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Thread: Invisible Hand v. Prisoner's Dilemma

  1. #1

    Invisible Hand v. Prisoner's Dilemma

    For those not familiar the Prisoner's Dilemma is as follows: 2 criminals are arrested for the same crime and placed in different rooms. If person A implicates person B, then person B will be tried for the crime and serve 4 years and A will go free. If they each implicate the other, they each serve 3 years. But if neither implicates the other, the lack of evidence will result in both being set free. The best scenario for "self" is to implicate the other, as it's possible to serve a reduced number of years or possibly go free. The best scenario for the "group" is to not talk as they might each go free.

    I will very much be simplifying The Invisible Hand, when I say it means: By acting in ones best "self" interests, the "group" benefits.



    Maybe the reason these two clash it's possible we aren't dealing with an apples to apples comparison. But it's an interesting contradiction....or maybe it's not. Would anyone care to offer an opinion? Post below.



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  3. #2
    Invisible Hand v. Prisoner's Dilemma

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  4. #3
    Quote Originally Posted by TommyJeff View Post
    Maybe the reason these two clash it's possible we aren't dealing with an apples to apples comparison. But it's an interesting contradiction....or maybe it's not. Would anyone care to offer an opinion? Post below.
    They are two different concepts for two different situations. Not really apples to apples.

    In economics, when there is a trade and both parties act for their own self-interest, both increase their wealth and thus, so does the group.

    In the prisoner's dilemma, you are not dealing with a free economic exchange. In order to gain a benefit for yourself, you must violate the rights of someone else. This is why the contrast is faulty.
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  5. #4
    The best scenario for "self" is to implicate the other, as it's possible to serve a reduced number of years or possibly go free. The best scenario for the "group" is to not talk as they might each go free.
    The best for self is to be set free. Either choice can result in that. The dilemma is that people do not have all of the information when making a choice, thus do not always make the best choice. In general, people often do not make the "best" choice for themselves or the group. No one is perfect, and many are lucky to survive their constant bad choices.
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  6. #5
    Really the key difference is that the prisoners are placed in separate rooms. This effectively prevents them from communicating with each other. With the invisible hand... we're not all literally in the same room but we are able to communicate with each other. We communicate with each other in different ways. One of the most important ways is by our willingness to pay (WTP). This allows us to communicate the intensity of our interests to each other. For example, we can be fairly confident that anybody hiking along will be more than happy to pick up and carry any gold nuggets that they happen to find. We can also be fairly confident that nobody hiking along will be more than happy to harvest any poison oak. People are willing to pay a high price for gold. People are not willing to pay even a low price for poison oak.

    Here's one of the best passages on the topic...

    It is thus that the private interests and passions of individuals naturally dispose them to turn their stocks towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society among all the different employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society. - Adam Smith, Wealth of Nations
    The problem with society is that too few people understand the importance of communicating the intensity of their preferences. As a result, we still have democracy. Voting allows us to communicate our preferences... but it doesn't allow us to communicate the intensity of our preferences. In order to prevent resources from being inefficiently allocated... we need to replace voting with spending.

  7. #6
    Quote Originally Posted by Xerographica View Post
    Really the key difference is that the prisoners are placed in separate rooms. This effectively prevents them from communicating with each other. With the invisible hand... we're not all literally in the same room but we are able to communicate with each other. We communicate with each other in different ways. One of the most important ways is by our willingness to pay (WTP). This allows us to communicate the intensity of our interests to each other. For example, we can be fairly confident that anybody hiking along will be more than happy to pick up and carry any gold nuggets that they happen to find. We can also be fairly confident that nobody hiking along will be more than happy to harvest any poison oak. People are willing to pay a high price for gold. People are not willing to pay even a low price for poison oak.

    Here's one of the best passages on the topic...


