 Our topic this morning is game theory. Or I kind of added a subtitle to that game theory, an entrepreneurial twist. So before I get into this, I do want to say one of my favorite ways to do economic research is to take two fields that are generally developing separately from each other and then smash them together and see what happens. So I know Dr. Thornton earlier, there were some people that heard his lecture on skyscrapers and he referenced something that I did there, where kind of my idea was Thornton had presented this idea about skyscrapers being connected with the Austrian business cycle theory. I said, well, what if we take this, take what economics tells us about land use and take what Rothbard tells us about wages, smash it all together and see what happens. And it turned out that Dr. Thornton is totally right, so it wasn't very original, right? But I had another reason that he was correct. So I kind of had the same idea here, was taking kind of a traditional approach to game theory, in particular the prisoner's dilemma and asking the question, what happens if we really take seriously the idea of entrepreneurship and apply it into these game theoretic ideas. So before we get into that, you want to share Rothbard does actually mention game theory in Man-economy and State. It's deep in an appendix, that's appendix A for chapter one. He says, outside of economics, the rest of praxeology is an unexplored area. He lists a few different points that would be considered praxeology, but that are not economics. And he mentioned specifically that a theory of games has been elaborated. By the time he was writing here, game theory was already starting to get a start, and he considered this to be part of praxeology. And I think that's quite true. It's a logical working out of the consequences of the fact that we're applying means to attain our ends. So let's go ahead and look at kind of the traditional prisoner's dilemma. Now how many of you have seen the prisoner's dilemma presented before somewhere? Okay, so it looks like roughly half, maybe a little more than that. Okay, well, let's walk through it. So we have our two criminals, Bonnie and Clyde, who commit some crime together. And the police catch them, take them into separate rooms as the story, and then give them each kind of this plea bargain. They can either confess or not. And here are the consequences. If they both confess, then they're both obviously going to be charged with a fairly serious crime, but they also participated in this plea bargain so they get five years in prison each of them would. Now, if neither of them confess, we can't really get them on the most serious charge or evidence isn't quite that good. That's why we care about the confession. But we can get them on a lesser charge and put them away for two years apiece. Now, if one confesses and the other doesn't, that's where things get very interesting. In that case, the one that confesses, we make a really good plea bargain with, you get to go home. Whereas the one that didn't confess gets put away for a very long time, we can get them on a very serious charge and also they didn't participate in any plea bargain. So in this case, say if Clyde confesses and put us in the first row here, well, Bonnie does not confess. Clyde, being the confessor, gets to walk away while Bonnie gets put away for 10 years. So then we start thinking about the incentives that Bonnie and Clyde have for confessing or not. Now, in this case, they're in separate rooms, they really can't collaborate on what they're going to do, they have to make their own independent decisions. So we'll think about Clyde first. Clyde says, well, I don't know what Bonnie's gonna do. She might possibly confess, she might not. Well, in the case that she does confess, if I also confess, I'm in prison for five years. But if I don't, I'm in prison for 10. So in that case, confessing looks better. On the other hand, maybe Bonnie's not going to confess, in which case I can be faithful and not confess either, in which case I'm in prison for two years, or I can go ahead and confess and just walk out free. Well, in that case, confessing looks better. So Clyde concludes that it doesn't actually matter what he thinks Bonnie's going to do, confessing looks like the best option. Because this is totally symmetric, Bonnie is facing exactly the same incentives, she also concludes that it doesn't matter what Clyde does, that it is best for Bonnie to confess as well. That's all the arrows point us toward this outcome, where both of our criminals decide to confess, and they get put away for five years apiece. I'll say you present this, and I'll often have an astute student say, but why would you do that? When obviously you're both better off, if neither of you confessed, that as you each would get two years in prison instead of five, assuming that we don't like being in prison, which I have not yet been in prison, I can't say for sure whether it's good or bad, but I'm going to keep trying to avoid it, the stories don't sound positive to me. Anyway, assuming that they don't want to be in prison, this is clearly a bad outcome for both of them. They would prefer if neither of them confessed. So the story is, well, now this is true, collectively we get this bad outcome, but individually they each had a really good reason to do what they did. After all, even if Clyde knew for sure that Bonnie wasn't going to confess, he still wants to confess that he gets zero years in prison, which is even better than two. So each of them faces individually these very bad incentives that