INDIVIDUAL vs COLLECTIVE WELFARE Whether or not you are consciously aware of it, your behaviour when making economic decisions has helped shape the economy as it exists today. Whilst not one of the most prevalent aspects of economics, at least not in public thought, it is one of the most pertinent.
The most famous aspect of human psychology that is used in economics is game theory, majorly influenced by John Forbes Nash Jr. Game theory manifests as a problem of individual prosperity vs the public prosperity. When Adam Smith pioneered capitalism and free markets, the driving force behind this was the pursuit of maximising one’s self-interest. It was his belief that when everyone fulfilled his or her own interests that this tended to help the public as well. John Nash however discovered a loophole in this. The most effective way of explaining game theory is to use an example, and the most common example is that of the prisoner’s dilemma. The example asks people to imagine that there are two prisoners who have committed a crime and are caught. They are being investigated individually, and are unaware of what is occurring in the other’s interview. There are four different scenarios that can take place: the first is that they both confess and both receive a 5 year sentence, another is that neither confesses and they both receive a 1 year sentence and the final scenario is that one prisoner confesses and
the other does not, leading to the former receiving no prison sentence and the latter a 10 year sentence (obviously the judicial system is not as simplistic as this, but for the purposes of this example we shall imagine that it is). If their decisions were driven by self-interest alone (we'll assume that this is to confess and hope that the other does not) then the outcome is not desirable for either, incurring a 5 year prison sentence for both. Whilst at the individual level the best choice was to confess, as this entails the possibility of no prison sentence, we can see that at the collective level this actually reaped damaging consequences. The reverse is true of the next option. Whilst at an individual level it is far riskier to not confess, and risk a 10 year sentence, if this action is pursued by both prisoners, than at a collective level it is far better as they only receive a 1 year prison sentence either. If we took their scenario under Smith’s traditional doctrine, and asked them to think in a competitive mindset, then again we would arrive at the scenario where both confess and the resulting total welfare at the collective level is reduced as they both receive 5-year prison sentences.
The issue here is that traditional capitalist doctrine acts upon a maximisation of expectations model; this essence is looking for choices that average out the best possible outcome. We can see that by confessing you will receive either 5 or 0 years of jail time, an 12