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David Segal

David Segal

Posted: October 6, 2009 11:14 AM

Trapped In Prisoner's Dilemma, More Stimulus Is The Way Out

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The recession has most of us feeling real constraints upon our personal freedom. It happens that the "Prisoner's Dilemma," formulated by researchers at the RAND Corporation during the burgeoning Cold War, provides a useful frame through which to consider the economy, and the welcome news that Democrats are considering a new array of stimulus measures.

Two suspects are arrested as accomplices in the same crime, and separately imprisoned. The prosecutors don't yet have enough evidence to convict either on serious charges, and offer each a deal: If one implicates the other, who stays mum, then the former goes free and the latter goes to prison for ten years. If both testify against one another, each is incarcerated for five years. If neither assists the authorities, they are both held for just one year.

One of the game's key assumptions is that the prisoners are unable to communicate and coordinate with each other. They are atomized, thoroughly rational, infinitely selfish, individual points. The lowest penalty carries the highest risk, and so if each seeks to maximize his or her reward and minimize his or her jeopardy, they should both cooperate with the prosecutors and sit in the clink for five years.

The Prisoner's Dilemma was developed at a time when the worlds' superpowers were extreme antagonists, distrustful of each other, relatively uncommunicative, and ruled by governance structures which were opaque to one another -- hence the nuclear arms race, and a strategy of deterrence via mutually assured destruction.

However, if we break that one critical constraint, slice through the Gordian Knot, and allow the actors to trust each other and coordinate their actions, then the solutions change dramatically, making possible outcomes that are better for all parties: The prisoners are best off if they agree to stay silent. The super-powers should sign nuclear disarmament pacts, overseen by international inspectors.

In his film The Trap, Adam Curtis traces the evolution of non-cooperative game theory, and its conception of individuals as driven by narrow-minded self interest, into the anti-interventionist free-market economic theory that came to define Thatcherism and Reaganism in the 1980s. It was largely contrived by RAND's and MIT's John Nash, subject of the book and film A Beautiful Mind and suffering from paranoid schizophrenia which skewed his conception of interpersonal relations. It still dominates global economic policy today, and Nash went on to win the 1994 Nobel Prize in Economics for his game theory work.

Economic theory is useful to the extent to which it describes real behavior, but living, breathing human beings are not maximally rational, egoistic actors. We are empathetic and have spent thousands of years developing structures via which to better work together, forming governments which we can use to undertake collective decision-making and action. Laissez-faire economics is often given the deference due a force of nature, but we are fundamentally social creatures, with a drive to communicate and coordinate with one another: The very fact that hundreds of thousands of years of evolution have selected us for this trait is strong evidence that our social tendencies increase the likelihood that we will prosper. We should be skeptical of an economic philosophy that neglects this or assumes it away.

A poor economy understandably scares atomized individuals out of spending. Consumers have lower incomes, and try to save more of them, terrified that next year will be thinner than this one. Investors won't invest, out of fear that no one will buy their new goods and services. But we needn't be so lonesome: Through government action, we can enter into an agreement by which we all pledge to spend, together -- and we're all better off for it.

In an age in which it is easier and more efficient than ever for people to communicate and cooperate, it is disconcerting that so many on the right would push for greater isolation of individuals, and condemn the relatively meager government intervention that has been enacted with the aim of pulling us out of the economic downturn. The stimulus package's oft-cited $787 billion figure includes nearly $300 billion in tax cuts, meaning that it represents a split between conservative and interventionist economic philosophy -- a Mad Hatter should be able to find almost as much to like about it as to dislike, and the amount of spending which it entails is far less than many Keynesian economists believe is needed to pull us out of recession. (As a percentage of GDP, China's stimulus is about three times as large, and less reliant on tax cuts -- and it appears to be working.)

Some in Rhode Island, where I live, decry that our state government spending rose a bit this year, without accruing a deficit, as most states are barred from doing so. But higher spending is precisely the point of the stimulus! As the economy is kick-started, government revenues will rise, and states will be able to wean themselves from increased federal funds.

In the Prisoner's Dilemma, coordination is not understood to be normatively wrong -- its impossibility is simply a rule of the game, based on frosty, false assumptions about human nature. Policies based in late 20th Century economics, predicated upon non-cooperative game theory, will leave our economy in shackles for a needlessly long period of time. If we agree to work together, and spend together -- a second stimulus, with more funding for local governments is probably in order -- then we can free ourselves from the economic mess so much sooner.