lead us toward this bad outcome. So there we go, five years each. We can also apply this to other cases, the tragedy of the commons, Dr. Terrell mentioned earlier this week. So here we have Bonnie and Clyde, rather than deciding whether they're going to confess, they're deciding whether they're going to use some kind of common pool resource or not. Right now, but it ends up, if they both use it, this common pool resource gets depleted, we have desolation of this resource and that wrong button again, right there it is, okay. But one of them could use the commons and find it very useful. Well, if the other one didn't use it, then naturally they would find it useless. On the other hand, if neither of them use it, they can at least look at this common pool resource and enjoy this pristine but basically useless wilderness. So here we would face very similar incentives as before. That is, Clyde would say, well if I don't use the thing, well Bonnie does, well then I get absolutely no use from it and I see Bonnie deteriorate it, I may as well get some use from it, even if that ends up being bad on the whole. On the other hand, if Bonnie doesn't use it, then I can at least get some use from it, do some damage, but not a whole lot, that's still better for me than just looking at the thing. So Clyde has a very good incentive to use the commons, as does Bonnie. So we end up overusing the commons. So here we could apply this to things like overfishing in international waters, that kind of thing. We all have an incentive to pull fish out of the ocean, but the result being that fish populations decline. We could also apply this to the case of public goods. So we have the choice with a public good, do we help fund it or do we just free ride on what everyone else is paying? Well, if both of us fund it, then we can split the cost, we're each paying a reasonable amount as far as we're concerned, compared to the benefit we're getting. We have these beautiful highways that we all get to drive on, the costs are split in what we consider to be a fair way, just in the sense that we each benefit more than it costs us individually. But if one of us is the only one that pays, say Clyde decides to free ride, well, Bonnie pays the thing, in that case Clyde can still drive on this highway. He gets the full benefit with none of the cost. Well, Bonnie ends up paying more than her own individual benefit. So we end up with Bonnie's very unhappy with the situation. Clyde, though, is very happy. This is even better than down here with the beautiful highways for all because now Clyde doesn't have to pay any of the cost. Or we could have everybody free ride, in which case, who will build the roads? Nobody bothers to answer that question. He's just kind of pose it as if it answers itself. But if we all try to free ride in this case, in that case nobody's paying to provide this resource, so it doesn't get provided at all. And that is, in fact, exactly what the incentives tell us to do. Clyde says, well, Bonnie's gonna free ride. I don't wanna pay the whole cost myself for a very small part of the benefit. On the other hand, if Bonnie's going to fund the thing, well, then I'd rather not fund the thing, let her pay the whole thing. Well, I just get the benefit for myself. So Clyde wants to free ride, Bonnie wants to free ride. And here we are in our libertarian utopia with no roads as many would claim. Okay, all right. See, here I have to think about myself and my own preferences. If I can get everything just dropped to me out of the sky, I don't feel any need to leave my house. I'm okay with that, right? Yeah, Amazon, let Amazon have drones to drop off my packages. And with the internet, I don't have to leave my house. I'm perfectly content. But anyway, maybe roads aren't as useful as many people like to think. Anyway, so we can also apply this to a more economicy, and in this case, a macroeconomic case. This would be what is kind of a traditional Keynesian coordination failure, right? So Keynes would say there's this kind of depression trap when it comes to the level of wages. So here, Bonnie and Clyde, rather than being criminals, are kind of entrepreneurs, employers, they have a choice of what they do with wages. They could try to keep wages low, or they could increase the wages for their employees. And here, by the Keynesian argument, if we all increase wages, then everybody has more money to spend, we spend more, we get these multiplier effects, dah, dah, dah, and we end up with an economic expansion. On the other hand, if we all keep wages low, then nobody has any money to spend, the economy stays depressed. On the other hand, when we think about these mixed cases, if Clyde keeps his wages low, his costs are nice and low, while if Bonnie's increasing wages at the same time, some of that money is going to get spent at Clyde's business. So now he's earning greater profits. Meanwhile, Bonnie's having to bear the entire cost of these increase of wages and only seeing part of the benefit in the increase in her business. So if she would find that costly, Clyde would find that profitable. Naturally, if Clyde were the one increasing wages, while Bonnie didn't, it would be flipped. So making this kind of argument, Keynesian would say, well, see, because of this, both Bonnie and Clyde want to try to keep wages low. After all, that's the only thing that gives them the possibility of having this great profit for themselves, while having the cost on the other. So we end up stuck in this depression forever, unless we have somebody come along and force us all to increase wages. So