Welcome back to Gary's economics.

Today, we are going to teach you some game theory.

Learning about game theory can teach us a lot about,

number one, how modern economists think.

And number two,

I've been thinking about it a lot recently

with regards to

difficulties I've been having and difficulties

I think we are going to have

with regards to fixing our economic system.

So we're going to go through that today.

Okay, so first,

a very quick introduction of what game theory is.

So game theory is a very popular field of economics.

Well,

it's a field of mathematics, really,

which is popular nowadays in economics,

where you

basically turn real life situations into gains.

You say there's a certain number of players,

maybe you and me, a two player game.

We make moves,

we play against each other and we get outcomes.

And through game theory,

we can analyse what you're going to do,

what I'm going to do,

what you should do,

what I should do,

and hopefully we play the game better.

What I'm going to do today

is I'm going to explain to you the simplest

and probably most famous game in game theory,

which is called The Prisoner's Dilemma.

Now, this is a super popular game

and it's been used by a lot of economists

to basically defend the idea that

people are selfish.

And the best way to understand is to explain the game.

Okay, so in The Prisoner's Dilemma,

you've got two prisoner's

they've been arrested for doing something wrong.

It could be anything.

Let's assume they've been arrested

for running a YouTube channel

that says the government is full of idiots

and the police are sitting

these two prisoners down in separate rooms,

and they've got a little bit of evidence

on both of these prisoners,

but not enough to really,

really hit them, put them in prison for a long time.

So what they're trying to do is, they're trying to

get both of the prisoners

to grass on each other,

to give information on one another.

And the way they do that is they say,

listen, if you grass on

your friend, the other prisoner,

then we’ll reduce your prison time.

And the way that they set this game up is like this.

Okay, so there's two players in this game.

Let's assume it's you and me.

So

you and me

and basically we only have...

It's a very, very simple game.

We only have one choice to make each,

which is whether or not we grass on each other.

And that means

there are four possible outcomes in this game,

which is

either we both grass

or we both stay silent

or you grass and I stay silent or I grass

and you stay silent.

So I'm drawing out a diagram here,

which basically covers

all the four situations in the game,

and we can view it as basically a move from you.

So in this diagram,

your two options are listed here on the top.

Grass on the left, stay silent on the right.

My two options are listed down the side.

Grass on the top, stay silent on the bottom.

So this covers all the four situations.

And the police have set it up

so that they want you to grass.

So they say to you, if you grass

and your friend doesn't grass,

So I don’t grass, we’ll

let you go away completely free

and we'll send your friend to jail for ten years.

So this is the situation here where you grass

and I stay silent. So it's this bottom left situation.

And in that case

they give you zero years and they give me ten years

and they make the same offer to me.

So if I grass and you stay silent, you'll get ten years

and I'll get zero years.

If we both stay silent, then they don't have much

evidence on us at all.

So they can only give us one year each.

So that's this bottom right corner.

We both stay silent. You one year, me one year.

If we both grass,

then they've got a lot of evidence on both of us

and they'll put us both in jail for five years.

That's this top left corner, we both grass.

Okay, so now we've got the basic set-up of the game.

We can start to analyse it

from a game theory perspective.

And what game theory will tell us to do is

consider your situation.

Now, you could be in one of two situations.

Situation number one is I'm grassing on you.

And situation number two is I'm silent

and I'm not grassing on you.

So you analyse what you should do in both situations.

Now consider I'm grassing on you.

Now you have a choice.

Either you grass on me and you get five years

or you don't grass on me and you get ten years.

So what game theory will say is, now

we've really simplified this game.

If Gary grasses on you,

your choice is five years

in prison or ten years in prison.

Obviously, five years is better,

so if I grass on you, you should grass.

That's your strategy.

If Gary grasses, you should grass.

Now situation number two.

What if Gary stays silent. Well now you have a choice.

Either you grass on me

and you get zero years in prison, you get to go free

or you don't grass on me

and you get one year in prison.

Now you have a choice.

Zero years in prison or one year in prison.

Zero years in prison

is obviously better than one year in prison.

So again, you should grass.

So in both situations, whether I grass on you

or I don't grass on you,

you should grass on me

because you will get less time in prison.

So that means we have

what game theorists would call a dominant strategy.

Whatever I do, you should grass on me.

Grassing on me is

the best outcome for you, regardless of my action.

So according to economists, game theorists,

you should definitely grass on me,

that is your dominant strategy.

Now, of course, this game is totally symmetrical,

so if we analyse the game from my perspective,

it will be exactly the same analysis

as what we just went through now.

