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Economic theory also applies to government shutdown

Bluefield native Dr. John Nash - subject of the movie "A Beautiful Mind" - won a share of the 1994 Nobel Prize in Economics for his work in game theory, which analyzes how decision-makers compete or cooperate in a given situation.

Nash published papers on the subject in the early 1950s, but it wasn't until the late 1970s that his work finally gained recognition for its potential application in economics and even politics.

This political application of game theory could actually help us better understand the recent stalemate between Republicans and Democrats, which has once again created a great deal of uncertainty for the overall economic and business climate.

Earlier this week, political representatives from both parties fired off statements saying they opposed a federal government shutdown. Despite the universal desire to avoid it, neither party was able broker a compromise to avoid it.

During a prior fiscal crisis in 2011, antitrust attorney Jon Sallet penned a piece for The Hill invoking game theory to explain the partisan impasse.

"We are caught in a prisoners' dilemma of our own making," Sallet wrote.

The "Prisoners' Dilemma," is a classic game theory thought experiment that examines the costs and benefits of cooperation and competition in a given situation.

Imagine this over-simplified example: Police arrest two suspects for a crime. In an effort to build a stronger case, the police separate the two and try to get them to rat out the other.

The criminals could face three outcomes. In one, they could cooperate and refuse to testify against the other, earning each a one-month sentence for a smaller crime. If they rat the other out, the first one to talk goes free and the other gets a year in jail for the more severe crime. But if they both try to rat out the other, they could end up serving three months each.

The best choice for both of them is to cooperate. But if both focus on the outcome that benefits them the most - betraying the other to go free - they still end up worse off.

This is called the "collective action" problem - "a circumstance in which cooperation yields the best outcome, and antagonism yields a second-best result," Sallet said.

He argued the hyperpartisan divide has produced a massive collective action problem for the country with "powerful incentives for political leaders to choose the path of disagreement and non-cooperation, embracing  'second-best' outcomes."

Sallet said this kind of approach appeals to "extreme partisans." If the opposing party supports something, it's in an extreme partisan's best interest to rail against how wrong that position is.

"Given the structure of partisan and primary politics, that is often the surest path to re-nomination and election, especially in one-party legislative districts," Sallet said. "It can also be the best way to raise money and profile."

A Cornell University Economics and Sociology course blog also picked up on Sallet's piece.

"With this incentive structure, it's no wonder that we have a dysfunctional political system that focuses more on personal attacks than legislative agendas," the Cornell blog said.

Perhaps Dr. Nash could draw us up a better solution?



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