2001 Annual Public Lecture

The first public lecture in the series was delivered on 7 December 2001 by Professor John Sutton. The title was A World Divided - Globalization Games.

John Sutton is Professor of Economics at the London School of Economics. As well as being a pioneering researcher in the study of how industries evolve, he is renowned as a compelling speaker and communicator. This lecture will be of interest to specialists and non-specialists alike.

Over the past twenty years, the theory of games has been used by economists to develop new and powerful insights into a wide range of important issues. We have become aware of some fascinating similarities between economic developments and biological processes in nature, as well as some significant differences. In the first part of this talk, I shall look at the use of Game Theory in economics. I want to show that we can think clearly, using logic and evidence, about how complex human societies evolve.

In the second part, I will apply the theory to the analysis of globalization. One view is that the normal workings of the market mechanism drive us towards a 'divided world', in which the rich get richer while the poor get poorer. An alternative view is more optimistic, suggesting that the market makes countries converge to a common condition of prosperity. If poverty persists, it results from our failure to give free rein to the workings of the market. The truth, I shall argue, lies in between these two views: the policies of governments will profoundly influence the degree to which lower income countries succeed in joining the high income club. The future is for us to determine.

Among the themes developed in the lecture:

• The founding fathers of game theory include two of the most fascinating figures in the mathematics and economics of the twentieth century: John von Neuman, a leading figure both in the development of the atom bomb and in the early history of computers; and John Nash, one of the most brilliant mathematicians of his generation whose life was clouded by decades of mental illness, but who gradually recovered - he was awarded the Nobel Prize in economics in 1996.
• Game theory has made waves in the press over the past few years as it provided the basis for sophisticated designs of auction processes in the renowned 'spectrum auctions' which netted hundreds of millions of pounds in revenues to governments round the world. It is less well known that it has also provided fascinating insights into the workings of auctions for oil exploration, an area that provides us with some of the most striking evidence in favour of game-theory based models.
• One of the most striking phenomena documented by biologists who have used game theoretic methods is the "Red Queen Effect", whereby an escalation process occurs as competing species vie with each other for some relative advantage. As the Red Queen remarked to Alice: in this country you have to run that fast just to stay in the same place. A close analogy exists between this process, and the competitive escalation that occurs as firms competing in the same global market vie with each other in enhancing their technological capabilities.
• In the early nineteenth century, income disparities between richer and poorer countries were much less than they are today. Why? At one level, the answer is obvious: the Industrial Revolution saw a leaping ahead of the industrialised world, while the rest of the world lagged behind. But why did industrialisation not spread more widely? And why, if we look at world income distribution over the past 50 years - a period of increasing globalisation and integration of the world economy - do we see no narrowing of income disparities, but an increasing divergence? The shape of the distribution of per capita GDP now (for the first time ever) shows a 'twin peaks' profile, with a set of 'rich countries' becoming sharply separated from a group of 'poor countries': does the working of free markets drive this process?

The text of this lecture is not available, but it is closely based on a lecture given at the British Academy last year, entitled "Rich Trades, Scare Capabilities: Industrial Development Revisited," (Keynes Lecture, 2000, forthcoming in the Proceedings of the British Academy, 2001). This lecture is attached, and can be downloaded from this site. To follow up the broader issues relating to Game Theory discussed in the early part of my lecture, I recommend the excellent biography of John Nash by Silvia Nasar, entitled A Beautiful Mind, Faber and Faber, 1998, and for applications in biology, Matt Ridley's wonderful book entitled The Red Queen, Viking, 1993.