    The problem with society is that too few people understand the importance of communicating the intensity of their preferences. As a result, we still have democracy. Voting allows us to communicate our preferences... but it doesn't allow us to communicate the intensity of our preferences. In order to prevent resources from being inefficiently allocated... we need to replace voting with spending.
    You may feel completely free to spend all of YOUR money as YOU wish. Mine, not at all.

  8. #7
    Quote Originally Posted by Ronin Truth View Post
    You may feel completely free to spend all of YOUR money as YOU wish. Mine, not at all.
    How is this relevant to what I wrote?

  9. #8
    I disagree with your definition of the invisible hand. It is very much an apples and oranges comparison. "Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

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  11. #9
    ArrestPoliticians, what about the free-rider problem? Getting something for nothing is in the best interest of the individual... so free-riding is in people's interest. But if too many people free-ride... then the service will be undersupplied and the entire group will be hurt. What's good for the individual is bad for the group.

    Clearly there's an important distinction between the individual's short-term best interest and long-term best interest. Free-riding is in people's short-term best interest but it's not in their long-term best interest.

    Does this mean that the invisible hand fails for public goods? No, it means that markets have to be structured accordingly.

  12. #10
    Quote Originally Posted by Xerographica View Post
    ArrestPoliticians, what about the free-rider problem? Getting something for nothing is in the best interest of the individual... so free-riding is in people's interest. But if too many people free-ride... then the service will be undersupplied and the entire group will be hurt. What's good for the individual is bad for the group.

    Clearly there's an important distinction between the individual's short-term best interest and long-term best interest. Free-riding is in people's short-term best interest but it's not in their long-term best interest.

    Does this mean that the invisible hand fails for public goods? No, it means that markets have to be structured accordingly.
    The invisible hand is talking about tendencies and trends, not absolutes in every case. The tendency of aggregate individual selfish action in the market is to increase aggregate wealth.

    Free-riding is just an example of bad law. Markets exist within a legal framework. Once the law is fixed then the problem goes away. Like you said, the market needs to structure accordingly. The Invisible Hand does not imply that every business contract and every investment scheme will be successful or wise.
    Last edited by ArrestPoliticians; 07-20-2016 at 07:38 AM.
    Carthago Delenda Est

  13. #11
    Quote Originally Posted by ArrestPoliticians View Post
    Free-riding is just an example of bad law. Markets exist within a legal framework. Once the law is fixed then the problem goes away. Like you said, the market needs to structure accordingly. The Invisible Hand does not imply that every business contract and every investment scheme will be successful or wise.
    I boil down the issue like so....

    allocation > valuation = forced-rider problem
    allocation < valuation = free-rider problem

    The only alternative to a market price is a controlled or fixed price which always transmits misleading information about relative scarcity. Inappropriate behavior results from a controlled price because false information has been transmitted by an artificial, non-market price. - Mark J. Perry, Why Socialism Failed
    Your valuation is your perception of a good's relative scarcity. The greater the disparity between your allocation and your valuation... the more misleading the information that's transmitted by your allocation.

    Let's take the minimum wage for example. Maybe your area has a labor surplus... so your valuation of unskilled labor is $3 dollars/hour. But, because of the minimum wage, you have to spend $7.25 dollars/hour on labor.

    allocation ($7.25) > valuation ($3) = forced-rider problem

    Your allocation transmits misleading information. Your allocation sends the message that labor is more scarce than it truly is. As a result, more workers move to your area which results in an even greater labor surplus... less opportunities and more poverty.

    How can we help ensure accurate information is transmitted for public goods? People should have the option to choose where their taxes go.

  14. #12
    Quote Originally Posted by CaptUSA View Post
    In the prisoner's dilemma... you must violate the rights of someone else. This is why the contrast is faulty.

    Perfectly explained. Thank you

  15. #13
    Quote Originally Posted by TommyJeff View Post
    Perfectly explained. Thank you
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  16. #14
    Game theory isn't that hard.

    Sincerely,

    Slutter McGee



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