Is market behavior essentially competitive or cooperative? We compete for customers—buyers of our labor or products—because we are both consumers and suppliers. Out of the process of exchange, in our own self-interest, come unintended benefits—social and market cooperation— networks that benefit everyone. This is the process that Scottish philosopher Adam Smith described in “An Inquiry into the Nature and Causes of the Wealth of Nations.”
Did Smith mean that the group (society’s) interests always coincide with the individual’s personal interests? It is possible that outcomes for members of a group will depend not only upon what they each do individually but what they also do collectively. If this is the case, we find ourselves in a situation known as the Prisoner’s Dilemma. In the Prisoner’s Dilemma, the individual’s rational, self-interested actions have perverse instead of beneficial consequences for the group. Another Scottish philosopher, David Hume,is credited with describing the problem (in an agrarian setting) that is paraphrased below:
If your corn is ripe today, and mine will be ripe tomorrow, it will benefit us both for me to help you harvest today, and you to help me tomorrow. But we are each self-interested and prefer not to assist the other. Further, I don’t trust that you will return the favor if I help you now. So we each keep our labor to ourselves, and lose individually and collectively on account of it.
Clearly there are issues of both ignorance and trust that help create the problem.
Modern economists use game theory to explain Hume’s example, and to describe the (literal) ‘prisoner’s’ dilemma. A pair of suspects are separated and questioned individually about an unsolved crime. They may or may not be guilty. Still, each suspect has two possible choices: confess (implicate the other suspect, and make a deal with the prosecutor for a much reduced or zero sentence), or maintain their innocence (and get no deal). But wait! Each suspect’s fate also hinges on what their associate claims. They must each weigh the possible outcomes (punishments) in ignorance of the other’s decision. One scenario follows.
If both suspects confess, both will receive a moderately severe punishment. If only one confesses, the silent partner takes the brunt of the punishment, while the other goes virtually free. But if both suspects refuse to confess, a lesser charge will net both some minimum punishment. Since neither can confer with the other to formulate a strategy, they must both decide in ignorance whether to invest their trust in the partner’s actions.
Under circumstances given above, trust is likley to break down (as with the farmers). Instead of lost crops, there are prison sentences at stake, but nevertheless, prosecutors are likely to obtain more confessions than guilt alone would justify. Some innocent people will confess because they believe they will be convicted of something anyway, and want to minimize punishment. Plea-bargained confessions are not uncommon, and can net the accused a less severe punishment by shifting (at least some of) the blame to others.
There are probably several several instances of strategic behavior of the prisoner’s dilemma type in cases of recent vintage. And since perjury itself carries severe penalties, suspects as well as witnesses must make careful ethical and practical decisions about their testimony.
As a result, ‘honor among thieves,’ maintaining trust that your (allegedly) criminal cohorts will not plea bargain for a better deal, or lying under oath on someone else’s behalf can all be extremely risky choices.
In the absence of a mutual self-help agrarian society, does the Prisoner’s Dilemma still apply in economic settings? It does, particularly in land use and environmental issues. Here, laws that fully define property rights, and laws that protect and uphold contracts based upon property rights, can eliminate most of the perverse consequences that result when rational self-interest conflicts with community interest. To the extent that private individuals cannot count on those protections, however, they may continue to make perverse choices from a community perspective. Particularly in endangered species and environmental areas, these cases abound.
The old TV game show was titled “Truth OR Consequences,” on the assumption that contestant lies would be found out, and the liars alone would pay the penalty (OK, it was rigged for entertainment purposes), while truth-tellers would go free. In real situations however, where individuals face costs no matter what they choose, the problem of the Prisoner’s dilemma remains unresolved.