Failures of Capitalism: The Prisoners Dilemma

How a simple thought experiment demonstrates a deep problem with free markets.

Erik Engheim

--

The prisoners dilemma is a simple game used to explain why participants in a market don’t always act in ways which are beneficial to society. It belongs to the field of game theory.

Simply told, two criminals are arrested and interrogated. Each criminal is contemplating whether to snitch on the other or keep silent. The trade-offs are these:

  • If you snitch on your partner and he stays silent you’ll go free and your partner will get 3 years of prison.
  • However if you are unlucky and he also snitches on you, you’ll both get 2 years of prison.
  • If both stay silent, each one will get 1 year of prison.
How many years of prison each prisoner will get, depending on whether they snitch (betray) or stay silent and loyal to each other. Bottom right is the optimal choice.

For the two of them combined it is best to keep silent, as that will give them a total of 2 years in prison.

However that is not a safe strategy to follow when you can’t trust the other guy. The safe strategy is to snitch, as that avoids being stuck with 3 years of prison. The total prison time for both will however end up with 4 years, which is the worst total outcome.

The reason prisoners dilemma is useful in economics is because it explains why participants in a free market will on many occasions do things which are not good for any of them.

Real World Examples of Prisoners Dilemma

Whether dealing with political ads or ads for products, one ends up with a prisoners dilemma. For society it is no gain that enormous amounts of money e.g. is spent on political campaigns and it doesn’t really benefit the individuals running for office either.

Advertisement

However if you spend minimal on advertisement and your opponent spends a lot, your opponent is likely to get an advantage over you.

--

--

Erik Engheim

Geek dad, living in Oslo, Norway with passion for UX, Julia programming, science, teaching, reading and writing.