this would be various applications of that traditional prisoner's dilemma. All right, yeah, so we're stuck in the depression. So our typical conclusions, let's say that in these type of cases and these prisoner's dilemmas, these individuals are choosing optimally for themselves. They're doing the best they can for their own. Confessing is, in fact, the best option if I want to shorten my own prison sentence. But at the same time, because of the interaction between our choices, we end up with these really bad outcomes that we actually agree are really bad outcomes. Nobody likes the depression. We'd rather have the economic expansion, but I'm not willing to change my outcome and increase my own wages to push us there. That would mean taking on the cost myself. All right, so the natural conclusion that many would point to it then, well, obviously we need to have the government step in, increase the minimum wage to say $15, $20 an hour, whatever it happens to be, this will get us out of the depression by increasing wages. We increase the level of income. People can spend this money, oh, and we get this wonderful multiplier effect. It gets us out of the depression. Or if we have a public good, we can't trust people to just fund it themselves. We need the government to step in and force everybody to fund the thing. And in fact, if we go back, let's go ahead and go back to there. Right, okay, if we step in in this case and we force everybody to fund the thing, we in fact all agree this is better. We'd rather have these beautiful highways than have to face the question of who will build the roads. So that is kind of the traditional way we do this. So fund public goods with taxes, force people to pay for the thing, and in fact the people will agree this is a better outcome. Similarly with the use of the commons. Let's limit the amount that people can use them. So we put regulations on how much you can fish or hunt or what have you. In order to prevent this overuse that would deplete that resource. Presumably this would also suggest that we need to by force prevent our prisoners from confessing. You never hear that as being a natural implication of this. I feel like there might be some other interests we need to consider in that case. All right, but never the other cases. It's kind of weird. All right, anyway. So we need the government to do these things to get us to that better social outcome. I suggest we should seriously question this. And in fact, as I find that many of my students say, no, wait a minute, this doesn't feel right. You feel like there should be some way to fix this. Well, I think if we take entrepreneurship seriously, we're going to have two elements that are going to come in. But first, Mises, when he talks about entrepreneurship, it's really largely about this idea of foresight. You're acting under uncertainty and if you're a really good entrepreneur you have a better sense of what's going to happen and you organize resources in order to deal with that future that you see more clearly than others do. So a successful entrepreneur in the Misesian view is someone that has very keen foresight, has a better view of the future than most do. I would say that it's sure my hope that being a good entrepreneur and being a good economist do not necessarily go hand in hand is I know from my own experience in making investments, I'm not a great entrepreneur. My foresight is very bad. I actually have a one Ameritrade account where I literally have $1.19 in it. Every single company I bought in that account went bankrupt when I was in college, so. Oh well. All right, so terrible entrepreneur. I hope I can still at least be a mediocre economist and a comparative advantage. Anyway, so Mises says it's all about having great foresight that'll make you a successful entrepreneur. Now Kirstner's view is that it's really a lot to do with alertness. So Kirstner has this view that there are kind of these opportunities that exist out there. And some people have better sight than others, some people see them while others don't. So entrepreneurship is really about seeing and seizing these opportunities. When I think of the Kirstnerian entrepreneur, I think of say when we're going out to lunch and we see everybody's trying to stream through like one half of this double door. So the Kirstnerian entrepreneurs, the person that says that there's another half to this door, we can open that and I'll get outside faster. So the opportunity exists, somebody just has to see it. And so what if we take these two points, foresight and alertness and grant it, say to our prisoners. So they're thinking as they're committing these crimes, that they know there's some possibility they're going to get caught. What might we possibly do to try to end up with a better outcome in that case? So let's revisit the prisoner's dilemma. Now here I would suggest that entrepreneurs would not just declare this game lost. Oh well, we're going to end up taking it into separate rooms. They're going to ask us to confess. We all know the incentives. You're going to confess, I'm going to confess. We end up in prison for five years apiece. Well, it was nice. See when we get out. This is not the approach that entrepreneurs would take here. We know that there's a better outcome possible. So entrepreneurs would take it into their hands to change the game. So here I think of entrepreneurs as being game changers in the game theoretic sense. So game theorists already know that there are lots of ways we can change the prisoner's dilemma to end up with a better outcome. So one of those would