Impediments to Regime Formation

To develop a theoretical understanding of why the anarchic structure of the international system impedes regime formation, liberal institutionalists have turned to microeconomics and game theory for assistance. Microeconomics study the behaviour of economic units operating under the conditions of perfect competition found, in theory, within the market-place. An analogy is drawn by liberal institutionalists between the economic market and the international system because both are constituted by anarchic structures. But, paradoxi­cally, whereas for liberal institutionalists the anar­chic structure of the international system poses a significant problem, for microeconomists, the absence of any centralized institutions constitutes the main asset of the market-place. Unrestrained by external interference, rational economic units pur­sue competitive and self-interested strategies which result in goods being bought and sold at what microeconomic theory demonstrates is the opti­mum price, generating the best possible outcome for all the units operating within the market.

This benign image of the economic market might seem to generate very little insight for liberal institutionalists. But the microeconomic approach becomes more relevant when attention is turned to the concept of market failure. Although micro-economists insist that an unrestrained market provides the most effective mechanism for the production of economic goods, it is accepted that the market is not effective when it comes to the pro­duction of 'public goods' like roads and hospitals. Indeed it is also acknowledged that there are cir­cumstances when unrestrained competition can result in the production of what might be called 'public bads' — the obvious example being pollu­tion. Microeconomists argue that suboptimum outcomes, like the under-provision of public goods or the proliferation of public bads, is not the result of irrationality. Suboptimum outcomes emerge in circumstances when economic actors need to col­laborate rather than compete. And under these circumstances, the market, which promotes com­petition, is not an appropriate mechanism for deal­ing with the situation.

When market failure occurs, therefore, micro-economists accept that it is necessary to find an alternative mechanism to the market—one that generates collaboration rather than competition. The principal mechanism, often only accepted with reluctance, takes the form of state intervention. The state can, when necessary, intervene into the market-place and require economic actors to collaborate rather than compete. So, for example, when rivers have become polluted as the result of industrial waste, the state can pass legislation which requires all the relevant economic actors to produce alternative outlets for the industrial waste which is polluting the rivers. Microeconomists cir­cumvent the problem of market failure, therefore, by means of structural transformation. The anar­chic structure of the market gives way to the hierar­chical structure of the state.

Within the international system, of course, no global equivalent of the state exists to enact legisla­tion compelling sovereign states to subscribe to a common policy. As a consequence, at least from the perspective of the microeconomist, it is unsurpris­ing to find widespread evidence of global problems persisting because of the failure of sovereign states to collaborate and implement collective solutions. Global pollution, resource depletion, arms races, and trade barriers are seen by liberal institutionalists to constitute global problems arising from market failure — where states have preferred to compete rather than to collaborate. On the other hand, the existence of regimes indicates that collaboration is certainly possible within the anarchic arena. Anarchy does not preclude collaboration; it simply makes it difficult to achieve. The microeconomic approach, drawing on game theory, has helped to explain why.

The existence of collaborative as well as compet­itive strategies generates a much more complex situation than found in the purely competitive market setting. For instance, if a motorist fails to stop at an intersection, then whether or not an acci­dent occurs will depend upon the behaviour of the motorists approaching the intersection on the other road. Most motorists, fortunately, adopt a cautious, co-operative strategy and so accidents at intersections are not a frequent occurrence. But in such cases of strategic interaction, the outcome, as the example illustrates, is determined by the inter­play of decisions reached by independent actors. No single actor can dictate the outcome. Game theory, a branch of mathematics, has developed a very extensive study of strategic interaction, and liberal institutionalists, while generally avoiding the mathematics, have drawn on some of the con­ceptual apparatus developed by game theorists in order to enhance their theoretical appreciation of the factors which inhibit collaboration in an anarchic setting.

