The ‘prisoner’s dilemma’ is the classic sub-optimal equilibrium example in Game Theory. 2 prisoners are being interrogated separately. Each faces the same decision – if they remain silent they each get 3 months jail. But if one blames the other, and the other remains silent, the whistleblower walks free while the other gets life imprisonment. If they both blame the other then they both get life. What is the equilibrium? While it is optimal for both to remain silent, the equilibrium strategy is to blame the other, and the sub-optimal outcome is they both blow the whistle and both get life…
This highly stylised example is used far too frequently to justify just about every government intervention imagineable. The premise is that competitive forces are destructive and sub-optimal, whereas the government can step in to ensure the best cooperative outcome. But the logic of the prisoner’s dilemma only holds up if there is a single game and no communication. In repeated games, where prisoners are interrogated repeatedly, or where the players can communicate and even make contracts, the whole sub-optimal equilibrium falls apart and the prisoners find their own way to the cooperative optimum.
So what does this mean for Brexit? The new-Keynesian alarmists point to the prisoner’s dilemma as an example of how Britain’s advantage-seeking break with the EU will cause other members to leave and the wonderful world of European cooperation will collapse into a collection of autarkic fiefdoms (ie no trade in anything from goods to labour to intellectual property) blah blah blah. Well, this is not a single period game and, believe it or not, the European nations all meet and talk regularly AND they pass laws enabling cooperation with one and other, whether the country is a EU member or not. In fact, the alarmists who rely on Game Theory to justify their warnings need to think again, since the optimal solution is for all European nations to cooperate on trade and all the good stuff, ultimately arriving at the same outcome regardless of whether a nation has an ‘EU’ branded on its belly or not.
What this all means is that (i) not much will change when the UK erases their EU branding and (ii) the alarmists have a pretty tough time finding an economic theory to support their case. Put another way, there is nothing special, in and of itself, about brand EU.