be repetition. It ends up if you take people and you have them repeat this prisoner's dilemma multiple times, now we have the possibility of, if you confess on me in the first round, I'm going to punish you in the second round. On the other hand, if you play nice with me in the first round, I can reward you in later rounds. Now we've changed the game in such a way that we can start enforcing better outcomes. And this is very well known amongst game theorists. This is not an original insight from me. I'm just suggesting that maybe entrepreneurs are going to try to set this game up, so it's repetitive. In fact, this idea of repetition, you can also set up this game matrix to think about trade policy and show how everybody wants to be protectionist because we perceive that as being better. But then we develop the World Trade Organization, which by design is supposed to repeat this game of trade policy and by doing so lead to freer markets. So taking this insight was something that economists literally did and applied in the real world in trying to design the way the World Trade Organization and previously GATT operated. So maybe it might be that our criminals are entrepreneurial enough to do the same thing. So Bonnie and Clyde agree that this is going to be a long lasting relationship. They're going to commit lots of crimes together. And even if they go to prison for a while, they'll get back together afterward and commit more crimes. If so, now they both have an incentive to be much more loyal to each other and to be less likely to confess. So if this is true, then okay, what are we going to get from game theory? Well, I suggest we can do a re-envisioning of how we use game theory. So the key assumption that underlies all the stuff that I did there at the beginning is that the game is fixed. We have this stuck matrix we have to deal with and under those assumptions, we end up with this terrible outcome in prisoners' dilemmas. With entrepreneurs, it simply isn't true. People after all are creative. Entrepreneurs are people. We're creative problem solvers. You give us a problem, we look for a solution and we know that solutions exist. So what we need to do then is ask the right question when we approach these kinds of cases. That is, how might entrepreneurs try to improve this game? We know the game naturally lead to a bad outcome. Entrepreneurs sensibly, if they have foresight or reasonable in their reasoning, also know this. What are they going to do to try to fix the game so we end up with a better outcome? And if they're not doing things to try to improve the game, why aren't they? Now it might be if you're a very entrepreneurial person and you realize that there's a way to do it so you go out and make a lot of money improving the game yourself, I'm not that person. I just think about this analytically. So why is it that in this particular case we end up with this bad outcome despite the fact that a better outcome is available? It might be that there's something else going on. There might be some kind of hidden cost involved that we just don't take account in that matrix. So for example, it might be that Bonnie and Clyde, while they're thieves, they also have a very strong sense of honesty, hypothetically. So maybe they say, I'm always going to tell the truth regardless and this has a very important, it's a very important moral stance I take even if I don't particularly care that much about property rights. In that case, confessing what carry with it, it's something like, okay, this is going the wrong way, isn't it? Okay, confessing what could carry with it. Oh, this huge cost of all I did the wrong thing, that kind of thing. So we end up with the outcome opposite of what I predicted before or it might be the other way around. It might be that not confessing is something that you think is absolutely horrible. So then confessing would in fact be the better outcome is you're willing to put up with the prison sentence. It's possibility. So there might be these hidden costs we can't see because after all costs are subjective. So maybe there's some kind of rule, preventing this from happening. It might be that there's just not actually possible given the institutional framework we're in for us to improve the game. So then we can identify what is the rule that is preventing us reaching that better outcome. So then I would suggest there is one sense using game theory wrong. So we can look at those previous examples, things like depressions and wages, commons and public goods, these kinds of things, just taking what we said at the beginning at face value, that's not what we wanna do. Why is it that we're not ending up with a better outcome? Now here I would suggest that Austrians are not immune to using game theory wrong by my view. Here there's a paper written, I'm Curly and Dempster, they're writing about business cycles and they presented this kind of game theoretic construct. Here I've reconstructed. This is pretty much straight from their paper from 2001. They were thinking about why is it that people invest during the boom when we know it's going to end? There's no way this is possibly going to last forever. So why is this happening? And they suggest, we can answer that with game theory. Now I have my own view of why that's happening. See me later this afternoon when I talk about errors, business cycles and fiscal stimulus, I'll talk about that there. But here's their idea. So we have say one individual firm, we'll just call it Firm X, and there's all the other firms. And you have the choice of either increasing investment in the