Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

A Macroeconomic Prisoner’s Dilemma? | February 13, 2009

Nate Silver has an excellent post up today explaining one of the reasons why our economy remains in free fall. As Silver explains, companies have frozen new projects and big decisions. These projects would create jobs that would filter into the economy and which could then be used to buy the offerings that come from these projects. But no company wants to invest in these projects (which would lose money in current economic circumstances) until the economy picks back up. But the economy won’t pick up until people have more money to spend. And so on and so forth.

While not quite a prisoners dilemma (wherein a pair of companies each lower their price to hurt the other, while they both end up hurting themselves), it’s something related. As Silver explains:

“This is not, technically speaking, a prisoner’s dilemma. If other firms increase their production, than it will probably become in the Company’s interest to increase theirs. It’s more like a game of chicken… [R]ight now there’s a lot of uncertainty. Uncertainty combined with deflationary expectations makes negotiations especially hard to complete, and right now we have those too in a lot of industries”

I believe these statements to be generally correct, and it matches up with all the anecdotal evidence I’ve gathered from talking to friends around the country. Companies across all industries just aren’t hiring nor are they really making any major decisions. It’s hunker down and hang on.

However, there’s tremendous opportunity out there because of this phenomena. If you’re a company at the leading edge of the economic comeback, a company who has continued to invest in R&D, new products, and superior processes, you’re likely to end up in a more advantageous position than the competition.

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