So game theory is the science of strategic thinking.
The idea here is that any time that you’re interacting with another person who has their
own interests and is trying to achieve their own ends, they are trying to do the best they
can given what they want, you’re trying to do the best you can given what you want,
and so you’re interacting in a strategic situation.
One of you is trying to achieve what you want, the other is trying to achieve what they want.
Game theory is a mathematical theory that attempts to make sense of how it is that people
interact in these strategic situations.
It was originally developed in economics in order to try to understand economic behavior
like why people buy certain things or why they’re willing to work for certain wages,
but later on it was expanded and applied to a variety of different situations including
biology, international relations, and even interpersonal relations like friendships and
parenting and family relations.
So one of the big problems that parents constantly confront when they’re raising two kids is
that the kids will sometimes compete with one another in order to get out of doing family
chores, leaving them to the siblings.
But the problem is, of course, the other kid, the sibling or friend, is going to figure
that out too and so will try and shirk as well.
In the end the parents are left for a messy room, the kids are upset with one another,
and nobody is happy.
One of the things that game theory has tried to deal with are these types of situations—they’re
sometimes called social dilemmas or prisoner’s dilemmas.
These are situations where each individual has a private incentive to do something, but
when both of them follow their private incentives the group or the two siblings are worse off
than if they had ignored their private incentives and just worked together.
One of the seminal discoveries in this area is that by teaching kids or countries, or
anyone for that matter, that you can break up that interaction into a bunch of little,
small interactions where you can cooperate with the other one—but just on condition
that the other one cooperated with you before.
You can change a bad social dilemma into a positive interaction.
This was put to its biggest use during the Cold War.
Reagan and Gorbachev negotiated the START treaty with one another, and one of the big
problems that they had is: how can you be sure that while you’re eliminating nuclear
weapons your adversary is also eliminating nuclear weapons?
So rather than saying, “We’re just going to get rid of some large percentage of our
nuclear weapons and hope that the USSR would do so as well,” they broke up the interaction
into a bunch of little, tiny ones.
So the USSR would eliminate just a few nuclear weapons, then the U.S. would eliminate just
a few nuclear weapons.
They would check, and then they would go onto the next stage, and then each would eliminate
a few more, and they would go onto the next stage.
This process of taking a big interaction and breaking it down into little, small parts
is one that we can use all over our lives, including in parenting.
So rather than Mom or Dad coming into the room and saying to the kids, “Clean up the
room,” and then leaving, Mom and Dad can come up and say, “Here’s the deal: each
of you take turns putting away one toy, and you make a deal with one another: ‘If you
put away your toy I’ll put away mine.’”
And by taking the big interaction, cleaning up the room, and breaking it into a series
of small interactions you make it feasible for the kids to cooperate with one another
in a way that wasn’t really possible before when you just left them with one big chore
where they had to decide whether they wanted to do it or not.
One popular proposal that’s often occurred in tax debates is that we ought to lower our
corporate tax rate in order to encourage companies that have located their assets offshore to
bring them back into the United States.
The idea here is that if we lower our corporate tax rate to be competitive with other countries
then corporations don’t have a reason to move their money offshore.
The danger here is that if we lower our corporate tax rate then another country might lower
their corporate tax rate, and as a result we end up in a race to the bottom, each country
lowering their rate to compete with the other one until eventually we end up with a corporate
tax rate of zero or near zero, or at least so low that we barely make any money.
If only we could get together with all the other countries and agree to fix our corporate
tax rate at a kind of uniform number and not to compete with one another, all countries
would be better off.
No company would have an incentive to move their assets off shore, but countries wouldn’t
lose out on the income from the higher corporate tax rate.
The difficulty here, of course, is that international cooperation is a hard thing to do.
The Nobel Prize-winning economist Elinor Ostrom did a history of social dilemmas and prisoner’s
dilemmas, and found that there are lots of different strategies that people have used
over time in order to prevent races to the bottom and competitions of this form.
The traditional economic story about social dilemmas and prisoner’s dilemmas has been,
there are kind of two solutions.
One solution is the completely libertarian solution where you just privatize everything
and you make everyone own everything.
The other is to have a single government that controls everything.
The problem in international relations is neither of these are really feasible.
There’s no way that we can privatize individual corporations and give their ownership to individual
countries, but nor can we have a world government that specifies what the corporate tax rate
in every single country would be.
What Elinor Ostrom found in her historic study of these types of social dilemmas was that
over history, people have found very sophisticated strategies that involve complicated checks
and balances, agreements and structures that allow them to solve these problems without
going to either extreme.
We suggest that there might be ways of modifying these individual small institutional arrangements
in order to try to develop a series of international agreements where individual countries could
have mechanisms to punish those countries who lower their corporate tax rate so we don’t
have to just trust that other countries are going to follow through on their promises.