midst of the boom or of just maintaining your old level of investment. Now if everybody increases investment, then our relative profits, compared to other firms, are going to be the same. We're all acting the same way. We end up with the same outcome. But we end up with the boom bust cycle. So we're all increasing investment. This cannot be sustained. Eventually it has to collapse. On the other hand, we could all just maintain investment. In which case again, our relative profits are going to be the same. We're acting the same way. We end up with the same result. But we don't get the boom bust. Without this excessive investment, we've not gone beyond what is a sustainable production possibility point. So we can just kind of continue what we're doing. In effect, we're just ignoring the credit expansion. Saying, yeah, no thanks. We're just going to keep doing what we did before. So between the two, I think most of us prefer a more stable economy to a less stable. So we'd say that this would be a better outcome if we all maintained investments. So why don't they? Well, it's what happens off of those two points. If I'm firm X and I increase investment in the midst of the boom, I can actually profit from this. After all, interest rates are low. It's a good time for me to go out and fund investments and it's going to be more profitable. If nobody else does this, then my profits are going to be higher than anybody else's. So I have the possibility then if others are maintaining investment and I increase investment, I end up with a higher relative profit compared to others. On the other hand, if everybody else is increasing investment and I don't, my profits are going to look relatively low compared to others. But if I increase investment, I'll at least be on par with everyone else. The result being that firm X has a very strong incentive then to increase their investment, regardless of what everybody else does. So each individual firm, so replace X with Y, Z, A, B, C, D, et cetera, all of the various firms in the economy face the same kind of incentive. So we end up with all the firms in the economy increasing investment during the boom and we get the boom bus cycle. Okay. So, here we face the question that I just raised. Well, why would we end up with this bad outcome? Why don't entrepreneurs fix it? What is preventing them from doing it? So there are a few things that I think are wrong with this. One is that they assume for entrepreneurs a very short-term perspective. If we believe in the boom bus cycle as being a real thing, and if we believe that entrepreneurs are forward looking, I'm not just interested in what are my profits next year, but over the very long haul. If you're somebody like me, I guess I'm old enough now, I remember when the dot-coms got started in the 90s. Stocks are doing remarkably well. People are throwing lots of money into these companies despite the fact that very few turn to any profit at all. This would suggest that our entrepreneurs are somewhat forward-looking. They may not be very good at it, but they're not just worried about present profits or profits next year. They believe that these companies will be profitable further in the future. Now, if we do have very rational firms here that know that it's not just we have relative profits that are equal, but there's going to be a boom-bust cycle, this bust is going to drag down our profits, give us losses in a few years. So why is it they ignore this, these future losses when they're thinking about these things? A second point is this idea of relative profit. It's kind of weird to me that relative profit is what firms are worried about here. When much of the time we don't really think of firms as being worried about relative profit, so except relative to other opportunities available to me, for example. So I thought that was kind of a weird thing, but most relevant to us here is that they're not asking the right question. That is why don't firms organize to prevent this increased investment, which is going to hurt all of them in the long run. Why don't they come up with some organized way of just maintaining their original level of investment? Okay, and they don't offer an answer. I'm not going to offer an answer either. This is something that came to mind as I was reading it. Why not? What is it that's going wrong here? Now there are also ways, though, that we can use game theory right, and we also see Austrians do this. My first example is not going to be from an Austrian. So game theory can inform us when is it that entrepreneurs are going to really go out and have to see creative or institutional sort of solutions to nasty problems. So I think my favorite example here, is Splitter Steel. Splitter Steel is part of a British game show, I believe it's called Golden Balls or something like that. So the way the game went, I don't actually know what the early rounds were like, but you have these two players that are accumulating some sum of money, and at the end they play a game that looks shockingly like a prisoner's dilemma. It's not quite a prisoner's dilemma, but it's very close. Where they have this option, each of them has two golden balls, one of them says steel, the other says split. And here are what the incentives look like. So we have in this case, say there are two people, Ibrahim and Nick. Ibrahim can either steal or split, Nick can steal or split. The rules of the game are that if both choose steel, then they each walk away empty handed, so you get absolutely nothing. If they both play split, then they split whatever that total amount was, I