Game theory: from the “invisible hand” to the “prisoner’s dilemma”
Another reason why the hegemony of general equilibrium theory and its underlying mathematical form has been largely reduced is a shift in emphasis towards new and different questions, requiring different methods.
The idea that individuals make decisions in reaction to exogenous variables has progressively given way to a more active view of decisions as strategic reactions to other agents’ own actions. In parallel, fascination for the idea that the market mechanism reconciles ex post the autonomous decisions of a myriad of individuals, has been replaced by a “prisoner’s dilemma” viewpoint, placing emphasis on inconsistencies between individual strategies and socially optimal outcomes, which can be recognized and anticipated ex ante. Game theory has proven to be the appropriate technique to explore the structure of strategic interactions and the effects of individual decisions on one another. Initiated in the 1940s with, among others, the above-mentioned seminal contribution of Morgenstern and von Neumann (1944), game theory experienced a rapid development and an extraordinary expansion of its application to economics in the 1980s and 1990s. By the end of the twentieth century, it had become the essential mathematical structure and support of all economic analysis, from the theory of individual behaviour to the study of markets and policies.