The prisoner's dilemma indicates that if people act on the basis of self-interest and there are no restrictions on their behavior, the results will not be in the interests of the group. The welfare of the group requires that some way be found to coordinate behavior and eliminate the conflicts involved in prisoner-dilemma situations. Large groups have found two basic solutions, and both rely on changing incentives, not goals.

One way involves establishing private-property rights and allowing markets to develop. Ownership encourages decision-makers to consider all the costs and benefits of their decision. The overgrazing problem in the discussion of the commons can illustrate this solution. If each of the herders has to confine his cows to his own plot of land, he will not be able to shift the costs of his overgrazing to others. As a result, he has an incentive to limit the size of his herd and the problem disappears.

The second and more direct way is to have a strong central authority that regulates people's behavior and punishes deviations. Hunting regulations illustrate this method. Wild ducks are owned by no one. As a result, the problem of the commons should apply, and ducks should be hunted to extinction. They are not because governments set limits on when and where ducks may be hunted, and on how many ducks each hunter may kill. To the individual hunter these restrictions may seem as irritating limitations on his freedom, but without them, hunters as a group would be much worse off.

The use of central authority as a way of coordinating behavior is widespread. It is the method that allows large business firms to exist. The boss coordinates his subordinates, directing them to actions that are in the interest of the all those who make up the firm. This solution was used in a more extreme form in the socialist economies of Eastern Europe and Asia. These economies were designed as if they were one giant firm. The bulk of economic decisions, such as what to produce and how to produce it, was made by government bureaucracies.

Which method, the market or central direction, is better? Evidence suggests that sometimes the first is and sometimes the second is. There are costs to using either method and, as a result, no country totally relies on either. One of the important political changes of the 1980s was the acknowledgment by the leadership of the Soviet Union and of China that their reliance on central coordination and their suppression of market forces had been excessive. From these experiences has come a new respect for the capabilities of market coordination.

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