I found this article while wandering around the Anchoress' website today. It's on the prisoner's dilemma. The prisoner's dilemma is as follows:

Two suspects, A and B, are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both stay silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a two-year sentence. Each prisoner must make the choice of whether to betray the other or to remain silent. However, neither prisoner knows for sure what choice the other prisoner will make. So this dilemma poses the question: How should the prisoners act?

Wikipedia

I've seen this before in video games where my character is prisoner A and one of my companions is prisoner B. The question is always phrased as a moral choice, do I screw my friend over, or do I stay loyal to my friend and risk losing? I always choose based on whether I'm playing a good guy or a villain.

But Bill Whittle points out something I hadn't considered before. If the other prisoner chooses to screw me over, then it is best for me to do the same. And if the other prisoner chooses to cooperate, then it is best for me to betray him. It is always in my best interest to betray my opponent. And if the other prisoner is rational, he'll choose the same and we both server two years.

This is pretty straight forward, and I might have gotten their had I considered it an economic question rather than a moral question. But what really interested me is what happens when you play the game over and over again, with the same two prisoners. Computer simulations show that choosing what the other prisoner chose last turn (tit-for-tat) gives the least time in jail for the prisoner.

Most Americans know that it is cooperation that generates the most wealth. I make my stuff, you make your stuff, and we and everybody else trade it all around until we have the stuff we want. Every economic system, from capitalism to socialism, is based off this idea that each person makes/does something useful and gets useful things in return.

Where things get interesting is in how each system deals with cheaters. If cheaters are punished, then cheating will be rare and cooperation will prevail. That is, if the imposed costs of cheating, fraud, stealing, going back on your word, and whatnot are greater than what you gain from cheating, you will play by the rules, even though cooperation has its own costs.

This is the tit-for-tat. Cooperation, specialization, is required to create the type of wealth seen in the United States. In order to write good software, I have to focus most of my time and energy on it. Which means to get food, I have to buy it, which requires that I trust that the company will pay me for what I write, and that the grocery store will accept that money in exchange for food and not give me a box of shredded paper instead. But this only happens if cheaters are removed from the game.

This is one of the rules of capitalism. The actors in the market are generally honest, and the dishonest ones are punished, so that self-interest leads to cooperation.

Communism, on the other hand, simply assumes that cheaters will disappear.

If cheaters are allowed to play, then society quickly devolves into a free-for-all. If some people take without giving back, then everyone else has to work harder to make up the difference. But as more people realize it is better for them personally to cheat rather than cooperate, then there will be more cheaters and the good people will have to suffer the additional costs of providing for them.

A concrete example: I want electricity for my house. I can either buy it from the electric company, or I can hook my house to my neighbor's house, who is paying the electric company. If there is no punishment for not paying, then of course letting my neighbor pay for both of us is my cheapest option. But if cheating is acceptable, then everyone will cheat. And if nobody pays for electricity, then the electric company stops providing it.

For most of history, and even much of the world today, people have been stuck in this state of not trusting. It is a point of equilibrium. I take advantage of others where I can because if I don't I will be taken advantage of.

This is why family is such an important part of most cultures. You can trust family, in a way you can't trust the random strangers you might meet doing business. So the clan or tribe becomes a group of people you can cooperate with, because you know they won't take advantage of you.

I think this will be a very useful lens through which to examine America's current economic crisis, and the societal break down that has preceded it.