Friday, May 29, 2015

Nash, Lichauco, and Steering a Post-EDSA Economy

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by James Matthew Miraflor

Deaths of great intellectuals diminish us all, but more so the scholars who are the main conduits of their work. In a span of a few days, students of the Philippine economy are shocked by the demise of two important paragons of the field – first, nationalist economist Alejandro Lichauco, and then game theory pioneer John Nash. The loss is simply incalculable.

Separated by miles and interests, the two celebrated economists used their Ivy League training to interpret and shape a world in conflict. Both are products of the Cold War, yet their ideas have persisted in a modern age of computer-driven, high-volume stock trading and post-WTO regional trade partnerships. While Nash is known mostly in microeconomics textbooks and Lichauco via word-of-mouth stories of Marcos dictatorship survivors, both have made their in impact in the minds of the Filipinos who keenly follow the country’s economic development.

Anyone interested in Philippine’s escape from the so-called “Middle Income trap” cannot afford to ignore the lives and contributions of these two illustrious economists. It is now more than ever – in a world of uncertainty, hegemonic overtures, and political machinations – that we should review the lessons of Nash and Lichauco. Game theory and nationalist economics are indispensable items in our toolbox as we chart the Philippine’s economic future amid multidimensional issues of China’s territorial expansionism, the Mindanao conflict amid ASEAN geopolitics (read this, and this), and America’s seductive offer for trans-Pacific trade.

Competitive Games and Rational Agents

John Forbes Nash, Jr. is an economist in the sense that John Maynard Keynes is an economist. Both men have other endeavors (Nash is principally a mathematician and Keynes is a probability theorist), yet their respective contributions to the science of economics are much more than most economists can ever dream of. Incidentally, Nash’s principal contribution in the field is one of his earliest outputs – his 1950 PhD thesis at the Princeton University. He proposed that in any game with a finite number of “strategies” or “actions”, what is called as a “mixed strategy” equilibrium exists. For this work, he won the Nobel Memorial Prize in Economic Sciences four decades later, in 1994.

Understanding Nash’s intuition is not easy, but it is immensely satisfying. Consider a rock-paper-scissors game. How does one maximize her expected victories, if there is a chance to play the game over and over? Clearly, committing to choose one action (say rock), would compel the competitor to commit to a single action to defeat it (paper).

What the player can do is to be unpredictable – to commit instead to randomize her actions, putting a probability of choosing each of the actions (say rock 2/3 of the time and 1/6 each for papers and scissors), instead of choosing a single one. Nash’s argument is that there exists a way for all players in the game to simultaneously randomize their actions and lead to an equilibrium, i.e. no player can profit from unilaterally changing her randomization strategy.

Nash effectively laid out a theory of conflict of rational agents; his calculations eventually led to the growth of a subfield of mathematics called game theory. Game theory posited that smart players, armed with full information of pay-offs and can marshal enough computational power to calculate probability distributions, can eventually lead to a détente (for more information on Game theory, I have an earlier blog post here: Games, Politics and Society).

Nash’s ideas eventually guided superpowers like United States and the Soviet Union as they simultaneously attempt to overpower the other – short of commencing a thermonuclear war that can end the human civilization. Nash’s equilibrium laid the edifice for a mutual, albeit uneasy, stability in a post-WWII, conflict-ridden world.

Proxy Wars and Strategic States

Alejandro “Ding” Lichauco’s study of inter-nation conflict is less abstract and more in-your-face. At the fringes of Unites States-Soviet Union détente are multiple proxy wars, one of which is staged in the Philippines. Eager to contain the communist threat, the Americans built a machinery to effectively influence the political and economic policy of post-WWII Philippine administrations. The country just became a theater to a new global conflict.
From here.
It is with this backdrop that Lichauco pursued his Bachelor of Arts in economics from Harvard College, and a Bachelor of Laws from Harvard Law School. He shared the same school with Filipino technocrats and scionsArmand Fabella who later became Secretary of Education of President Ramos, and Oscar Lopez, who now leads the Lopez conglomerate of public utilities, media, real estate, and manufacturing.

Lichauco then returned to the Philippines armed with an insight: what the country need is a state that can strategically chart its future in a scientific manner, free from foreign influence. Lichauco saw American hegemony as a stumbling block in the development of the Philippines as an industrialized and independent nation.

This belief guided his subsequent political actions. He supported a fellow nationalist, Claro M. Recto, in his bid for the presidency in 1957 under the Nationalist Citizens’ Party (Lapiang Makabansa). Lichauco – garbed with sterling credentials as former policy director of the Philippine Chamber of Industries (the original half of the PCCI), research department chief of the National Economic Council (the predecessor of NEDA), and senior consultant to the Congressional Economic Planning Office (now CPBD) – tirelessly polemicized against US’ role in promoting monopoly capitalism and sabotaging national initiatives to industrialize.

By 1960s, Lichauco joined nationalist icons Sen. Lorenzo Tañada, historian Renato Constantino, future University of the Philippines President Francisco Nemenzo, Jr., and Jose Maria Sison (who would later form the Communist Party of the Philippines and the National Democratic Front in 1968) in starting the Movement for the Advancement of Nationalism (MAN). When President Ferdinand Marcos pushed for a Constitutional Convention in 1971, Lichauco – then representative of the 1st district of Rizal – refused to cooperate. Lichauco insisted that Marcos is cozying up with the Americans in a game of political opportunism. He paid dearly for his ideas when the dictatorship ordered his arrest along with 11 others who refused to sign the draft constitution.

