Game theory is a distinct and interdisciplinary approach to the study of human behavior. The disciplines most involved in game theory are mathematics, economics and the other social and behavioral sciences. Game theory (like computational theory and so many other contributions) was founded by the great mathematician John von Neumann. The first important book was The Theory of Games and Economic Behavior, which von Neumann wrote in collaboration with the great mathematical economist, Oskar Morgenstern. Certainly Morgenstern brought ideas from neoclassical economics into the partnership, but von Neumann, too, was well aware of them and had made other contributions to neoclassical economics.
Since the work of John von Neumann, "games" have been a scientific metaphor for a much wider range of human interactions in which the outcomes depend on the interactive strategies of two or more persons, who have opposed or at best mixed motives. Among the issues discussed in game theory are
1) What does it mean to choose strategies "rationally" when outcomes depend on the strategies chosen by others and when information is incomplete?
2) In "games" that allow mutual gain (or mutual loss) is it "rational" to cooperate to realize the mutual gain (or avoid the mutual loss) or is it "rational" to act aggressively in seeking individual gain regardless of mutual gain or loss?
The key link between neoclassical economics and game theory was and is rationality. Neoclassical economics is based on the assumption that human beings are absolutely rational in their economic choices. Specifically, the assumption is that each person maximizes her or his rewards -- profits, incomes, or subjective benefits -- in the circumstances that she or he faces. This hypothesis serves a double purpose in the study of the allocation of resources. First, it narrows the range of possibilities somewhat. Absolutely rational behavior is more predictable than irrational behavior. Second, it provides a criterion for evaluation of the efficiency of an economic system. If the system leads to a reduction in the rewards coming to some people, without producing more than compensating rewards to others (costs greater than benefits, broadly) then something is wrong. Pollution, the overexploitation of fisheries, and inadequate resources committed to research can all be examples of this.
In neoclassical economics, the rational individual faces a specific system of institutions, including property rights, money, and highly competitive markets. These are among the "circumstances" that the person takes into account in maximizing rewards. The implications of property rights, a money economy and ideally competitive markets is that the individual needs not consider her or his interactions with other individuals. She or he needs consider only his or her own situation and the "conditions of the market." But this leads to two problems. First, it limits the range of the theory. Where-ever competition is restricted (but there is no monopoly), or property rights are not fully defined, consensus neoclassical economic theory is inapplicable, and neoclassical economics has never produced a generally accepted extension of the theory to cover these cases. Decisions taken outside the money economy were also problematic for neoclassical economics.
Game theory was intended to confront just this problem: to provide a theory of economic and strategic behavior when people interact directly, rather than "through the market." In game theory, "games" have always been a metaphor for more serious interactions in human society. Game theory may be about poker and baseball, but it is not about chess, and it is about such serious interactions as market competition, arms races and environmental pollution. But game theory addresses the serious interactions using the metaphor of a game: in these serious interactions, as in games, the individual's choice is essentially a choice of a strategy, and the outcome of the interaction depends on the strategies chosen by each of the participants. On this interpretation, a study of games may indeed tell us something about serious interactions. But how much?
In neoclassical economic theory, to choose rationally is to maximize one's rewards. From one point of view, this is a problem in mathematics: choose the activity that maximizes rewards in given circumstances. Thus we may think of rational economic choices as the "solution" to a problem of mathematics. In game theory, the case is more complex, since the outcome depends not only on my own strategies and the "market conditions," but also directly on the strategies chosen by others, but we may still think of the rational choice of strategies as a mathematical problem -- maximize the rewards of a group of interacting decision makers -- and so we again speak of the rational outcome as the "solution" to the game.
Anthony Downs' An Economic Theory of Democracy delineates the self-interest axiom of politicians who sets re-election as their primary objective function, and explains for political failures that yield inept public policy. In theory, the single-minded elected official will attempt to appease and provide services to well informed and influential voters, and will rationally concentrate on particularized legislation that quickly provides constituency appreciation. Thus, the general problems plaguing society will be overlooked. Downs claims that this self-interested ideology breeds catastrophe as budget maximizing bureaucrats, well-organized interest groups, and rationally ill-informed voters will act collectively in creating a political chaos.
