In more ways than one. Lets say one wolf is kind of smart and realizes it's a multi-round game, and that after they eat the sheep there won't anything else for them to eat except each other. What does that wolf do then? And what if it occurs to him that he can't be sure that the other wolf hasn't realized this too?

Everything else is one wolf eating two sheep.

What about a system where wolves aren't allowed to eat sheep, and everybody just chooses for themselves what to have for dinner (so long as that choice doesn't involve coercing someone else)?

Nobody "allows" wolves to eat. They do it unless they are stopped. As such, such system exists except in fantasy-lands where neither politics nor economics exist.

In that case the sheep starve, because the grass is a wolfs private property.

Good analogy. A wolf majority results in sheep being eaten with or without democracy because the wolves are more powerful. A sheep majority can save the sheep from the wolves only in a democratic system where the wolves respect majority rule.

By the way, rich people are wolves, not sheep.