believe in this case was 50,000 pounds, so they would each get 25,000 if they both play split. If one plays split while the other plays steel, whoever the stealer is, gets the whole thing. So if Nick plays steel while Ibrahim plays split, then Nick gets the whole 50,000, while Ibrahim gets nothing. If it's the other way around, then Nick would get nothing, Ibrahim gets the whole 50,000. As we look at the incentives, say okay, for Nick, if he believes that Ibrahim is gonna play steal, it really doesn't matter what Nick does, he's gonna walk away with nothing. So that doesn't tell Nick what to do. But if Ibrahim plays split, then Nick can possibly get the whole 50,000, instead of just 25, if he plays steel. So either Nick, he doesn't really know what he would do if Ibrahim plays steel, it doesn't actually matter. His decision's going to be based on if Ibrahim plays split, then Nick can get more by playing steel, similarly for Ibrahim. So we'd expect then, each of them has some reason then to play steel, we should see them each walk away empty handed and the game show now has lots of extra funding for their next episode. So what happened in this case? In this case, Nick was a very entrepreneurial player. He said, I don't like this game, I'm going to change it. So here's what he suggested. He said, hey, I promise you, Ibrahim, I'm going to play steel. Now, Ibrahim should believe him after all, that's what the logic says. But, I'm going to play steel and then I'll split the money with you 50-50. Okay, and this is, naturally, if it's his 50,000, he can do what he wants with it. If he wants to give half of it to the other player, there's nothing saying he can't. So what do you just do? So Nick just changed the incentives that Ibrahim has to face. So Nick says, I absolutely promise, I'm going to play steel. I'm a man of my word, which is kind of great to hear. I'm a man of my word, I'm very honest and I'm going to play steel. And Ibrahim looked at him and said, you're crazy, you're absolutely insane. You're going to lose yourself, this 25,000 we can get if we both play split because you're making this promise to play steel. Why should I go along with this? But I think that Nick managed to get Ibrahim to think hard enough. He said, okay, well, in this case, if I really believe, Nick, that he's going to play steel, then I'm going to get nothing if I also play steel. But if I play split, I can get 25,000 if I believe this guy. On the other hand, maybe he's lying, in which case he's going to play split, in which case I could possibly get the whole thing from playing steel. But Nick tells me he's honest. And I kind of actually believe him that he seems crazy enough to be the kind of person that's going to claim, oh, I'm a good person, I'm very honest, I'm going to steal the whole thing. He seems just nutty enough to do this. So, sure, why not? So the outcome we ended up with was right here, was okay, Nick's going to play steel, Ibrahim's going to split. So that is what we would predict would happen. Well, it turns out that this isn't actually what happened. After managing to convince Ibrahim to pick split, when they both revealed they actually both played split. Right, because it turned out, what Nick also did was remove his own incentive to play steel, as long as he could convince Ibrahim that he was going to, which is kind of hilarious. I guess that saved him writing the check afterward or something, so. All right, so they ended up splitting it, okay. All right, so this was a case where I think this was a good, entrepreneurial player. Knew this game was coming, they always end this game the same way. And had in mind a way to change the game to change the outcome. Now, Puerto de Soto presented actually, in some ways, a very similar way of asking the question by facing this kind of dilemma. So we have two banks, Bank A and Bank B. And in this case, he's trying to analyze are they going to expand credit or not? And he suggests that if neither of them expand credit, this would be basically very conservative banks, we're operating according to 100% reserve principles, that kind of thing. We would both certainly survive this, we maintain solvency, liquidity, and all of that. We earn a relatively small profit. We're only earning, say, the fees and then whatever legitimate lending we're doing of stuff that's lent to us, a relatively small profit. On the other hand, if we both expand credit, then we would also both survive. But we could earn a very large profit from lending our deposits. So in that case, between the two, not expanding, everybody not expanding or everybody expanding, expanding looks good. But then you have these off cases. What if Bank A doesn't expand while Bank B expands? In this case, Bank A is very nice and stable, it's going to survive. While Bank B, we're going to have a credit, see confidence in them eroding over time, they're eventually going to hit the point where they're going to have a liquidity crisis, a bank rent is going to ruin them, Bank B is totally going to fail. That's not a good thing. Similarly, if Bank A is thinking about them individually expanding without the help of Bank B, they know they're putting themselves at risk and they're possibly going to fail as well. So hard to, DeSoto says we really have these two possible outcomes. Either nobody is going to expand, in which case we're all going to survive but earn a small profit, or we're all going to expand and everybody survives and earns a large profit. This is actually not a prisoner's dilemma. It's not so clear which of these two we're going to choose. We would