The provision of public services is very much like a complex game of ‘Prisoner’s Dilemma’, with the government aiming to establish an ‘altruistic equilibrium’
Many people are familiar with the Prisoner’s Dilemma, that staple of game theory that can be used to demonstrate that nice guys don’t necessarily finish last and that altruism can be a winning strategy for everybody in the longer run.
In the game, you and I are playing against each other and we are each placed in a dilemma. Each must then decide individually and without the knowledge of the other whether to cooperate with or not. In the language of the game, not to cooperate is to ‘defect’.
If I play ‘Cooperate’ and you play ‘Defect’, you win a big reward and I get a big fine for being a sucker. If we both play ‘Defect’, we each get a fine, but not as great as the sucker’s fine. If we both play ‘Cooperate’ we both get a reward, but not as great as the reward you get if you defect and I am a cooperative sucker.
What this boils down to is that on a single round of the game, the logical play for each of us is to defect because that way we each maximise our potential winnings and minimise our potential losses. But the beauty of the game is that if we play over and over again, and the risk and reward structure is set up in the right way, we can work out between us that mutual cooperation is a better strategy.
If we can trust each other enough to cooperate consistently, we can both be assured of winning by giving up part of our potential winnings. The Prisoner’s Dilemma is a simple but subtle demonstration of the importance of trust in human interactions.
Public provision could be likened to a huge, complicated game of Prisoner’s Dilemma. Over time, we have learned that giving up something from our potential life rewards can be better for us in the long run. Taxpayers pay their taxes to the government, which passes them on to public service providers, which uses them to provide services and benefits to those who need them.
Within that complicated series of relationships there is a fair serving of trust at every point. It works if we can be fairly sure that we won’t be suckered by someone reneging on the deal later on.
Not everyone will always cooperate and there will be defectors in the system, described in tabloid language as tax evaders, benefit cheats, shirkers and scroungers – maybe even looters and rioters. But as long as the vast majority of us cooperate, the system settles down into a kind of equilibrium in which we may all grumble a bit but most of us go away more or less happy, and probably with a nice warm feeling of altruism.
Recently, of course, the rules have changed. In the terms of the Prisoner’s Dilemma game, there is now less money for ‘rewards’ and the ‘fines’ have increased. We are still required to pay about the same amount of tax, perhaps a bit more, but the benefits and services we receive may be worse. Providers are still expected to provide the same services, or better, but will be paid less for doing it.
So the game equilibrium has been broken and everyone will be reassessing their strategy as if they were in the Prisoner’s Dilemma game. Why am I paying so much tax when services are being cut? Am I still prepared to provide this service for the rewards I am getting? Do I trust any of these people any more? These deliberations are going on, perhaps consciously but more likely unconsciously, in millions of minds.
Inevitably some people who were previously cooperating happily will decide that their best strategy is to defect, but in the real world, as opposed to Prisoner’s Dilemma world, this is easier for some than for others. If I own shares in a company that provides care homes, for example, I may be able to defect by selling those shares, but if I am a resident in one of those care homes, simple defection is not necessarily so easy. This imbalance makes it harder for society to absorb the impact of the changed circumstances.
The complicated web of co-operations and defections will take time to settle down into a new cooperative equilibrium, but to restore it quickly we need to take account of another consequence of the new reality.
In the Prisoner’s Dilemma game the rules are set by a mysterious third party who can weight the rewards and fines so that cooperative equilibrium becomes possible. In the real world there is no such third party – unless you happen to live in a country ruled by a benign, all-seeing dictator with an interest in game theory and a masters degree in mathematics. Certainly in the UK, where that system of government has yet to evolve, the equivalent of the fines and rewards system emerges from a broad consensus in society.
The most the Government can do in this complicated world is to set the framework for the system in such a way that an altruistic equilibrium can evolve. Such an equilibrium is not inevitable: in the Prisoner’s Dilemma it is quite possible for an equilibrium to be established in which everyone defects (see the film, ‘The Beautiful Mind’ for further information). Finance people have a big role to play in helping to reset the framework.
Another role for Government, and for Finance, is to provide information, so that people can make decisions about cooperation or defection in possession of the facts. People are not cold calculating machines and many for whom defection may be coldly rational would decide not to defect if they can make a conscious choice.
This is why transparency is important – not so that we can see who earns more than the Prime Minister, but so we have the information we need to make rational choices about costs and benefits, and also because of the role transparency plays in establishing trust.
But overall, the rules under which our game operates are our rules and the choices are our choices. It will be up to us as a society how quickly a new equilibrium is established, or whether one is established at all. Until that happens it will be easier, not harder, for defectors to win.
Alan Finch is senior financial analyst at Tower Hamlets Council
