Two accomplices get arrested for a number of crimes. The police have enough information to assure they both get a two year sentence. But they think they could connect them to another, much bigger crime, so they make both criminals an offer. If one informs on the other, he’ll go free, while the other will certainly get a ten year sentence. However, if both inform on each other, the police will have enough to ensure they both get five years.

The above scenario is commonly given to explain one principle of what has come to be called Game Theory: that when everyone works in his own best interest, it is possible to end up in a far worse position than if everyone had worked in the best interest of the collective. In the above situation it is always in one’s best interest to inform. If the other prisoner informs, you only get five years instead of ten, and if he doesn’t inform, you go free instead of getting two. Nonetheless, when both prisoners follow their best interest by informing, both get five, whereas paradoxically both could have gotten only two if they’d kept their mouths shut.

Conservatives, Libertarians, and Classical Liberals* tend to hate the above conclusion. And perhaps hate is too soft a word. It is an anathema to liberty, and one is a despised Communist merely for thinking it. As we all know, unbridled liberty is the source of all prosperity. America won the Cold War, after all, by each of us concerning ourselves only with our individual prosperity, whereas those collectivists sank into economic malaise, which ruined the Soviets, and would have ruined China if they hadn’t reformed their economic system to be more free-market. At least, this is the prevailing wisdom among modern Conservatives.

The above argument does a serious disservice to the principle of individual liberty and small government. It reduces what is essentially a moral argument into utilitarianism. Classical Liberal thought is based on the idea that people have foundational rights, that these rights allow one to choose to do anything which is not directly belligerent to another person’s rights, and that no one’s rights may be morally infringed for the benefit of any number of others. The utilitarian expresses the last principle differently: that when no one’s rights are infringed, any number of others will benefit. Now, if we were to apply that to, say, our first amendment rights, we would arrive at the conclusion that we are permitted freedom of speech because it benefits society. But from here it is no great leap to conclude that where freedom of speech does not benefit society, it need not be granted. No such conclusion could be drawn from the moral argument, that no amount of benefit to society can ever justify the suppression of speech. For this reason, the moral argument is superior to the utilitarian: it isn’t weakened when the collectivists put forward arguments along the lines of the prisoner paradox.

What then should the response to collectivism? Friedrich von Hayek, perhaps destined to be considered the greatest of the 20th century’s Classical Liberals, wrote extensively on this topic. In his work, the Road to Serfdom, the argument was put forward that the level of regulation necessary to achieve any benefits from collectivism would effectively end human liberty. Our choices would all need to be made for us by central planners, because we wouldn’t comply with the best interests of the collective on our own.

Put another way, let’s return to the first scenario. The reason this situation is regarded as paradoxical is because it is always in one’s best interest to choose the option that leads to prison for five years, whereas it is never in one’s best interest to choose the option that only leads to two years. Even if both prisoners are allowed to get together and talk out their options, and they both see that a better outcome is assured if both of them keep their mouths shut, and they agree to this course of action, it still remains an even better option for each one to double cross the other. If the first double crosses the second, he gets even fewer years than the two he’d agreed to earlier, and if both double cross, he gets five instead of ten. The paradox of this situation is that if each individual is allowed to have any individual choice whatsoever, his best choice leads to the worse result, and his worst choice leads to the better result. In order to obtain the better result, these criminals can’t be allowed any say in the matter, and a central planner must step in and choose to make both of them keep silent whether they want to or not. So long as they have any kind of individual choice, this problem cannot be resolved.

The Classical Liberal’s only recourse then is to try to eliminate any personal involvement in situations where these kinds of paradoxes occur, and they do occur often enough in our economy. When given a choice between an economic disaster or the loss of personal liberty, abstain altogether! I’ve harped on health insurance before, and have said most of what I think needs saying, but I think it provides a good example of how we ought to approach these problems. When health insurance is used as a payment mechanism for general medical care, the quantity of medicine you individually purchase has very little correlation to the premiums you pay, so frugality is not rewarded: you may as well use it to cover as much as you can; your costs will be divided among so many people that it’s hardly noticeable. But when everyone adopts this mindset, the costs of hundreds of millions of people splurging adds up, and premiums are forced to skyrocket just so insurance providers can break even. There’s still no point in being frugal, because that won’t lower your premium by more than a minuscule fraction of a cent, and even if everyone else in the country acted in the best interest of the collective and lowered their consumption, that only returns us to the position we were in at the beginning, where everyone is encouraged to buy lots of medicine for cheap, once again leading everyone to splurge. Just abstain: get catastrophic coverage, a cheap policy with a very high deductible, but pay for day to day expenses out of pocket and you’ll probably be able to save money. (That is, provided Washington gets its act together and allows tax-free personal health savings accounts.)

And, incidentally, this is another reason why the people in Washington trying to pass their insurance regulation “reform” bill (which I still doubt is going to make it into law, although the Dems are apparently more suicidal than I gave them credit for when I wrote after Scott Brown’s election and are trying to go Kamikaze to get it passed) are writing a simple disaster. The use of insurance as a funding mechanism for ordinary, expected health-care expenses puts everyone in the above paradox, which is causing the higher premiums we want to prevent. Abstention from non-catastrophic insurance is the only solution, yet the bill in question makes it illegal to abstain. This leaves us with one of two choices: premiums can go up forever, or a (death) panel of central planners will make our decisions for us, based on our value to the collective. The Democrats swear the latter will never happen, so in other words they plan on reducing premiums by forcing the market to raise premiums. Brilliant.

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*Try as I may, I cannot find an appropriate word for the philosophy upon which the idea of a limited government is founded other than Liberal. The word Liberal, from the Latin root meaning “free,” was applied first to the same people as invented the idea of defined and limited government powers as a vehicle for protecting freedom. This Classic Liberalism finds its expression most clearly in modern fiscal conservatives, whereas fiscal liberals, being statist and all too often authoritarian, do not deserve the term. Doubtless calling conservatives liberals and liberals illiberal is confusing, but it needs to be done, as the alternative is becoming more problematic. Fiscal conservatives, being unable to call liberals illiberal, have taken to calling them by names of other historically illiberal groups: socialists and fascists. This is not precisely accurate, and illiberals are all too ready to point out minor distinctions between their views which are supposed to deflect the accusation. A wider, blanket term for statists is required, and that term is illiberal. But to use that term, the fiscal conservative must also become comfortable with calling himself a Liberal.