So that means obviously

I also have a dominant strategy.

Whatever you do, I should grass on you.

And whatever I do, you should grass on me.

This means that we have what in game theory

they call a Nash equilibrium,

which is named after the insane

mathematician John Nash.

Which means, I definitely know what I'm going to do

because I'm going to grass on you whatever.

You definitely know what you're going to do.

You're going to grass on me or whatever.

So we will both definitely grass on each other.

I can't change what you do.

You can't change what I do. It's a stable equilibrium.

We will both grass and each other.

We will end up here in the top left box

where we both get five years in prison.

Now, what's interesting about

this game is there's another box.

This bottom right corner

where if we both stay silent.,

it would have been better for both of us.

I would have got one year, you would have got one year.

As it is, we're both grassing, we’re

both getting five years.

So we've ended up in a pretty bad situation.

So it's interesting, right?

Why does it happen

that we end up in this bad situation?

Why can't we just both not grass

and be in a better situation?

The reason for that is we've done the analysis.

If I know you're not grassing,

it's better for me to grass.

So I'm going to grass anyway

and you're in the same situation.

If you know I'm not grassing, you're going to grass.

So basically we can't trust each other

because we're both selfish.,

we're both going to grass off

and the end result is we're going to get a bad outcome

for both of us. Now, this is

the most famous game in game theory,

and it's often used by game theorists, micro economists

to basically justify the idea that people are selfish

and that basically f*cks us up because we're selfish.

But there's nothing you can do about it

because people are selfish.

And I think this analysis and

people who are very good at game theory

probably shouldn't be making this analysis.

I think it's really interesting

and I want to explain to you why.

So

we are ending up in the bad outcome

because we both selfishly chose to grass

and there's nothing we can do about that

because people are selfish, right?

But actually the reason this happened is because

we when we did the game theory,

we assumed that

and we never spoke about this assumption.

I never mentioned the assumption

when we went through the game,

we assumed that

both players act in such a way

that the only thing they care about

is reducing their prison time.

So actually, when we went through the analysis,

we kind of assumed that the players were selfish.

In reality, if you were

in this situation with your friend,

you might say, well,

you know, I don't want to betray my friend,

or I trust that my friend is not going to grass me up.

So I'm not going to...

I'm not going to betray him

because he's my friend and I trust him.

But we didn't talk about

this at all in our analysis, right?

There are many situations

where this game has been tried out in game shows or in

economists experiments.

And what you find is actually a lot of people

in this kind of situation,

they won't betray their friend.

They will

stick with their friend because they like them

or because they trust them

or because they think they can get the better

outcome by sticking together.

So actually,

the people who have kind of proved themselves

to be selfish in this analysis,

in this analysis are the economists themselves.

It was the economists

that said you would definitely betray your friend

because the only thing you care about

is your prison time. And that analysis is correct.

If the only thing you care about

in the whole world

is reducing your prison time in this game,

you should definitely betray your friend. That is true.

But the analysis that we did that we will both grass

that answer, that equilibrium, that response

only becomes correct if we make that assumption.

So if we assume selfishness,

we get selfish outcomes, which may be bad.

In reality,

this game does nothing to tell us

whether people are selfish or not.

It only tells us that,

here is a game where the correct strategy

if the only thing you care about

is reducing your prison time, is to be selfish. So

this is my first conclusion here.

Anyone who ever says that game theory

suggests that people are selfish

basically doesn't understand game theory.

Game theory can tell you what to do if we know exactly

what you want.

If we know what you want, we can tell you what to do.

If we know that you’re selfish,

we can tell you which outcome

sorry, which strategy is probably going

to give you the best selfish outcome.

If you're not selfish, if you care about other people,

then you can probably work together

and you can probably get towards

this good outcome of only

getting one year in prison each.

But that only works

if you have a degree of non selfishness.

Now I want to get onto

the reason I've been thinking about this

a lot recently.

Now, the reason for that is,

as you know, I've been running this YouTube

channel for three, more than three years now,

and the main idea behind this YouTube channel is that

the economy as it is, is in a really bad situation.

Living standards

for ordinary families are

getting worse and worse quite quickly

and they will continue to get worse.

And what I continually say on this channel is that

if we get together

and force

politicians to tax the rich more aggressively

to force wealth to flow

to ordinary people

rather than away from ordinary people,

we can make inequality come down.

We can make the economy better,

and we can make living standards

better for ordinary people.

