Economics, economic policy, and social justice

A.Y. 2020/2021
9
Max ECTS
63
Overall hours
SSD
SECS-P/02
Language
English
Learning objectives
The course aims at offering an institutionalist approach to economics and economic policy. Concepts and models of modern microeconomics are presented as fruitful tools for answering the general question about the appropriate institutional mechanisms of collective choice and implementation of sustainable development, its values and goals, and the demands for social justice, which are inherent in it.
Therefore, the main objective of the course is to furnish participants conceptual tools for understanding whether competitive market economies are the proper institutional framework in which socially and economically desirable outcomes can be achieved, or alternative institutional arrangements are also required. So that - beyond the neoclassical theory of general equilibrium of competitive markets - the collective decision models that operationalize alternative views of distributive justice - like as utilitarianism, contractarianism, and the ideas of justice as fairness, and that based on functionings and capabilities - will be presented with analytic precision. Beyond the typical theoretical models of neoclassical microeconomics and social choice theory, the course introduces at elementary level, concepts and solutions of game theory, which are necessary to understand strategic interactions, and the normative and positive problems of economic policy, like as the equilibrium conditions under which desirable institutions (supportive of social welfare and fairness) can be implemented .
Expected learning outcomes
At the end of the course, students will be enabled to use economic methodology in order to assess what institutions and organizations are functional to pursue the objectives of sustainable development. They will develop a critical attitude toward the ideological economic justification of market societies, but also the ability to assess the intellectual basis of the economists' claim to be able of offering a general view of social institutions based on rational behaviour. Hence, the student will be endowed with basic analytical tools of microeconomics, social choice theory and game theory that allow her/him to understand what institutions may satisfy at the same time the principles of efficiency, equity, self-enforceability and stability. As far as social justice, and the economic policies aimed to fighting unacceptable inequalities, are basic components of the objectives of sustainable development, students will be enabled to see within the perspective of economics, how global, national and local institutions should be designed in order satisfy the requirement of social justice. At the same time, they will be put in the condition of understanding how such institutions and organizations can be accepted through rational individual and collective decisions and correspond to rule of behaviour that may emerge from strategic interaction and display equilibrium properties.
Course syllabus and organization

Single session

Responsible
Lesson period
Second semester
Course syllabus
The course is partitioned in two main parts.

Part I the introduction of the course present the basic problems of an economic theory of institutions and the necessary interconnection with social justice and the social contract, Then part I covers the origins of modern normative and positive economics of institutions. After a general presentation of the problem (which is stressed through the presentation of the impossibility result demonstrated di Ken Arrow) a considerable portion of the course is devoted to an introduction of neoclassical microeconomics, the ideal of perfect competitive market and its welfare properties, based on rational choice assumptions, which illustrates why economists are so much attracted by the ideal that society should resemble a perfect competitive market. This part, however, also shows why markets are normally not perfectly competitive, why some goods are not marketable, and why the normative properties of competitions may fail. At the end, also the discussion of the "Coase theorem" shows that "the market" cannot be the sole answer provided by economics neither to the demand for an optimal design of institutions, nor for a positive analysis of the institutions that would emerge form economic interactions. Thus an economic explanation of the emergence of more basic institution than the market s needed in terms of the constitutional contract (Buchanan). Such conclusion is reinforced by consideration of the institutions that can avoid the "tragedy of the commons" and the problem of growing inequalities.

The second part (which, to be sure, is furtherly partitioned in two main sections) addresses contemporary normative and positive theories of economic policy aimed at social justice against the background of increasing inequalities in western societies. This part considers the principles illustrated by economic theories of justice (Buchanan Harsanyi, Rawls, Sen) - for the optimal shape of institutions (social choice). Social contract theories of the constitutional agreement take a relevant part, as they are understood through the economic models of bargaining and coalition games. Then, an introduction to the game theoretic analysis of the conditions of implementation and stability for such optimal institutions is provided. Institution are seen as conventions giving alternative coordination solutions to simple games. The emergence of cooperation and hence of compliance with the social contract is explained through the study of iterated prisoners' dilemma, and the problem of multiple equilibrium is illustrated. The course concludes with the presentation of a unifying perspective comprising both the normative and the positive treatment of institutions: the social contract is modeled as an equilibrium selection device (using the idea of choice under the veil of ignorance) resulting in the choice of a solution which satisfies normative requirements as well as the condition of uniqueness and stability.

Detailed topics

PART I the origin of modern economics of institutions

1. Introduction:
a. Substantive: beyond the fixation with the perfect competitive market, the main problem of the day : increasing inequalities and the demand for justice as the basic claim for sustainable development .
b. Methodological: the normative and positive economic theory of desirable institutions: which institution would we accept? can we put them in practice?
c. The economics definition of institution (Aoki) , rules of the game end game of rules, institutions as result of equilibrium selection process based on the social contract

2. Arrow impossibility theorem as the sign of the difficulties of a general economic theory of institutions; and the difficulties of social choice with minimal assumptions about values and information

3. Could "the market" be the answer? Microeconomics and the ideal of perfect competitive market (and its limitations).

a. Individual rationality and utility functions under certainty, risk and uncertainty, and their limitation
b. Consumer choice and indifference curves
c. Neoclassical theory of production: technologies. Costs and choice.
d. Competitive markets, equilibrium in the short run. and in the long run
e. Pareto efficiency and the socially desirable properties of the perfectly competitive market; the two theorems of welfare economics, and the demanding assumption under which they work.
f. When the market is not perfectly competitive, and why even a competitive market does not answer normative requirements.

