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January 04, 2006
The government is a Mob Boss.
Imagine a simple example of prisoners’ dilemma. It’s the standard tool used to introduce game theory, and for good reason.
Let me explain a bit: the idea is that two men (black) and (blue) committed a crime. The DA puts them in separate rooms and tell ‘em to confess. As inducement, he says that if either confesses and the other doesn’t the confessor will get 9 months and the other will get 5 years. If they both confess, they’ll each get 3 years. If neither confesses—he’s got enough evidence to get them 1 year in jail...
The payoffs are shown in the chart below. The black lettering represents (black)’s payoff and the blue represents (blue)’s payoff.
Now, this is a model—a simplified version of reality. As such, there are certain assumptions we are making. Chiefly that each person’s sole concern is spending as little time as possible in prison. Also that the entirety of the world for these guys is represented by what’s in that box...
So, given all that, both guys will confess. And the reason is that no matter what the other person does, each person is better off by confessing. Yet both people confessing gives them 2 more years than if they’d both remained silent. This is a sub-optimal situation...
If both parties could trust the other party to stay silent, they’d both take that option. But since they are both rational actors, they get screwed. What they need is an outside agent who will force them both to keep quiet. Like a mob boss:
Under this scenario, the mob boss will send an assassin after the worthless soul of anyone who confesses. Draconian measures make it possible to reach the optimal solution. Trust is gained. Hobbes smiles knowingly...
Trusting other people is the glue that holds our—or any-- society together. It makes everything from commerce to marriage possible. As rational actors (with imperfect information) we each want as much Utility (this is a word in economist that translates roughly as "happiness") as possible with as little effort as possible. Each of us, therefore, is occasionally in a prisoners’ dilemma with others; our interests are served easily by screwing each other, but optimally when we work together.
For instance, when you step into Best Buy to get a TV you know that if they send you home with a defective unit, you will be compensated for it. They don’t really want to; it’s in their short-term best interest to screw you on it. But they’ll take it back and give you one that works. Or perhaps give you credit towards something else. The point is that you have a reasonable expectation that if you spend your money with them, you’ll have a product that approximates what it is supposed to do...
There are a couple reasons for that. One is that Best Buy has a lot of big, big stores. They want to be around forever. Therefore they are going to do what they can to ensure that people are not unsatisfied with their products and service. Repeated interactions tend to lead to trust...
A great explicit expel of this is found on eBay. When you go there and check out the customer rankings of dealers, and the number of eBay transitions the dealer has had, you are trying to gauge the level of trust you should have for a dealer...
Another reason Best Buy doesn’t screw you: If they do, eventually the government will step in and sue them out of business. The government will act like the Mob Boss, and enforce a process which results in trust...
This isn’t a one sided consumers against Business, try passing a fake bill, bad check or stolen Visa. The government will step right in and restore trust...
One of the government’s primary rolls is to create the trust which facilitates commerce. Thus I find it troubling to hear right-wring rhetoric about the inability of government to regulate commerce. When government doesn’t do this, when the government decides that whatever business wants to do is just fine, when the order of the day is to let it be trust is weakened and each consumer is left to their own devices. To have commerce which functions properly, to have a society which is able to flourish, we need a government empowered to objectively establish ground rules.
Posted by Andrew at January 4, 2006 12:36 PM
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Comments
Have you watched 'A beautiful mind' my friend?
Sounds similar.
Posted by: Brett Fife at January 11, 2006 04:31 PM
No, though I am aware that Russle Crow John Nash won his Nobel for his work in pioneering Game Theory...
This work is now so standard that it is considered to be the basis of modern Political Science...
Posted by: Andrew Cory at January 11, 2006 04:42 PM