If the world were seriously threatened, what would happen to the economy?

Question

Imagine a world exactly like Earth, complete with humans and all. The scientists of this world suddenly discover that, unless drastic measures are taken, all life on Earth will be eradicated. However, there is one (and only one) option that can save the world, if we can get the funding. This plan would cost an exorbitant amount of money, but has a probable chance of being successful. In this situation, what would happen to the costs of the materials necessary for the plan? Would the sellers raise the price due to the increased demand, or would they lower it in order to make saving the world easier?

Answer 1

We can see what happens already. It happens daily in business. Let's get to work

However, there is one (and only one) option that can save the world, if we can get the funding.

This phrasing indicates either an absurdly unlikely circumstance, or a partial picture. It is very unlikely that there is actually only one solution. For example, let's assume the problem is trivial: "put these 7 numbers in order: 1, 3, 5, 7, 4, 13, 20." There are many solutions such as

• Swap the 5 and the 7. Then swap the 7 and the 4
• Swap the 4 and the 5. Then swap the 5 and the 7.
• Jumble the whole group up, put it through StackSort (read the image's tooltip). Then go get a drink of water.

And so forth. The actual number of degrees of freedom in the problem is quite staggering, especially when you consider the question of "what happens next after we succeed?" Are we thirsty? Maybe the plans that involved drinking water are good!

What you more likely are describing is a case where there is a hard requirement: thou shalt do X, or the entire planet dies. There may be many implementations of X which function, although your word choices indicate that most courses of action will not satisfy X.

Thus the goal of every rational actor in this scenario is two fold:

• Ensure the survival of the planet
• Ensure that, after the planet is saved, their position is as ideal as possible.

Alternatively, in mercenary order of priorities: 1) get paid. 2) live long enough to enjoy getting paid.

Now this works great as long as everyone has perfect information. However, we don't. Its entirely possible that we may do our part, but someone else slacks off. In this case, we may be obliged to do even more work to save the planet, making up for the slackers. Now we're getting somewhere. This sounds a lot like a traditional Prisoner's Dilemma. This is a dilemma where two individuals (we'll call them Alice and Bob) commit a crime. There's not enough evidence to convict either one, so they are called in for questioning. There, they are provided with a dilemma:

If you agree to testify against your partner, your testimony plus the evidence will be enough to convict him. This same deal is being offered to your partner. We admit, we don't have enough evidence to convict either of you without the other person admitting you two both did it, so here's the deal. If neither of you testify, we're going to convict both of you on a lesser crime, and give you both 1 year in jail. If either of you testifies against the other, they can go scott free, while the other person spends 9 years in jail. If both of you agree to testify, you'll both get convicted, but we'll only sentence you to 3 year.

The logic diagram looks like this

                       Alice
               Quiet          Testifies
              +-------------+--------------+
   Quiet      | Alice: 1yrs | Alice: 0yrs  |
              | Bob:   1yrs | Bob:   9yrs  |
Bob           +-------------+--------------+
   Testifies  | Alice: 9yrs | Alice: 3yr   |
              | Bob:   0yrs | Bob:   3yr   |
              +-------------+--------------+

The dilemma forms because the best course of action is to both stay quiet. However, if you both realize this, you have to worry that your partner might try to decrease their own sentence by ratting you out. Thus, you must be conservative and testify. The result of the dilemma is that the most rational course of action is to testify, and both of you serve 3 years, even though you could have gotten away with just 1.

We can draw an analogy to our example. Instead of "Quiet" and "Testify," we can "Conform" to what is best for the planet, or "Defect" and do what is best for us

                       Alice
                     Conform              Defect
              +---------------------+--------------------+
   Conform    | Everyone lives      | Everyone lives     |
              | Everyone is even    | Alice makes money  |
Bob           +---------------------+--------------------+
   Defect     | Everyone lives      | Everyone dies      |
              | Bob makes money     | Everyone is unhappy|
              +---------------------+--------------------+

Obviously this pattern has more players, but the basic story with two players is enough to understand what is happening. The correlary to the prisoner's dilemma suggests that everyone gets greedy, then dies.

However, that's not the end of the story for this dilemma. You see, if it was that simple, being a prosecutor or Attorney General would be a piece of cake! In reality, this doesn't work. We find that criminals refuse to snitch on each other with remarkable consistency. There's clearly a second force going on in the real world! From talking with criminals, we find the answer is obvious. A snitch doesn't get very far in the crime world. If you snitch, you've basically ended your career as a criminal. Nobody will work with a snitch, and everybody knows it. So this adjusts the logic of both Alice and Bob in our example. Both of them know the other person knows that snitches will be brutally punished. They may avoid a few years of jail time, but the trade isn't worth it. This knowledge is enough to get both Alice and Bob to conform, refusing to testify against their partner, and both get a year in prison.

