The Prisoners Dilemma

Mainstream Eonomics, which failed to predict the recession in 2008, which was the bursting of a bubble fueled by the uses fo complex financial instruments, 1998, the recession of 1988 which resulted from a boom in derivatives that meant the financial system had to be bailed out with tax payers money, recession of the mid 70s and the great depression of the thirtie, assumes if we all look after number one we will all be better off. Rationality is often defined as furthering your own interests having taken account of the options open to others for in response to your actions. It is not hard to find cases where, if we all pursue our own interests, we all end up pwrse off then if we cooperate. Perhaps the most famous example is the prisoners dilemma

Two alleged criminals are arrested and held separately. Each knows that if both deny everything they will get a short sentence. If one confesses and implicates the other they will go free and the other will get a long sentence . If both confess and implicate the others both will be executed.

It appears rational for each to defect by confessing and fingering the other but if they do both will end up worse of than if they had cooperated kept silent.

Less lethally it is rational to drop litter, but if everyone drops litter the street becomes an eyesore.

In some parts of the world farmers know that if they cooperate they will all be better off but that one defector can benefit while making others worse off, so none of them cooperate.

We have seen how by pursuing their own interests and ignoring others the finance industry threw the world into recession and netted vast profits at taxpayer's expense but suffered severe financial and other wounds (remember Lehman Brothers?) and a hopefully permanent loss of status and trust which could eventually cost them a lot more.

They also took a load of money from the taxpayers and said “Thank you very much. Here's the bill, Oh you wanted us to lend it to others? WHAT money?” but that is another story.

A single play of the dilemma is not soluble but if the game is repeated again and again there are various strategies. A simple but effective strategy is Tit for Tat - simply do what the other player did. Of course if they make a mistake and defected when they wanted to cooperate both will get locked into a negative cycle. A more effective strategy in this case is occasionally to cooperate and see if the other person cooperates. If they do fine, if not keep defecting. There are many other strategies and a lot of research on how strategies evolve with time in large groups of interacting computer programs

The point I want to make here is that the Prisoners Dilemma makes nonsense of the Mainstream Economic assumption that we are all better off if we look after number one. Of course the mainstream economist could argue that such cases are rare in practice and society as a whole is better off if we simply look after ourselves. Here I will ignore the economists's assumption that having more money or goods automatically makes one happier and look only at money

My favourite counterexample is offshoring to cut costs. It is rational for each business to cut its costs by offshoring and making the customers of other businesses unemployed. But if all businesses do this the domestic market will collapse. A similar argument can be made about replacing humans with machines. In the limit the only people earning money will be those making the machines – for a while at least.

Carefully examined the prisoners dilemma shows that the unbridled pursuit of self interest can be self defeating, whether this involves individuals dropping litter, large corporations spilling oil all over the place or banks and others concocting mind breakingly complex schemes. Most of which needed to be explained by a psychiatrist rather than an investment analyst, in the pursuit of profit, and the most dangerous case of all where the pursuit of profit results in environmental damage that could endanger us all.