A prisoner’s dilemma is when two groups that would be better off cooperating in order to achieve a higher coordinated payout choose instead to sacrifice their better aggregate payouts because their individual incentives lead them to forgo cooperation. Typically represented in a matrix form, one way to conceptualize it is to describe the following scenario: I and Stephen Colbert are both in prison for being fearless conservatives. We are given the choice to either be silent or to cooperate with the statist authorities by informing on the other. If we are both silent, we would get two years each in prison, if we both informed we would get three years in prison, and if one of us cooperated and the other remained silent, the one cooperating would be free, while the other who was silent would get five years. It is in both of our private interests to inform on the other, because then we face a choice between freedom if the other was silent, and three years if the other informed, rather than in the case of if we choose to be silent, in which case we face either two years in prison if the other was silent, and five years if the other informed.
In aggregate that means instead of having two years in prison if we both were silent, we will both inform on one another and get a negative aggregate outcome of having three years in prison each because it is in our private interest to arrive to this equilibrium, since both of us will seek the better payoff of informing on the other. We will harm each other as we seek to help ourselves.
The 21st century’s prisoner’s dilemma will be that every firm will not want to hire workers, but will want every other firm to hire workers in order to have a consumer base for itself. This is because the private payoff of having less labor (and saving on what for many businesses is the largest cost) is such a powerful private incentive. Despite what other businesses do in aggregate, it will almost always be better for the individual firm to shed workers. Unfortunately, this will lead to a worse social equilibrium. Castes of the unemployed, political and economic volatility, and staggering inequality may become the norm. Ironically, this economic chaos will then lead to lower profits, as less consumers will be able to buy most products. If left unchecked, lower private costs will be overwhelmed by higher social costs.
The 1950s saw the rise of the Great Society, the establishment of the welfare state, and of mass infrastructure projects that set the foundation of the 20th century. We will have to do even better to build the 21st century, and ensure a balence between private and social incentives.
(Now please help break me and Stephen out of prison!)