27/07/2011 13:03 BST | Updated 26/09/2011 06:12 BST

Greece is Facing a Nation-Wide Prisoner's Dilemma

Game theory, popularised to the wider public by the film 'A Beautiful Mind', offers a simple, yet extremely powerful, analogy to examine social interactions: the prisoner's dilemma.

Game theory, popularised to the wider public by the film 'A Beautiful Mind', offers a simple, yet extremely powerful, analogy to examine social interactions: the prisoner's dilemma. This proposition suggests that, under certain circumstances, individual decision-makers become worse-off by acting rationally!

This is exactly the situation Greece is now facing. Realising that the age of artificially low interest rates is over, the Greek government is attempting (rather unsuccessfully) to reform the State and introduce governance forms similar to those of other European countries. Examples of such policies include the sale of government property and the liberalisation of a number of protected or 'closed' sectors.

Politics and inefficient implementation aside, introducing some of these measures makes sense. Greek consumers pay significantly higher prices for medicines partly because of the regulatory protection enjoyed by pharmacists. Similarly, the domestic trucking sector was shielded from competition and was thus able to impose a significant premium on the price of their services. According to some studies, liberalising closed professions could boost GDP by 10 percentage points in five years.

What is interesting is the public's reaction to this. Most people agree that change is required in order to bring public finance back on track. Most people also agree that vested interests, in the form of professional associations or trade unions, have reaped benefits at the expense of the entire population. Yet, when it comes to their 'back yard', each professional group is ready to bring the country into paralysis in order to maintain its privileges. See the most recent example of taxi drivers who imposed an actual blockade on most ports and airports in the country.

Here is where game theory comes to play. Collectively, all Greeks, including the aforementioned professional groups, would be better off in the long run by supporting these initiatives. Granted, truck drivers will lose a substantial part of their wealth but they will be also paying less for drugs, architects, lawyers, and so on. However, the incentives change when moving to the individual level. Each professional group is - individually - better off by resisting change irrespective of what other professional groups do. In fact, the best plausible scenario is for everyone else to change but me!

This phenomenon explains the slightly schizophrenic behavior exhibited by various professional or other groups when faced with government action challenging the status quo. The same people that complain about the mess of the modern Greek polity (and, let me emphasise, rightly so) are simultaneously resisting initiatives that help improving it. Add to this politicians' unparalleled ability to produce senseless legislation by offering compromises and you get the reason why Greece is not bound to recover any time soon.

Thankfully game theory offers some ideas about how to solve this paradox. The answer lies in the development of trust among Greek people and their politicians that change will go ahead. And a belief that change will encompass all levels of society, including the upper echelons that still enjoy an amnesty from criminal activities. Greek people do not protest because they resist change per se. They are angry because they know that change, just like the pending default, will be 'selective'.

Of course, nobody believes that such a radical rewrite of the social contract can happen any time soon. Building institutions is a painfully slow process that requires the active participation of society as a whole. Indeed, it is a sad realisation that a nation famously (and occasionally irritatingly) fond of its democratic past has produced one of the most dysfunctional democracies to date.