Monday, April 25, 2011

Games show how economists lead us astray

In universities these days they play a lot of games - though when the economists play they prefer to call it "game theory". And game playing is one of the most potentially useful things academics do.

The most famous game played by social scientists is "the prisoner's dilemma". As described by Wikipedia, two suspects are arrested by the police. The police have insufficient evidence for a conviction, but they keep them separate and offer each the same deal.

If one testifies for the prosecution against the other (that is, "defects" from a position of solidarity with the other) and the other remains silent (that is, "co-operates" with the other), the defector goes free and the silent accomplice receives the full 10-year sentence.

If both remain silent, both are sentenced to only six months for a minor offence. If each betrays the other, each receives a five-year sentence. So each prisoner must choose whether to betray the other or remain silent.

Each is assured the other won't know about the betrayal before the end of the investigation. So how should the prisoners act?

As a group, the two prisoners are better off if they each stay silent - each gets only six months' jail.

As individuals, however, the risk of being betrayed by the other means the "rational" choice is always to dob in the other guy. If he stays silent, you get off while he gets 10 years. If he dobs you in too, you both get half the full sentence, whereas if you were to stay silent while he dobbed you in you'd cop the full 10 years. Barry Schwartz and Kenneth Sharpe, in their new book Practical Wisdom, observe that social scientists love the prisoner's dilemma game because it embodies many situations in life in which co-operation would make everyone better off, but choosing to co-operate makes you vulnerable to exploitation by people who choose not to co-operate.

It's noteworthy that, though the economists' model leads them to predict that everyone will make the "rational" choice to be unco-operative, when the once-only game is played with experimental subjects a significant minority of people choose to co-operate.

See what's happening? It turns out that the economists' conventional, neo-classical model is just one way of "framing" the economic problem - the problem of how to make a living.
The model frames the problem as a problem for individuals: how do I look after myself in a world composed of other individuals whose main aim is to look after themselves as individuals?

In other words, the model sees the economic world as fundamentally competitive. It highlights the risk that others will choose not to co-operate with me, and highlights the benefit to me of "free-riding" - taking advantage of those who do choose to co-operate.

The one thing it doesn't highlight is the opportunity cost - whether to me or to all of us - of our mutual failure to reap the benefits of co-operation.

So "the economists' way of thinking" is a way of framing the economic problem that's biased in favour of competition and against co-operation. But it's just one way of framing the problem; framing it another way could emphasise the benefits of co-operation and the costs of excessive competitiveness.

When we're taught to think about the economic problem the way economists conventionally think about it, our thinking becomes biased against recognising the benefits of co-operative solutions: "communitarian" or "collective" solutions, whether agreed between people informally or - to overcome the problem of free-riding - delivered by governments using compulsory mechanisms such as taxation.

Conventional economic analysis will always be biased against government intervention because it frames the economic problem as one to be solved by individuals, not by society.

A crude reading of evolution says it's all about competition - the survival of the fittest. A more modern, sophisticated reading says the supremacy of the human animal is as much the product of co-operation between humans as about competition between them. Both co-operation and competition are key components of our winning formula.

The fact is that a huge proportion of economic activity involves co-operation between people rather than competition in markets. There are all the goods and services produced within households.

And there's all the activity that occurs inside big companies, including trade between the different parts of national and trans-national corporations. Economists know surprisingly little about this activity.

To emphasise the point that conventional economics (and, indeed, all economics) involves framing, Schwartz and Sharpe note that the participants in one experiment were giving the same version of the prisoner's dilemma game, except that one group was told it was the Wall Street Game whereas the other group was told it was the Community Game.

You guessed it: people playing the Wall Street game were much more likely to defect. In a similar game, those told they were taking part in the Social Exchange Study were more likely to co-operate than those told they were taking part in the Business Transaction Study.

The latter researchers say the social-exchange frame induced a motivation for the players to do what was right, whereas the business-transaction frame induced the motivation to get as much money from playing the game as possible.

All this suggests the success economists have had in recent decades in propagating their way of framing the choices we face has subtly influenced our thinking and behaviour, making us more competitive and self-seeking and less co-operative and public-spirited.

If so, we're the poorer for it. We need to frame the economic problem more carefully.