If public choice theory is correct, then a governmental bureaucracy should have little interest in efficiency. In reality, the theory may be guilty of being too extreme, but there is considerable inefficiency within government agencies that has become a common characteristic. Economists point to the monopoly possessed by many of these agencies that provides no incentive to operate at cost efficient levels. Also, the allocative wisdom of government is quite dubious as they have often caused harmful misallocation effects. Optimism by economists for the effectiveness of government is diminishing, and "even when economists believe that a good case can be made for government intervention, they have come to realize that the intervention will not necessarily be the kind they envision or could defend."
Another purpose of government in public choice theory is re-distribution that calls forth equity concerns. In this area, economists are more enthusiastic about the potential effectiveness of government, but disapprove of governmental interference in market prices, such as minimum wage, rent controls, and subsidies that distort true values and preferences. In view of this stance, cash payments are preferred over in-kind benefits like food stamps and rental credit because the poor will not be compelled to purchase "lesser goods." The overall consensus among economists on both sides is that government needs to play a role in balancing an inequitable and uncaring market system, but efficiency must not be forsaken because the costs associated with this mistake will create new and unwanted problems.
Although necessary at times, active governmental intervention worries economists. The University of Chicago economist Gary Becker wrote, "In modern economies, profits often are determined more by government subsidies, taxes, and regulations than by traditional management or entrepreneurial skills." According to Becker, excess regulations result in vigorous rent-seeking behavior by all actors within a market economy that eventually corrupts government officials and steers the economy and the political system down the path of inefficiency. Becker's article is a good example of the skepticism that is prevalent among economists when the activities of government and the market become unreasonably intertwined, and he reinforces the claims by James Buchanan and Anthony Downs that the actors within the body of government have a tendency to behave according to their self-interested needs by pandering to specific interest groups.
Increasingly, political scientists are using game theory to analyze strategic interactions across many different political settings. Each of the four major subfields, to differing degrees, has seen game theoretic concepts enter its vocablulary, and students entering the profession will need to understand the potential and limits of game theory. This course aims to give students an entry-level understanding of the basic concepts of game theory, and how these concepts have been applied to the study of political phenomena. Students should leave the course with a working knowledge of games of complete information, to the point where they can state a model correctly, solve it, and elucidate some of the theory's empirical implications.
Institutional analysis lies behind much of modern positive political theory, so we will combine our study of pure game thoery with a study of certain key political institutions. The institutions we will be examining within this course are legislatures, legislative committees, courts, and treaties, among others. Among the topics to be studied within these "institutional laboratories" are strategic voting, coalition formation, agenda setting, and the provision of public goods. This is primarily a methods course. I will focus my attention on providing you with the tools to analyze systematically strategic situations in politics, broadly defined. The policy making examples we examine are meant to be illustrative, rather than providing the primary focus of the course. Therefore, the course is divided into sections along analytical methods lines, not substantive policy area or institutional lines.
A branch of the social sciences that takes as its principal subject of study the interrelationships between political and economic institutions and processes. That is, political economists are interested in analyzing and explaining the ways in which various sorts of government affect the allocation of scarce resources in society through their laws and policies as well as the ways in which the nature of the economic system and the behavior of people acting on their economic interests affects the form of government and the kinds of laws and policies that get made.
What economists call game theory psychologists call the theory of social situations, which is an accurate description of what game theory is about. Although game theory is relevant to parlor games such as poker or bridge, most research in game theory focuses on how groups of people interact. There are two main branches of game theory: cooperative and noncooperative game theory. Noncooperative game theory deals largely with how intelligent individuals interact with one another in an effort to achieve their own goals. That is the branch of game theory I will discuss here.