I was listening to the NPR this morning (thanks Simon for one of the best tips I got when I moved to the US last year) when the expert they were interviewing put the problems with the US economy in terms than anybody familiar with game theory would recognise. Basically the issue is that right not americans are saving money, which is good for them given these economic circumstances, but that precise fact is not good for the country that needs people to start spending. This is the Prisoner’s Dilemma (PD) or one of its variants. If I am living in the US, rationally it is in the interest to save as much money as I can as I may need it soon given the uncertainty of the economy. On the other hand it is clear that if everybody acts as I do then the economy will remain under stress for a long long time.

In other words, if spending means cooperating with the community in restoring the health of the economy and saving the money under the mattress is defecting, then from a selfish point of view what I would hope for is for people to spend their hard earned money as I keep mine safe. Unfortunately this view is shared by most individuals in the game so the outcome is less than optimal (but still better than spending the money and then finding that the economy is so bad that my position has been made redundant). The situation is roughly capture in the following table.

So basically any rational player would, as is the case in the prisoner’s dilemma, defect. If the rest of the players defect you are better of defecting, if they don’t then you still get a better result by defecting even if you are an exception. If everybody saves then the economy will keep going down so you better hold to your money, if the people start spending you might still want to keep your money just in case while the economy reaches a point in which you can assume that your savings for the rainy day won’t be that necessary.

So how can that be changed? Well, I am no economist so in all honesty I can suggest any solution that won’t be better than that of any other armchair economist but it could be that inflation could be a way forward. With inflation the value of having savings decreases and so does the payoff of defecting. Interestingly, in most economic crises inflation is one of the economic indicators that tends to go down.