To me, this is not a GMing problem. It's a social problem.
It is a social problem, presented within the context of a group of people gaming. Most such problems are exceedingly minor, and simply telling the GM that it is okay for them to stick by their guns is sufficient and appropriate. That's pretty much what Gygax seems to be doing, to me.
I don't need, or expect, the maker of a DVD player to tell me what to do if an unpleasant person turns up to my video night and starts spoiling the movies for everyone else. Similarly, I don't think the rules of an RPG provide a solution for people who want to spoil the game for others. It's a social problem, which has to be solved socially.
The game *is* a social situation - you can't readily separate the two. The DMG is not just "rules of the game". It is also advice on making the game work, in a practical sense - and that can and will include social aspects, then and today.
Gygax was not writing for *you*, so what you, personally, need now is not really relevant. He wasn't generally writing to mature adults who are apt to assert their authority confidently but without ruffling feathers. Do you forget how horribly awkward and ungainly young geeks can be at handling social interaction issues? Young geeks in the 1970s, even! Gygax was not in a position to give advice on social problems, in general. But he was writing to an audience that, on the whole, had a lot of socialization issues. Giving them something that operated within the context of the game gave them a way to keep things rolling, so the gathering could become a framework upon which to build those much-needed social interaction skills!
I don't think he was thinking in those terms, mind you. He didn't separate between rules issues and social issues - they were all just things that a GM might encounter. Which makes sense - the updated "How to Win Friends and Influence People" wasn't going to be published until 1981. I don't think identifying social/people issues as a separate thing that could be solved with general approaches was really mainstream in the US at the time.
Today, we can and do give better advice - but it largely boils down to much the same thing. Gygax merely lacked nuance.
Nor do I think it is helpful for the rulebook, or the gamer culture more generally, to label players who have chosen option A as "munchkins" or "problem players". (There is a fair bit of this in the 2nd ed AD&D PHB.) If option A is an option that is bad for the game, then why is the rulebook permitting it?
Well, we have learned a lot since Gygax's time, too. We can have a more nuanced approach today, because we understand what people are in the games for better.
But, a hammer used well builds a house, and used improperly sends you to the hospital with a smashed thumb. The general case is that option A is not actually all that bad for the game, but a player misusing it is bad for the game.
I guess my issue with this is that I don't see how Gygax's quote applies. I mean, this is a player asking "Do you mind if I cheat?" and the GM answers "Yes I do. Please don't." I'm having trouble seeing how there is much more to it than that.
For a new, socially awkward GM, permission to (in fact, urging to) do exactly that is valuable. That's largely what Gygax seems to have been doing.
I do think he wording does leave holes for misinterpretation, I grant you, so that GMs might tend to take it as license to be egotistical jerks. Much of his writing does, to me, come across as a bit pretentious, which would support such an interpretation.