call this a coordination game and the ability of these two banks to coordinate is going to determine the outcome. There are lots of things in life that are coordination games, it turns out. Even simple things like which side of the road do you drive on is a coordination game. It doesn't particularly matter whether it's right or left as long as you do what everyone else is doing. So here in the States, drive on the right, please drive on the right. If you go to the UK, drive on the left. It's going to prevent head-on collisions both of those ways. Now, I don't know why the rest of the world hasn't agreed with us in the States. It is the right, not the wrong side of the road, but yeah, well. All right, so we need some kind of coordination then to determine which of these happens. Well, where DeSoto says it's obvious which we were going to try to coordinate. So in this world, we all earn small profits. In this world, we'd all earn large profits. So we have a very strong incentive to try to change the game in such a way that everybody wants to expand, that we eliminate this fear of failure if you're expanding on your own. So what does he suggest? He says if we have really prudent bankers that are worried about failure, they're not going to expand because of that fear of failure. On the other hand, if we have very imprudent bankers that are really just worried about chasing that large profit, then they're going to expand regardless. But every banker, no matter how prudent you are, has an incentive to try to coordinate the credit expansion. If we can all do it, then it's not dangerous. So bankers are going to push for some kind of organization of this credit expansion, which takes the form of the central bank. So we change the game. We have some kind of bailout introduced where we have a central bank, guaranteeing you're not going to have any problems with liquidity crisis. We'll just provide you with money if that happens to come up. So in that case, if, okay, so we have the same thing if none of us expand or if we all expand. We've just changed things in these off corners, right? So if bank A doesn't expand, they're naturally going to survive, right? If bank B does expand in that case, then they're going to get bailed out and earn a relatively small profit, right? Okay, so we no longer have to worry about failing if the other bank doesn't expand while we do. So it may as well go ahead and expand. Same thing for bank A. We're going to earn a small profit either way if we don't expand. So we each have some incentive then to go ahead and expand the amount of credit we provide and earn these larger profits as we've eliminated, right, this negative outcome if we don't, sorry, if we expand but the other doesn't. All right, so eliminate the fear of failure by eliminating the possibility of failure and we end up with credit expansion. And this is exactly the way that DeSoto uses this example. He says, let's lay out what does the game theory tell us? Okay, either we're going to have prudent bankers that don't or imprudent bankers that do. Really, we'd all rather if everybody was imprudent, let's find a way to enforce that outcome. And that's exactly what we see banks do. So if we start thinking along these lines, say, okay, how is it then that entrepreneurs are going to try to solve these various cases we've provided before? So with the prisoner's dilemma, I've already mentioned before, one possibility is to repeat the game. So we build this criminal relationship. We have partners in crime, we commit crimes together time after time after time. This in turn provides us with the possibility if we get caught, we don't want to confess on each other because there's going to be the possibility of betraying in the future. So we can enforce better outcomes here. Or it might be that we just have straight up an enforcer. This is the case that I call breaking confessor's kneecaps. So, okay, we agreed we weren't going to confess. You went ahead and confessed anyway. Well, we happened to have a third friend that's standing outside in the alley with a baseball bat. You're going to spend some time in the hospital. We're going to change your incentives a bit. If you confess, sure, you don't go to prison, but you go to the hospital instead. Or perhaps worse. You do have a family for now, after all. So some kind of enforcement mechanism we create. Interestingly, that's not that different from funding public goods with taxes. It turns out we've enforcers making you fund the thing. So how about the tragedy of the commons? Or what's the solution there? Well, here, kind of weirdly, this is something that's basically consensus at this point amongst most economists. The way you handle this is you privatize the commons. And this was something I wasn't aware of until Dr. Terrell mentioned it. Manger actually talked about this. Years ago, 100 years ago, Manger says, oh, you need to give this common resource over to some private individual to regulate the use of it. That's exactly what is considered to be the best case now. I know there was one example. I don't remember the African countries involved. I think it was Kenya and one that they were bordering. They were having a problem with elephant poaching. And so poachers were killing these elephants and was hurting the elephant populations because tusks are very valuable. Well, the one country, I think it was Kenya that did the wrong thing, if I recall correctly. Or they said, well, no, these elephants are a national treasure. Poaching is illegal or going to enforce laws against poaching very severely. Turns