The world economy roiled following Britain’s vote to leave the European Union. Uncertainty was the cause. Even the scope of the potential deal is unknown because neither the government of UK Prime Minister David Cameron nor the EU had any contingency plans in place in case of a pro-Brexit vote.
So the UK and EU are now like inmates stuck in their own psychic prisons, while the rest of the world watches from outside, hoping they come together. For the good of the global economy, officials on both sides should remember the prisoner’s dilemma.
How the Game Goes
The prisoner’s dilemma is a classic of game theory that illustrates the bounds of rational self-interest. It is formulated in the Stanford Encyclopedia of Philosophy as follows:
"Tanya and Cinque have been arrested for robbing the Hibernia Savings Bank and placed in separate isolation cells. Both care much more about their personal freedom than about the welfare of their accomplice. A clever prosecutor makes the following offer to each. “You may choose to confess or remain silent. If you confess and your accomplice remains silent I will drop all charges against you and use your testimony to ensure that your accomplice does serious time. Likewise, if your accomplice confesses while you remain silent, they will go free while you do the time. If you both confess I get two convictions, but I'll see to it that you both get early parole. If you both remain silent, I'll have to settle for token sentences on firearms possession charges. If you wish to confess, you must leave a note with the jailer before my return tomorrow morning.”
The prisoner’s dilemma is this: The best option, taken by itself, is for the prisoner to confess. But if both confess, they both still get punished, and the outcome is worse than if they’d both kept mum. Self-interest seems more attractive, but is likely to lead to a worse result."
That is the situation in which the UK and EU now find themselves. The UK may be tempted to ask for all the advantages of the EU’s single market with none of the costs, as Boris Johnson, putative leader of the Leave campaigners in Parliament, seemed to suggest yesterday.
Yet, EU officials are likely to resist such maximalist demands. They would see them as triumphalist bravado. Britain could end up with a bad deal.
Meanwhile, Jean-Claude Juncker, head of the European Commission, has called for “consequences” to Britain’s exit vote, and implied that British MEPs should leave the European Parliament, of which they are still members, immediately.
No One Wins From Defection
For the EU, not cooperating with Britain would seem to make sense on the surface. Italy will face a constitutional referendum, which could potentially cause its government might fall, especially as Italian Euroskeptics have recently won some stunning domestic victories.
In France, the autarkic leader of the National Front, Marine Le Pen, is also riding high, and today got to make her case for a sovereign France in the pages of The New York Times. By punishing Britain, inflicting on it significant economic damage, the powers-that-be in Brussels might be able to head off these threats.
Intransigence by Brussels and a potential trade war with the UK—including possible repatriation of UK citizens living on the Continent, many of whom are retirees—would do great and continuing harm to Europe and the world as well as the UK. Remember Smoot-Hawley?
And if officials in Brussels were to dismiss the complaints that led Britain to leave, it would underscore the EU’s democratic deficit in a way that strengthens Euroskeptic voices in other member states.
For these reasons, both sides should remember the prisoner’s dilemma, and go for the optimal resolution by cooperating.
A Way Out
The new UK government, when it is formed, should immediately announce it will not repatriate people who have come to the UK to work and contribute to the country’s economy, but will grandfather them into any new immigration regime. It should also announce that it will not raise trade barriers to European goods. Britain has always been a liberal, commercial economy. These two pronouncements would underline that.
The EU, meanwhile, should similarly quell the fears of Britons living in the EU, granting them continued legal status, and announce its willingness to negotiate a genuine free trade deal with the UK (which for its part should consider unilateral free trade with the rest of the world, as Rory Broomfield and I recommended in our 2014 runner-up submission for the Brexit Prize).
Brexit is a dramatic move, and fraught with peril. But by remembering the prisoner’s dilemma, leaders on all sides can turn peril into opportunity.
Originally posted to Foundation for Economic Education.