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Oct. 21, 2005 Game theory wins Nobel prizes lately. This year, Thomas Schelling and Robert Aumann shared the economics award. Game theory is simply the logic of strategy. Game theory studies any situation where your action plan depends on what you expect other people will do. Game theory gives useful advice on calculating what other people will do, and how you can plan your response for best results. Game theory classifies different environments for strategy, and we call these environments “games.” The most studied game is the Prisoner’s Dilemma. I don’t want to dwell on the game itself (one can study further here). For the moment, I simply want to dwell on the lessons the game teaches. Here’s a useful one: whenever a group can obtain something (a public good) but it doesn’t need every member to participate, it gives every member a motive to risk non-participation. If you know that your group might achieve some goal even if you don’t contribute, you have a motive to avoid helping. After all, you achieve the goal without paying the price. Of course, everyone else in the group has the same motive. Game theory, then, teaches that the larger the group, the less efficient it will be. Some groups are so large that the inefficiency defeats it. If all the poor people in the world banded together to form a cohesive political bloc, they’d dominate the world and resolve their own poverty. Nevertheless, that group will never form; its own inefficiency makes it impossible. Sometimes, you have to swallow the inefficiency because you have no other choice, and you have to come up with creative ways to combat the inefficiency. The classic example is paying taxes. We need government, and therefore we need to collect taxes. However, the chance of being caught for not paying your taxes is (according to some reports) no better than ten to twenty percent. Every individual has perhaps an eighty percent chance of getting all government services without paying for them. Normally, that percentage would be a killer, and the group would never get off the ground. But we need government, so we’ve added incentives to the equation. For instance, we overwhelm the penalty for being caught. You may only have a twenty percent chance of being caught, but we make the penalty so severe that it scares the hell out of citizens. We also appeal to simple moral considerations: if you want services, it’s only fair that you pay for them. If we were simply relying on the mere rationality of paying taxes, government would never get off the ground, so we overcome the rationality through other means. Governments deal with some problems better than others. Let’s divide government problems into two categories: “wide” problems and “large” problems. The difference? Wide problems are individual problems, widely distributed. Resolving these problems depends on how each individual behaves as an individual. Large problems don’t depend on how each individual behaves individually; these problems transcend individuals. For instance, alcoholism is really an individual problem, multiplied by many individuals. It's "big" only because so many individuals have it, but the problem itself is individual. National defense, on the other hand, is a large problem. The dynamics of game theory, especially the prisoner's dilemma, show that you (generally) can’t solve wide problems with a top-down, government approach. For instance, you can’t use government to fight alcoholism. There’s no way to penalize each individual’s behavior, mostly because it isn’t a rational behavior. Therefore, you can’t appeal to the individual’s rational self-interest as a way to coax him into different behavior. The drug war is the same problem. Racism has the same characteristics. One exception is the economy. The economy is inherently a wide problem, in that it’s many individuals making individual spending decisions. However, those decisions tend to be rationally self-interested (extremely so), and therefore government can actually influence that behavior. The two primary means of influencing spending is managing the dollar and managing taxes; and government can set the levels for both. Normally, the efficiency of the group decreases as it grows, but the inefficiency is offset by how sensitive individuals are to rational self-interest. On the other hand, consider education. A good education is mostly a function of a talented teacher in school and a stable environment at home. No government policy can give a teacher talent. No government policy can create a stable marriage. So, the basic ingredients to a successful education are beyond the scope of any government. One might counter that if we paid teachers more, it will attract more talented people who now seek better paying careers elsewhere. That’s unlikely. After all, untalented people want better pay as much as talented people. Offering better pay will likely make the applicant pool larger, but not necessarily any better. Education can only improve through better management of talent, and that’s more about policy than funding. Another classic example is energy. Creating and maintaining the energy grid is a large project, and that’s tailor-made for government. However, trying to limit energy consumption depends on how each individual responds. Government can’t really address that. Creating energy is a large problem and belongs to government, but limiting energy consumption is a wide problem. Government usually sucks at that. Liberals (and the media) routinely describe conservatives as wanting small government, or as little government as possible. The description leaves you with the idea that conservatives are just cheap. But that’s not true. It’s more about what kinds of problems government addresses. Conservatives want government to address the kinds of problems that we can actually do something about. We want to limit wasting resources on problems we can’t affect.
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