While humans depend on cooperation to survive and thrive, our best, most innovative work often arises from competition. Striking the right balance between cooperation and competition is not always easy, but when it comes to the global economy, it is not as complicated as one might assume, thanks not least to important insights from game theory. U.S. President Donald Trump would benefit his country and the world by acquainting himself with them.
The Nobel laureate John Nash, building on the work of mathematician John von Neumann and the economist Oskar Morgenstern, laid the mathematical foundations for modern-day game theory by analyzing cooperative and non-cooperative interactions among rational agents. Among large numbers of economic actors, free and fair competition leads to optimal (or nearly optimal) outcomes. But when such competition is disrupted, such as by monopoly power or government intervention, outcomes worsen.
Trump¡¯s tariff policy illustrates this point. Suppose that the United States is playing a game with a major rival like China. For simplicity, we will assume that each can choose between two policy moves: high tariffs or low tariffs. If the U.S. and China choose low tariffs, bilateral trade is strengthened, supporting both economies¡¯ growth. As a result, the U.S. and China enjoy a reasonably strong and relatively equal payoff.
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