The prisoner’s dilemma is the most important concept to come out of game theory. The basic setup has two criminals isolated in a police station and accused of a bank robbery. Each criminal is given the opportunity to sign a sworn statement against the other. If they both refuse to sign, they both get minor punishments of 2 years. If they both sign the statement, they get the harsh punishments of 5 years. If one signs, and the other refuses, the signer gets only 1 year and the refuser gets the maximal 8 years.
The prisoner’s dilemma is a powerful metaphor because the socially optimal outcome is to stay silent, but since each party has an incentive to betray the other, the equilibrium will deteriorate to the worst possible case, 5 years for both. When individual and social incentives align, there is little danger of reaching a bad outcome. When they conflict, even good actors may be pushed into the worst possible outcome due to circumstances. Similar situations appear in some form all across society. Indeed, the defining problem of civilization is how trust and cooperation can survive in cases where individual incentives are against it. Many use the prisoner’s dilemma as a trump card against selfishness, greed, or the entire system of capitalism.
The great irony of the Prisoner’s Dilemma comes from the very initial situation itself. In the original Prisoner’s Dilemma, the true socially optimal outcome is for them both to confess. Assuming society is just, these are criminals who merit the punishments they are due. The prisoner’s dilemma is actually working for society in this case rather than against. Nor is this an isolated quirk of the defining example. The most common invocation of the prisoner’s dilemma in economics is against private monopolies. Producers have an incentive to band together and fix prices at artificially high level. However, these cartels usually fail because each producer has an individual incentive to undercut their competition. Since monopolies are beneficial for all producers, but socially inefficient, again, the prisoner’s dilemma is working towards socially optimal outcomes. The prisoner’s dilemma in capitalism is working for society.
The larger dimension at work is one of institutions. The police have isolated the criminals and set up the deals and punishments precisely to exploit the prisoner’s dilemma effect. Likewise, cartels will succeed or fail based on whether the larger society supports or opposes them. When the government sanctions cartels, encourages them to meet and deal, and allows them to enforce discipline, they will thrive and society suffer. When government attacks open collusion and refuses to accept the cartels contracts, they’ll whither and fail in any covert agreements as the prisoner’s dilemma will tear them apart. The defining goal of civilization should be to structure institutions to maximize socially beneficial prisoner’s dilemma and minimize socially destructive prisoner’s dilemma.
