Monday, June 30, 2008

Resource Conservation & Game Theory



Jeffrey Sachs seems to think that a cooperative approach on the world's most pressing problems of energy, water, raw materials will eventually help in sustaining high growth rates. I like his argument that the world economy has never been so large. This, he says necessitates greater conservation because free market economics which dictate that the prices be set by supply and demand will result in price spikes when disurption of supply/supply concerns set in. As an example, the above figure (credit: Yahoo Finance) shows how the NASDAQ and S&P 500 indices fell as the commodity prices rose in Feb'08. Back then (as it is now), concerns over global food production (mainly corn, rice) and the everincreasing oil prices led to the commodity price increases that we see today.

With my limited knowledge of economics, I think that Prof. Sachs's approach parallels John Nash's game theory. The most optimal distribution of resources (and the best global output) will occur when all the players (individual nations) coordinate their act and come together. However, in practice, every nation has its own strategic objectives which leads to lesser cooperation in sharing/developing the world's resources.

My views:
Conserving resources to save growth sounds like a noble idea. However, will India, China and the rest of the developing world wait until mutual understanding of resource use happen? The recently released Indian climate change plan emphasizes solar energy and sustainability. Given that most assessments of long term energy use have fossil fuels still being the major source of energy, it remains to be seen how far the present Indian government (and its successors) will go towards making climate action a reality.

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