For the purposes of this article, let’s agree on a limited definition of game theory. Game theory is a study of how escalation occurs during competition or conflict and why and under what circumstances people cooperate for mutual benefit or defect for personal gain. It was popularized at the RAND think tank after the second World War in an attempt to predict the behavior of the Soviets—and guide our own—in the charged atmosphere of atomic escalation.

The game that most elegantly illustrates the dynamic of escalation was developed by Martin Shubik and is called the Dollar Auction. Shubik is currently professor of mathematical institutional economics at Yale University, where he specializes in the economics of corporate competition. Formerly, he served as a consultant to IBM and as a staff member of the prestigious T.J. Watson Research Lab.

Shubik slyly describes the Dollar Auction as “an amusing and instructive parlor game,” and, indeed, anyone can play it at home. It works best in large groups when, as Shubik advises, “spirits are high and the propensity to calculate does not settle in until at least two bids have been made.” However, given the rate of inflation since the game’s inception, perhaps a $20 bill is a more appropriate auction item than a single dollar.

There are only two rules:

1. As in any auction, the bill goes to the highest bidder. Each new bid must be higher than the previous bid, and the game ends when there is no new bid.

2. Unlike the typical auction, the second-highest bidder must also pay the amount of his last bid—but gets nothing in return.

It all begins innocently enough. After all, $20 can be had for a penny, so it would be foolish not to bid. The auctioneer accepts an opening bid of, say, a quarter. The $20 is still available for 26 cents, so someone else raises the bid. The original bidder is then in the position of having to pay out a quarter for nothing, so he raises the bid again. Several more people toss in their bids, and we’re off. If you think the bill eventually goes for its full value, you’re way too optimistic. That would leave the second-place bidder owing as much as $19.99. The second-place bidder can improve his position by $20 by bidding $20.01, claiming the $20 prize and therefore losing just a penny. But the same holds true for whoever now holds the second-highest bid. So the bidding continues. The results are

farcical and dispiriting in their implication. When this game was popular at MIT, highly intelligent people routinely paid between three and five times the amount of the bill being auctioned. Very few players had sufficient foresight to predict that escalation would be expensive and would not produce anticipated results.

Although at RAND game theory was applied primarily to military strategy, Shubik and others believed it could also be applied successfully to economics. Since economics has elements of both competition and conflict, the patterns of escalation are repeated with similar outcomes across commercial contexts. Whether it’s making a point just a little more forcefully to a coworker who responds in kind or participating in a mutually destructive price war with a competitor or dumping below-cost goods on foreign markets only to have tariffs raised in reprisal or pumping more and more resources into an antiquated system to keep it running beyond its usefulness, what seems urgent and reasonable, perhaps even prudent in the moment, often produces unintended and unpredictable results.

Escalation, like addiction, is seductive because it is incremental, and an action taken today is frequently separated by time from its consequences. Microsoft’s business practices come to mind. Microsoft had a history of take-no-prisoners-and-kill-the-wounded business practices, until the wounded persuaded the Justice Department that these practices unfairly stifled competition. Likewise, minor labor disputes often escalate into prolonged strikes in which both sides end up losing much more than they would have had they settled initially. But because each party in the escalation process holds itself as the victim, every new demand seems wholly justified—always a good idea at the time.

One troubling manifestation of economic escalation was seen last December at the World Trade Organization (WTO) conference in Seattle where 50,000 people gathered to protest the deification of trade. Many came at the behest of AFL-CIO President John Sweeney who was responding to the WTO’s duplicity toward the world’s labor force. On the one hand, Sweeney knew that the shameless exploitation of low-wage workers—including warehousefulls of programmers in Bombay who work for 80 percent less than their American counterparts—is judged by the WTO to be a matter of “national sovereignty” and therefore beyond its jurisdiction. However, should any nation pass a law that restricts the exploitation of its workers, it is judged guilty of erecting a “non-tariff” barrier to “free” trade and is thus subject to sanctions. The violence in Seattle was, in part, an unanticipated outcome of accelerated economic activity that exploits people in the name of market reforms.