A Schizophrenic World

Nash would also be prevented to work, but for a very different reason. At the peak of his productive mathematical career, he succumbed to the hallucinations and delusions brought by his schizophrenia – a story brought to life by the 2001 movie “A Beautiful Mind”. In the movie (spoiler alert), we got a glimpse of Nash’s imaginary friends and illusory conversations that are actually internal monologues of paranoia and desire.

Nash would eventually fight his way out of this debilitating condition, but not until he has strained most his relationships and tarnished his otherwise superb reputation. Nash will eventually be vindicated by his 1994 Nobel prize, when the world began to recognize his immense impact on trade agreements, military strategy, diplomatic negotiations, evolutionary biology, and of course, on competitive games.

At that time, the post-Berlin Wall world is in a new manic state. Empowered by the collapse of Soviet satellites, the US facilitated the world’s maddening rush to a new economic era – what eventually came to be called as neoliberal globalization. Deluded by the promise of market dynamism via policies of liberalization, privatization, and deregulation, countries from Latin America to Europe to Southeast Asia acquiesced and dismantled their own state apparatuses, and then sold the prized parts to emergent oligarchies. This is definitely Lichauco’s nightmare.

From here.
In the Philippines, post-EDSA sentiment garbed the neoliberal schizophrenia with political democratization and anti-monopoly sentiments. Lichauco’s arguments, while commemorated by activists and militant movements, will largely be shunned by the neoclassical mainstream at the UP School of Economics and University of Asia and the Pacific (UA&P). Lichauco’s vision of nationalist economics will have to be put in the back burner just before the twin crisis of 1997 in Asia and 2008 in the world, which eventually forced countries to revisit their protectionist past.

Towards a Philippine Political-Economic Strategy

What lessons can we learn as a nation from Nash and Lichauco? From Nash, we can glean the importance of a randomization strategy – one that prevents any opponent from predicting and eventually subverting our national intent. We also learned that there is a best case pay-off for any conflict given that all players are expected to be rational – an important consideration on whether we should enter any given conflict (see SPNE). From Lichauco, we learn that in any conflict involving nations and corporations, a strong state is our best mechanism for national survival and progress (check this out too).

For instance, Nash provided us the means of interpreting what has emerged to be an equilibrium of costly conflict given the current strategies of the Philippine government and the Moro Islamic Liberation Front (MILF), and why both parties should simultaneously deviate from this destructive détente via political negotiations. Lichauco’s polemic teaches us to conduct such negotiations vigilant of other nation-states like the United States or Malaysia who may be trying to gain by influencing the outcome. Lichauco would have suggested a negotiation strategy guided by a strong, independent foreign policy.

We need to put this in mind as we begin drafting the new Philippine Development Plan (PDP), which will be our country’s roadmap for the next six years. Consider the problem of Micro, Small, and Medium Enterprises (MSMEs), which comprise 99.58% of Philippine enterprises. Suppose foreign markets have shifted and now have growing demand for specific products which Filipino MSMEs can clearly provide if they can expand their production. But they cannot do so without capital. Local banks would not provide capitalization on MSMEs with small production capacity or huge potential market. Exporters would be reluctant to connect undercapitalized MSMEs with foreign markets. Foreign markets are fickle and players from other countries can enter.

Clearly, this is a suboptimal Nash equilibrium – which no player will attempt to unilaterally deviate. What is needed is a simultaneous strategy change facilitated by a strong third party, in this case, the government. The actual policy is something Lichauco would approve of: 1) production and R&D support to MSMEs while protecting them from volatile foreign demands, 2) marshaling government financial institutions to provide risk capital to protected MSMEs, a 3) state-facilitated search for foreign markets to penetrate, and a 4) state-sponsored strategy to gather competitive intelligence from competitors (likely sponsored by their own nation-states) for updating pricing and quality strategies.

Our PDP should no longer be blind to the forces of political-economy that governs the market. Firms do not only produce for their customers, they make or buy at the behest of their home country’s political policies. Even with the WTO, nations sought to be unpredictable in their fulfillment of their commitments to harmonize tariff regimes. Meanwhile, our own trade and industrialization strategies are developed at the behest of foreign consultants, especially those deployed by International Financial Institutions (IFI). How could we afford to develop a strategy that cannot be subverted if it is already revealed and even developed by agents of possible competitors?

World Bank transfers prediction model to DOF. See story here.
In this confusing world, Nash and Lichauco offer us methods to power through the complexity and understand the dynamics of hidden games and conflicts as we steer our fragile, post-EDSA economy into the future. The best way to pay respect to these eminent economists is to actually deploy tools from the intellectual arsenal they have offered their lives to develop.


*The author is currently working on his MS Computer Science at the UP College of Engineering after finishing his MA Economics coursework at the UP School of Economics (UPSE). His primary research is on computational complexity of game theoretic problems, under the auspices of the Scientific Computing Laboratory (SCL) of the University’s computer science department

The author is one with the country in mourning the passing of another great Filipino economist –Dr. Fidelina “Baby” Natividad-Carlos of the UPSE.

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