Likewise the global "essence" will likely rise up to try to find ways to ensure conformance. This will likely be in the form of governments putting dramatic pressure on companies to not defect in the name of profit. Sure, they can defect, but it might be the straw that broke the camel's back, causing the earth to die, and even if someone else did cover for them, they'd be labeled as a profiteering pile of filth and nobody will work with them, nor accept their money.

The real question is not whether there will be defectors, but whether second order effects will creep in. At some point, when you're leaning on a company to do something "for the common good" rather than "for your own profit," you can lean hard enough that the company gives you the middle finger, and folds up instead. The challenge for the government is to find ways to put pressure on the companies without causing them to fold up.

There's another related experiment that has been done, involving two parties. Each party is assigned a random role. The first party is given two envelopes and some money, say $100. They are told to divide the money up between the two envelopes. One is money they will keep, and the other is kept by the second party. The second party is then permitted to look at the distribution of cash, and make a choice. They can either take their money, and the first person keeps theirs, or they can refuse it, and the first person gets nothing.

The game theory logic for player one is simple. The first person's goal is to get as much money as they can, without causing the second player to defect. If they defect, nobody gets any money. The second player's logic is theoretically easy: just take the money, you always profit. However, if the first player knows this, they may only leave $1.

This scenario is not well described in game theory. You actually need drama theory to make sense of the results. However, the results are easy to spot. In America, the most common result was a 50/50 split. If the first person tried to take more money, such as a 90/10 split, the second person would punish them by making sure nobody gets money.

In some African nations, the result was different. The first player would choose 90/10, and the second player would accept. When asked why, the answer would be "because \10 is better than \$0, and if I was in the first player's position, I'd have gotten to have the $90 anyways." In some groups, the split was actually quite arbitrary. It was found these groups were known for sharing everything as a group. It really didn't matter if the split was 50/50 or 90/10, they were going to pool the money later once both parties got back together!

So this is the stage for where your question really ends up. Large powers like governments will put pressure on the companies to band together and do things for the common good. The amount of pressure they can put on the companies before they defect depends on the culture.

So now we get back to the original issue of many solutions to the problem. The more solutions there are, the less pressure will be needed to ensure enough conformance to survive. As the number of solutions get smaller, more pressure will be needed, causing more companies to defect. At some point, that can be the end of humanity. However, we cannot know one way or another without a very lengthy exploration of exactly what scenario we are in, and what solutions present.

Answer 2

In such a situation of dire global emergency, it is entirely likely that governments would switch to a command-economy mode, meaning that if the vendors of the goods necessary to save the world did not voluntarily reduce their profit margins, then governments would take steps to make it a legal necessity for the vendors to supply the goods at cost.

In the event that the vendors attempted to decline to supply the goods entirely, the vendors' businesses could be seized and nationalised, and if necessary any persons with necessary trade secrets could be... compelled by whatever means necessary to divulge those secrets for the good of the entire world.

Answer 3

Ideally, the suppliers would provide the necessary materials at a reasonable price.

In all likelihood though, given the nature of humanity and the inability of the entire race to work together harmoniously (even if it would mean utter extinction), the price of the necessary components would skyrocket and a very select, very rich stakeholders would more than likely demand exorbitant compensation or concessions as the age old question of "What do I get out of it?" is raised.

More specifically, it would most likely become a case of - "If these scientists can avoid the catastrophe, why should I not monopolize the solution and charge for the privilege? After all, it's only fair that I'm properly compensated for my time and material, and those that really want to be saved will find a way to pay for it?"

I don't hold much hope for humanity.

Answer 4

I completely agree with Monty Wild that for a short-term project seizure of resources would be the probable outcome.

Two issues though that might throw a wrench into your 'save-the-world' project:

• Since when is there only 1 scientific opinion? I thought there were at least 3: the world is going to end soon - the world is going to end next century - the world is not going to end. Yes, sure, the Flat Earth society (thankfully) gets laughed at, but what about the climate change issues? Does the climate change or does it not? Also, will your population believe the scientists (so that your politicians get the support to push such a large-scale project through)?
• As long as your potential DoomsDay is more than two decades away, I think you're pretty much SOL. Humans really aren't good at planning on such long terms; any politician suggesting to seize resources for the next twenty years will get laughed out of office (or at least not reelected). And global cooperation for such a long time seems very unlikely. Putting so many resources into a single project will inevitably effect the population, and there will inevitably be a country where the population revolts and stops contributing. Which will probably trigger a domino-effect amongst the economically weaker countries, and you need to be very, very lucky if it doesn't completely destroy any chances of success.

Answer 5

It is in the sellers' interest to not be wiped out by the same issue that will wipe out everyone else so suddenly, so they have no incentive to raise the price beyond the point where the plan would be put into place. However, if the high demand means their inexpensive way of making something is not sufficient, their costs will increase and their prices will likely also increase. Finally, if the solution is nonobvious, the society may have a need to offer a strong incentive for the creation of that solution, which could be in the form of a high reward and price paid for a solution. (The money is pretty meaningless if live on Earth were wiped out, though).