out, though, it's very difficult to enforce these things because elephants are wandering out across the savanna. It's very difficult to catch all the poachers that go out there. So they saw their elephant population decline, despite the fact they're claiming how important these elephants are to them. One of the neighboring countries was a little bit more informed by this slide and said, well, this is what we'll do. Just declare a date. Any elephants on your land at this date belong to you. Do with them what you will. You want to harvest them, whatever. It's up to you. They're yours. Well, it turns out people are very protective of their own property. So once you make these things private property, people don't want to just slaughter them all. In fact, you want to start increasing the population so you can slaughter small amounts of them and have a regular income. This shouldn't be shocking. Are we really worried about cattle populations in the Western US? I am not. We intentionally are breeding them because that's a profitable thing to do. Same thing with basically any kind of domesticated animal. By privatizing them, we've protected their populations. So that would be another thing if you really love pigs, eat more pork, right? And it's very much along the lines of what Dr. Terrell said, if you love trees, use more unrecycled paper. Or you're encouraging entrepreneurs to produce more of the thing. But for that to happen, we have to privatize it to start with. If the only way you can own the elephant is by killing it and sneaking it out of the country, then that's what people are gonna do. If you give them an option to own it some other way, perhaps while it's still alive, they're going to have more of an incentive to keep it alive and let it breed. So the tragedy of the commons, privatize them. Take the commons, make them no longer common if at all possible. And then with public goods, there are actually a number of ways that we can try to deal with public goods apart from taxes. One method that is quite successful, it turns out, and that entrepreneurs have figured out is having some kind of matching fund. So rather than saying, if we go back to the original example, I made it sound like Bonnie, if she decided to fund the thing, was committing to make sure it was fully funded. Maybe you don't make her do that. Make her say, well, if other people commit enough, I'm willing to commit some amount. This is in fact exactly what the model for Kickstarter is. So as long as we hit whatever the goal is, then yes, I'm willing to put forth my 25, 52, 200, $2,000, whatever it is. If we don't hit that amount that we need, though, that thing expired and I don't have to give you the money. So we could do the same kind of thing with any public good. One of my favorite examples of this was reading Rainbow, which I have very fond memories of as a child. There was Jordy LeForge telling me about books, because I also watched Star Trek at the time. So anyway, it was this great program, encouraging reading, telling us about kids books funded by PBS, so it wasn't perfect. Well, they decided they were gonna come back and they were going to fund themselves by Kickstarter. And they raised millions of dollars in order to make, I believe they were kind of going the app approach now. So to develop this app, they needed some money to do it. There were so many people that loved reading Rainbow, they were willing to pledge money to get this app developed, they raised millions of dollars to do it. Without the need to go begging to PBS for more money to make this happen, we funded it jointly through Kickstarter. So there's the possibility here by having some kind of matching fund, have your payment be contingent upon others paying, by doing that we can also possibly fund public goods without running into the same problems that we described earlier with the prisoner's dilemma. And so there are other solutions out there. And the thing that kind of depresses me is that these solutions are not new. I'm not the first person presenting these. I can claim exactly zero originality here. Yet despite this, whenever we say we should privatize the roads, well, who will build the roads? Well, there's this thing called matching funds, there's this thing called Kickstarter. I may not love roads that much, but I'm willing to pay $50, if the rest of my neighbors pay $50 to repave my road, that kind of thing. And we have options out there and we do use them already. So anyway, so there are these other solutions out there for solving the prisoner's dilemma where we don't get stuck with this bad outcome. Entrepreneurs are in fact creative people, they see these problems coming and they come up with solutions to them. And so, I'm just kind of concluding, there are a couple ways we can approach game theory if we really take entrepreneurship seriously. One is the wrong way. We just end up all, we're choosing these lousy outcomes because we have these individual incentives to do it. The conclusion being we need to eliminate individual choice, throw in taxes, for example. The right way to think about it is to realize that lousy outcomes are going to attract entrepreneurs. When we see problems, creative problem solvers, that is people, entrepreneurs, are going to try to find a way to solve them. So we need to ask the question, when they're not solving these problems, why aren't they fixing them? If they are solving them, what are they doing to fix them and might there be other ways that we can use those same solutions to also fix these problems? That's kind of a fly by, but thank you very much.