, April 7, 1991.

Certainly it is good news that President Bush met Toshiki Kaifu last week in Newport Beach to help the prime minister out in his by-election. There is good news, too, on the trade balance with Japan - good news that the value of the dollar can turn up and nobody screams bloody murder.

But beneath the relatively smooth relationship of the moment, sentiment is building for some more explicit form of American industrial policy—and that promises a thicket of interesting new political problems for years to come.

The newest raised voice is that of Kenneth Flamm, the widely respected semiconductor analyst at the Brookings Institution in Washington. American trade policy has come to a fork in the road, he says: The semiconductor agreement this summer is going to be a test case that will establish policy for decades to come.

"The status quo is unsustainable," Flamm says. "It is simply unacceptable for the American government to leave our high-technology firms, as individual players, at the mercy of coordinated strategic policies organized by coalitions of their foreign competitors, backed explicitly or implicitly by their national governments."

This sentiment exemplifies a subtle trend, operating at a high level in present-day economic thinking, inside universities and among business groups. It is not that economists are giving up on their long-held conviction that freer trade brings benefits to all; most aren't. Rather they are recognizing that free trade may be easier to subvert, and harder to arrange than previously thought. They are acknowledging a new wing of their studies of cooperation, coordination and competition built in the last 30 years by game theory. Behind this search for an approporiate new role for government in the supervision of trade is not a single galvanizing book - the way that Keynes' "General Theory of Employment, Interest and Money" laid down the case for government stabilization in the 1930s.

Instead, there have been a series of theoretical and empirical developments in trade theory in the last 10 years, led perhaps by Elhanan Helpman of Tel Aviv University and Paul Krugman of MIT, opening out quickly into a host of subtleties explored by others.

In the "new" international economics, strategic trade policy is not simply a matter of picking winners and losers, of whipping up enthusiasm for big projects, but rather a matter of delicate thrusts and feints, not just in particular markets, but in macroeconomic policies, too.

Until recently, the best introduction to the implications of this new way of thinking about your opponents was a metaphoric one—mathematician Nesmith Ankeny's little classic, "Poker Strategy: Winning with Game Theory," published in 1981. It is still a pretty good window on the world, though, unaccountably, it is out of print. Now, however, there is a fascinating new book, "Thinking Strategically: The Competitive Edge in Business, Politics and Everyday Life," written by two economists who are at the very center of the game theory craze. Avinash Dixit of Princeton and Barry Nalebuff of Yale write about tennis, incentives, brinksmanship, courting, commuting, voting, cheating, bargaining and Robert Campeau in terms that can be read with real pleasure by anyone who likes business magazines. In the process, they extend the strategic point of view into every realm of policy, and make it clear why thinking about government will never be the same again.

Strategic thinking, they say, is the art of outdoing an adversary, knowing that he's trying to do the same to you. A lumberjack doesn't have to think strategically, they say, but a general does - and so does a spouse, a child, a business rival. Wise practitioners are forever thinking about their collaborators' and opponents' aims and expectations, and a great deal is known about the situations that typically arise. "Our aim is to improve your strategy IQ," they write.

The problem is, of course, that if Dixit and Nalebuff can improve your IQ, they can improve your competitor's as well—and the Japanese translation rights to their book were sold months ago. Contests between strategically sophisticated competitors quickly turn into grown-up versions of the children's game, played with fists and fingers, of scissors-paper-stone.

Which brings us back to the problems of pursuing national industrial policies that are designed to permit their implementers to prosper at the expense of others. The mischief that can arise when nations begin to play these games on an international scale can be truly monumental. Discussions of the success of Japanese industrial planning usually concentrate on the handful of unambiguous successes of the Ministry of Industry and Trade—and leave out the broken plays and outright fumbles of that legendary agency over the years. Nor do they mention that most of MITI's striking successes happened before Japan's economy grew large and complex.

And as Harvard University's Dale Jorgenson notes, industrial policy enthusiasts usually ignore altogether the factor that the Japanese themselves believe is responsible for their amazing post-war success: The blend of macroeconomic policies designed to stimulate capital formation and investment. The stewardship of the Ministry of Finance, far more than MIT, accounts for Japanese success, according to Jorgenson.

No doubt about it: The world of strategy is a rich and complicated realm. There are plenty of worthwhile skills that will enable you to see through your opponents' strategy, achieve cooperation, make credible commitments, and so forth—and they can be learned and mutually understood.

But important as technical ability is, perhaps the worst mistake a strategist can make is to think that knowledge is the beginning and end of the game. In his poker book, mathematician Ankey identifies four attributes that are fundamental to winning any game. Knowing the rules and probabilities is only one. Discipline, judgment and hustle are the others, he says. Those proposing to prescribe an industrial policy for America should keep in mind all four.


Copyright © 2008 by Avinash Dixit and Barry Nalebuff