Answer 6

The climate change analogy suggests that the response would be to deny the problem for as long as possible, and then to ensure that even if everyone else perishes the well-off have enough bunkers and tinned food to survive it.

The World War analogy suggests that there would be some combination of command economy and long-term debt (e.g. the Lend-Lease programme and the Marshall plan). Get the materials first and leave an IOU.

There would undoubtably be profiteering and some inflation of the prices. That's human nature; if, as you've set it out, there's no way the project would not be funded regardless of the cost, market forces don't apply. See for example the Daraprim pricing scandal: rather than the cost being related to production in any way, or ability of people to pay, the makers inflated it hugely.

If you're holding the resource necessary to save the world, the only thing stopping you from demanding all the money in the world for it is the risk that going too far will result in you being expropriated by the government or murdered by an angry mob.

Another example from the real world is Tamiflu and the debate over expropriating it from the patent holders in the event of a potential bird flu pandemic.

A bit depends on the details: is the solution building a single thing in a single place? What opportunities are there for ISS-like international cooperation? Is there a chance that the disaster might be partial, or attenuated so it only affects some part of the world? Could the problem or solution be weaponised? These all affect who gets to profit from and pay for the fix.

Answer 7

Look at our own history for your answer.

First, even in times of war trading still happens. The currency may change, but trading it's self continues. This is even true between enemies at times. So some kind of economy would still exist.

Next look at World War 2 and some of the countries war efforts. In the USA there was an extreme drive for metals. Prices went up, and stuff got hard to find. Propaganda and similar campaigns to "Make it do" arose. Look into how that worked out. There were several lines that people would not cross (Alarm clocks, sliced bread, and beauty products) but many many more that people were willing to give up (canned goods, typewriters, toys, and appliances)

In a "do or die" situation, I would think the same basic principal would unfold, with rationing, propaganda, and and a sense of "For Earth (or what ever the world is called)" people would be willing, at least historically, to make the daily sacrifices needed to build the anti-dooms-day device.

Answer 8

Quoting Wikipedia:

In economics, a demand shock is a sudden event that increases or decreases demand for goods or services temporarily.

Unfortunately, that article doesn't give a lot of detail, although it does point to a couple of examples (probably smaller and less dramatic than your hypothetical), and give you a name for your concept that you can use for further reading. It does back up your guess that prices increase; however, price gouging can only really occur if there is a monopoly or near-monopoly on production, and for some reason it's hard for more entrepeneurs to join in (common reasons are regulation like patents or naturally-occurring prohibitive startup costs, like drilling an oil well). Otherwise, competition between producers undercutting each other will continue to keep prices reasonable. Likely if price-gouging did arise, the government would step in and break up monopolies or lower barriers to entry (if possible) to restore competition and drop the prices again.

It may even be the case that as the industry booms, competition intensifies, economies of scale increase, and efficiency of production and investment in industry R&D actually become a higher priority, so that costs and therefore prices actually lower. This is especially likely if previously the market for some resource was pretty niche but has now become a major commodity.

However, it's also plausible that as demand increases, it becomes economically viable to pursue less efficient means of production in the name of increasing total output (suppose you have to mine some ore, and you need a certain level of purity in order for it to be actually worth digging out of the ground; as demand increases, the minimum level of purity that's "worth it" widens out). That would lead to an increase in price, but a reasonable one, since it reflects the increased underlying cost of production to keep pace with demand.

Generally the shift of a bunch of labour and resources into this Big Solution could conceivably draw resources away from general economic activity, which might see a decline in quality of life, or a crash in unstable markets or something equally dramatic. However, macroeconomics can be counterintuitive, and arbitrarily increasing consumption and giving people unproductive busywork has at times been proposed as a solution to some economic problems. I'm not really qualified to comment on that.

The prospect of imminent catastrophe will have direct social and economic impacts as well. Planning for the future now seems like less of a good idea, which makes investment seem like less of a good idea, which may lead to trouble. It's hard to say how people will individually react, and how optimistic or pessimistic they would be, but they could conceivably cause more widespread havoc. All this economist's talk becomes kind of irrelevant if people stop coming to work and start rioting instead and societal order breaks down. You may also find that people will deny that the apocalypse could possibly be happening, or even deny that it should be stopped. But that's more outside the scope of your question.

In short: demand shocks have occurred in the past, and you might want to look them up (I haven't). If competition in production is easy, that will help to mitigate the impact on prices – simply put, as soon as producing unobtanium ore because hugely profitable, mining companies will flood in until it is merely very profitable, and then continue flooding in for as long as it is more profitable than whatever they were doing before, and thus is the equilibrium largely restored. Either way, you might find that the socio-psychological impact of imminent possible doom has a more striking impact on daily life than commodity market prices anyway.