And yet, when I speak to politicians about this idea,

including politicians who are

on the left, like politicians in the Labour Party,

very often they say to me, you know,

we can't publicly support these kinds of ideas

because they're not popular, because

they're not vote winners.

And when I publicly speak about these ideas,

I very often get people

push back against me and say, oh,

we basically, we don't want to believe that's true.

And when I get these kind of responses,

what I often feel is

especially when I'm talking to better off people,

these are people who are busy people, good jobs,

good salaries,

and they basically have a choice to make

when they hear my theories, which is do I

believe this guy? Do I agree with this guy, and do I

start to devote some of my time

some of my energy towards

basically helping him achieve his goals?

Or do I ignore it and say, listen, that's nonsense,

I don't really care about that

and just let him do his thing.

And when I see this play out in front of me,

I'm often reminded of the prisoner's dilemma because

that person is in a similar situation right?

Whatever I do, whether my project is a success or not,

whether we manage to reduce inequality or not,

this guy has to decide whether to devote

some of his time, some of his resources,

some of his energy

towards reducing inequality

and the truth of the matter is,

you as an individual,

every individual in this country,

whether they choose to support this or not,

probably won't make a difference

to whether we're successful or not.

So that person basically has the choice of

supporting and

making some sort of

guaranteed loss of time

or just ignoring and using his time in a selfish way.

And whatever choice he makes, he will probably

well, society will probably end up

in the same situation.

We will either succeed

and the economy will get better or we will fail

and the economy will get worse.

So once again,

we're in this kind of interesting situation

where basically,

if enough people are willing to act unselfishly,

which means

devoting a little bit of time, a little bit of energy

towards

watching our videos, understanding what's happening,

sharing the videos, telling your friends and family,

trying to build the big movement

so that a majority of this country understands

if we don't fix inequality, the economy will get worse.

If enough people do that, then

we can solve this problem.

If not enough people do that, then

you will continue to see what we are seeing,

which is living conditions

continue to fall relatively quickly.

There’s big increases in poverty,

life gets worse and worse for ordinary people

in this country.

And I think it's an interesting kind of...

essentially it's a prisoner's dilemma

for not just two players, but the country as a whole.

Every individual person in this country

can be a little bit better off

just not bothering about it

basically, just just do what you

can for yourself, for your family

just only worry about you

and the people closest to you.

And if enough people make that decision,

the economy will collapse and ordinary families

will be poor,

or people make that sacrifice,

a guaranteed

sacrifice of their time and their energy and people...

and protect the ordinary people of the country,

avoid the collapse of the economy.

And I think it's

a really interesting kind of

philosophical dilemma, right. Because,

you know, I grew up in this country

and I grew up in a culture

which was very much sort of get rich or die trying.

And, you know,

I believe it’s important to look after your family.

And I understand the desire to try and be selfish

and to try and get rich.

But it's created this really interesting situation

where if ordinary people

can be convinced in large enough number to be greedy,

then we know with certainty ordinary

people's kids and grandkids will be poor.

It's interesting, right,

because you would think

being greedy would make you rich.

But we've created this game where

if we can convince enough people,

poor people and ordinary people to be greedy enough,

then we can absolutely bankrupt the kids of

poor and ordinary people.

So in a sense, it's kind of a

it's kind of a test, really.

It's a test for the people of this country, basically.

Are enough people willing

to make that sacrifice of time and effort

to educate themselves, to educate each other,

that the only way we can reduce inequality is together?

Or basically, are we too selfish to do that?

And are we going to drive ourselves into poverty?

So listen,

game theory teaches us not that people are selfish,

but that if enough people are selfish,

basically we can completely f*ck them over.

And I think this is kind of the situation that

we are in as a country.

I think the culture of

our country has sort of moved

in a direction in the last 40, 50 years

where people have been trained to be selfish

and the big problem with this is

if everyone is selfish and everybody fights selfishly,

then it becomes easy for the very powerful

and the very rich to take everything

from the ordinary and from the weak.

And that is what is happening,

essentially, I believe in the economy,

and that is why life is getting worse.

And the only power that ordinary people

have to protect themselves

and the rich and the powerful is

that there's a lot of them

and they only use that power

if they act unselfishly and work together.

So, listen, I believe we can fix the economy.

We can only do it by dealing

realistically with inequality.

The rich are not going to support that

and they're going to oppose it. And they do oppose it.

But we can stop that by working together.

I'm going to do that. I'm going to keep working on it.

That's why we put these videos out every week.

And I hope you do too.

So please

watch these videos, share these videos and

help us bring people together

and fix this economy by understanding it better.

Thank you.