Theory-building requires an analyst to distil the essential elements of the situation under scrutiny. Game theory is particularly parsimonious. The focus is on the interaction between two actors, each with only two possible strategies—one co-operative and the other competitive—which can be followed. Strategic interaction, therefore, involves four possi­ble outcomes. The strategies chosen are based on rational calculation. Rational actors, according to game theorists, (1) evaluate outcomes, (2) produce a preference ranking, and then (3) choose the best option available. These are the essential elements of rationality. What social scientists have realized is that they can use the very simple conceptual appa­ratus involving rational two-person games to model a wide range of social situations. The games are considered to distil the essential elements of sit­uations that in reality are much more complex. By stripping away the detail, it becomes easier to understand the underlying dynamics of the situ­ation. So, for example, it is argued that all examples of market failure can modelled by the game known as Prisoners' Dilemma (see Box 12.4).

Box 12.4. The Game of Prisoners' Dilemma

The Prisoners' Dilemma Scenario

The governor of a prison once had two prisoners whom he could not hang wi lout a voluntary confession of at least one. Accordingly, he summoned one prisoner and offered him his freedom and a sum of money if he would confess at least a day before the second prisoner did so, so that an indictment could be prepared and so that the second prisoner could be hanged. If the latter should confess at least a day before him, however, the first pris­oner was told, then the prisoner would be freed and rewarded and he would be hanged. 'And what if we both should confess on the same day, your Excellency?' asked the first prisoner. 'Then you each will keep your life but will get ten years in prison'. 'And if neither of us should confess, your Excellency?' 'Then both of you will be set free—without any reward, of course. But will you bet your neck that your fellow prisoner—that crook—will not hurry to confess and pocket the reward? Now go back to your solitary cell and think about your answer until tomorrow.' The second prisoner in his interview was told the same, and each man spent the night alone consider­ing his dilemma. (Deutsch 1968: 120).

The two actors are confronted with two possible strategies, generating a situation with four possible out­comes. Being rational, the prisoners can place these out­comes on a preference ranking. The matrix reveals the preference rankings for the two prisoners. Both prisoners will pursue the strategy which will optimize their position in the light of the strategies available to the other pris­oner. To avoid being hanged, both prisoners will confess and end up in prison for ten years, thereby demonstrat­ing how individual rationality leads to collective irra­tionality. The suboptimal outcome could only be avoided if the two prisoners possessed a mechanism which allowed them to collaborate.

In this figure, cell numerals refer to ordinally ranked prefer­ences: 4 = best, 1 = worst. The first number in each cell refers to A's preference and the second number refers to B's preference.

		A
		Silent	Confess*
B	Silent	3, 3 ‡	4, 1
	Confess*	1, 4	2, 2 †

* Dominant strategy: both players have dominant rather than contingent strategies. A strategy becomes dominant if it is preferable to the alternative strategy no matter which strategy the other player adopts.

† Denotes an equilibrium outcome.

‡ A Pareto Optimal Outcome: Vilfredo Pareto (1848-1923) was an Italian sociologist and economist who developed a crite­rion for identifying when an exchange between two parties has reached its most efficient or optimum point. He argued, in essence, that the point is reached when one party is better off and the other party is no worse off than before the exchange took place. An implication of this optimum is discussed later.

The logic associated with the Prisoners' Dilemma is seen by liberal institutionalists to account for why a wide range of irrational outcomes in the international arena can be explained in rational terms. It explains why states have persisted in over­fishing the seas, in polluting the atmosphere, in selling arms to undesirable regimes, and promoting policies which inhibit trade. All represent cases of market failure, with states choosing to pursue com­petitive rather than collaborative strategies. They fail to pursue collaborative strategies because they expect the other members of the anarchic system to pursue competitive strategies. It would be irrational for one state to require its fishing industry to observe a fishing quota, for example, if it is believed that the fishing industries in other states are intend­ing to disregard the quota and thereby become 'free-riders'. As a consequence, states avoid a Pareto optimal outcome and are driven by rational calcu­lation to pursue a strategy which, through strategic interaction, leads to a suboptimal outcome.

If the Prisoners' Dilemma game does accurately map this situation, however, then it not only explains why anarchy inhibits collaboration, but it also indicates that states acknowledge the advan­tages of collaboration. They are only inhibited from moving to collaborative strategies by their expecta­tion that other states will defect. The Prisoners' Dilemma demonstrates the importance of identify­ing a mechanism which will convince all the actors that there is no danger of defection. Liberal institutionalists believe that the establishment of regimes provides evidence that mechanisms of this kind must exist.