What the members of the WTO failed to grasp is that the imposition of market worship, so sensible and predetermined in their minds, could have unpredictable and violent results. As the Dollar Auction suggests, when people feel threatened, they tend to act irrationally; when faced with imminent loss, they often up the ante. But if the ferocity of the Seattle protests were unanticipated, far more dangerous are the alarming results of globalization in Europe.

The formation of the European Union (EU) was a highly accelerated process driven primarily by economic dictates. Trade was on everybody’s fast track. To qualify for membership in the EU, many nations imposed draconian cuts in social services on populations either unaccustomed or ill-equipped to endure them. As reported in the Los Angeles Times, instead of the promised plenty, market reforms “magnified inequities and hastened the breakdown of certain social structures, leading to instability, mass migration and ethnic strife.” That instability is being exploited by neo-fascist and neo-Nazi movements that have found widespread acceptance preaching the gospel of isolationism, protectionism, and cultural and racial purity—mirror opposites of the ideals espoused by the EU.

In Austria, Joerg Haider, described (in what must surely be a demonic déjà vu for European survivors of World War II) as the “charismatic fuhrer” of the ultra-right-wing Freedom Party, won 27 percent of the vote in a recent national election. In spite of international opposition, he is now in a strong position to become that nation’s chancellor. Switzerland’s equivalent People’s Party captured 23 percent of the voters. Its leader

Christoph Blocher, like Haider, is a Nazi sympathizer and “rails against immigrants, government corruption, and the European Union.”

In Germany, the rise of neo-Nazism is widespread and well documented. Economically depressed East Germany has become a breeding ground for skinheads. The Times recounts a Berlin criminologist’s assessment that “one-third of German youth is now prone to the extreme right.”

In Belgium, “the neo-fascist Vlaams Blok outpolled all rivals with 30 percent of the vote in Antwerp.” The story is the same in France, Italy, and Norway, where the extreme right has mustered 15 percent of the vote nationally. These numbers may seem trivial by American political standards based on a two-party, winner-take-all system. But in Europe’s coalition-based parliamentary systems, a relatively modest block of votes can determine the course of government.

The Dollar Auction in War and Peace

In the late 19th century, cross-channel adversaries France and Britain began modernizing their navies in an effort to protect themselves from each other. Battleships multiplied like water hyacinths. It didn’t take long for the buildup to alarm neighboring Germany, which feared the consequences of an expanding nautical gap and promptly doubled the size of its fleet in the name of national defense. In response, the British ordained an emergency program to build a new class of super battleships. The result was the Dreadnought, with more speed and firepower than any ship afloat. The British Admiralty foolishly boasted that “one Dreadnought could sink the entire German Navy.”

What could the Germans do? Build their own Dreadnoughts, of course, which they did with an industrial urgency born of intimidation. Once both sides were Dreadnaughty, superiority became a matter of numerical preeminence. The race was on, and the building frenzy (which Germany won), continued until the outbreak of formal hostilities in 1914. Ironically, what was begun by the British as a quest for national security resulted in a severe decline in British naval power in contrast to Germany’s.

The same pattern of escalation continued after the second World War. The atomic bomb was the new Dreadnought, and, this time, the United States was engaged in a deadly competition with the Soviets. The world’s elite powers were matched in an all-out race to see who could get fastest to where no one wanted to go. Although the prospect of peace through temporary advantage was used to justify each escalation, in practice, every step increased the threat to humankind rather than decreased it.

“Free” trade is today’s Dreadnought. This time, the prospect of wealth and economic advantage is inciting nations to adopt policies tailored to commercial, not human, values. Each step seems urgent, sensible, almost inevitable. And yet with each escalation, events also appear to be pushing us in a direction few want to go: to a replay of one of the most barbaric times in our history. Consider the reemergence of a belligerent fascist Europe with its tribal mentality, its ethnic hatreds, and access to modern weaponry.

Overlooked in the rapture of globalization is that, when the bidding ends, the bill comes due. The best solution to the Dollar Auction is not to play. The next best solution is to slow down and negotiate a favorable outcome for all parties.

The game continues. Do you wish to bid?

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