Credit expansion, the prisoner’s dilemma and free banking as mechanism design


  • Ludwig M.P. van den Hauwe Ludwig van den Hauwe received his Ph.D. from the Université Paris-Dauphine.



Despite the distinctive character of the Austrian approach to «microfoundations for macroeconomics», the literature on free banking contains a number of arguments which make use of game-theoretic concepts and models such as the well-known Prisoner’s Dilemma model. While there can be no general a priori presumption against the possible usefulness of game-theoretic concepts for Austrian theorizing, in the context of the debate on free banking such concepts and models have been used with varying degrees of perspicacity. One example which is elaborated in the paper is concerned with the interaction configuration between independent banks in a fractional-reserve free banking system, which has sometimes been modeled as a One-Shot Prisoner’s Dilemma game. This conceptualization does not provide a sufficient argument for the in-concert overexpansion thesis, nor for the thesis that fractional-reserve free banking will tend to lead to the establishment of a central bank. The author drops the implicit assumption that there exists a one-to-one correspondence between the outcome matrix and the utility matrix. When it is acknowledged that banks in a fractional-reserve free banking system need not necessarily adopt a «myopic», self-regarding perspective but may recognize the long-run harmony of interests between the banking sector and society at large, a different conceptualization and a different matrix representation emerge.

Key words: Economic Mechanism Design; Business Cycle Theory; Prisoner’s Dilemma; Free Banking.

JEL codes: D01, E31, E32, E42, E52, E58, E66, G18, K39.

Resumen: A pesar del carácter distintivo del enfoque austríaco de las «microfundaciones para la macroeconomía», la literatura sobre la banca libre contiene algunos argumentos que recurren a los conceptos y modelos de la teoría de juegos tales como el conocido modelo Dilema del Prisionero. A pesar de que no puede existir una presunción a priori sobre la posible utilidad de conceptos de la teoría de juegos para las teorías austríacas, en el contexto del debate sobre la banca libre tales conceptos y modelos han sido manejados con distintos grados de perspicacia. Un ejemplo elaborado en el documento comenta la configuración de interacción entre los bancos independientes en un sistema de banca libre con reserva fraccionaria, que a veces ha sido modelado como un juego de Dilema del Prisionero One-Shot. Esta conceptualización no ofrece suficientes argumentos para la tesis de la sobreexpansión in-concert, ni para la tesis de que un sistema de banca libre con reserva fraccionaria tendería a la creación de un banco central. El autor abandona la asunción implícita de que existe una correspondencia de uno a uno entre la matriz de resultado y la matriz de utilidad. Al reconocerse que los bancos en un sistema de banca libre con reserva fraccionaria no deben adoptar necesariamente una perspectiva «miope» y egoísta, pero pueden reconocer la armonía de intereses a largo plazo entre el sector bancario y la sociedad en general, surgen una conceptualización y representación de la matriz distintas.

Palabras clave: Diseño de mecanismo económico; Teoría del ciclo económico; Dilema del Prisionero; Banca libre.

Códigos JEL: D01, E31, E32, E42, E52, E58, E66, G18, K39.


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How to Cite

Hauwe, L. M. van den . (2008). Credit expansion, the prisoner’s dilemma and free banking as mechanism design. REVISTA PROCESOS DE MERCADO, 5(2), 133–174.