4. Market failure, Externalities, Coase theorem and the need for a further design of institutions.

5. Buchanan's constitutional contract, the constitutional basis for the market, and its indefiniteness and instability
6. The tragedy of the commons and the perspective of non-market & non authoritarian democratic self-governance of the commons (in the institutionalist and behavioral economic approach)

PART II, Section A: collective choice on institutions and the theory of social welfare and justice


8. Theories of justice in the language of economics

a. Harsanyi's preference utilitarianism, the possibility of social choice and the non-inter-observer validity of the utilitarian social choice function.

b. Rawlsian theory of justice, primary social goods, and the two principle of justice, the dual deduction form the maximin principle, and equality, stability and the sense of justice
c. Sen's idea of justice, functioning and capabilities beyond resources as the building blocks of justice, public reasoning and the question about the collective agreement on the combination of functionings/ capabilities maximizing social wellbeing.

d. The needs/ merits theory of justice as reformulation of the constitutional and post constitutional contracts, and the correspondence of justice principles with bargaining and coalition game solutions.

Part II, Section B: stability of institutions, equilibrium multiplicity and equilibrium selection.
9. Ex post stability and implementation of just institutions: Institution as social conventions, and the game theory of conventions
a. Conventions and simple games
b. Conventions in repeated games

10. Multiple equilibria and equilibrium selection, eduction VS evolution

11. Toward a unified normative and positive perspective: the social contract as equilibrium selection mechanism. Binmore-Rawls theory of egalitarian institutions as simultaneous solution of the fairness and stability problems. Why a libertarian cannot be but egalitarian.
Prerequisites for admission
As this is a course of the first-year, students are not requested to satisfy formal prerequisites beyond those necessary for the admission to the LLM. However, those students who haven't had in their previous career the opportunity to attend introductory courses in economics would profit very much from attending the crash course in economics provided by the LLM program in the first semester.
Teaching methods
Lectures and discussions based on detailed lessonn notes
Teaching Resources
· Reading list:
Deteailed lesson notes will be provided by the teacher for any class.
PART I (a)
M.Aoki, Toward an Institutional comparative analysis, chaptyer 1
D.Mueller - "Real-valued social welfare functions" and "Axiomatic social welfare functions", from Public choice, ch.19, 20
R. Sudgen et al. - "Social choice", from The theory of choice (Sugden, Lyons, Hargreaves Heap, Hollis - The theory of Choice, a critical guide, Blackwell,

Part I(b)
Andrew Schotter, Microeconomics, a modern approach, South western publ.
chapters Chapters 1, 2, 3, 4, 8, 9, 10, 14, 15, 21, 22,24

Part I (c)
R. Coase, the problem of social cost (1960)
L. Ostrom, The governance of the commons , Cambridge university press, 1990 (chapters suggested by the teacher).
J.Buchanan - The limits of liberty, ch. 2,3,4,8 (Chicago UP)

Part II,(A)
J.C. Harsanyi - "Cardinal welfare, individualistic ethics, and interpersonal comparisons of utility" in Essays on ethics , social behavior and scientific explanation, Kluwer.
J.C. Harsanyi - "Morality and social welfare" - ch. 4 from Rational behavior and bargaining equilibrium in games and social situations (Canbridge 1977)
J. Rawls - "A theory of justice", ch. 2,3
A. Sen - "Inequality reexamined", ch.2
J.C. Harsanyi - "Two persons simple bargaining games: the Nash solution", ch. 8 from "Rational behavior and bargaining equilibrium in games and social situations"
R. Lyons - "Bargaining", ch.8 from "The theory of choice"

Part II (B)
R.Sudgen - "Conventions", from Palgrave Dictionary of economics and the law, Palgrave MacMillan
R.Sudgen - "Games", from "The economics of rights, cooperation and welfare" 1986, Blackwell
R.Sudgen - "Coordination", in The economics and right cooperation and welfare (id.)
D.Lewis - ch. 1,2 from "Convention" (1968)
J.C.Harsanyi - "Advances in understanding rational behavior" in Essays on Ethics, Social behavior and scientific explanation, Kluwer.

Part II (C)
K.Binmore - "Evolution in Eden", ch.2 in Game theory and the social contrac
K.Binmore - "The game of morals", ch. 4-6 in Game theory and the social contract
L.Sacconi "A Rawlsian View of CSR and the Game Theory of its Implementation (Part II): Fairness and Equilibrium", in Sacconi, Freeman, Blair, Vercelli (eds) Corporate social responsibility and corporate governance: the contribution of economic theory and related disciplines, Palgrave , 2011.
L. Sacconi, "Ethics, Economic Organization and the Social Contract" in A. Grandori (a cura di), Handbook of Economic Organization: Integrating Economic and Organization Theory,: Edward Elgar Publishing, 2013, p. 112-136
Assessment methods and Criteria
Written exam: for each part and subparts of the course program students will be given a choice among a list of open questions to be answered - one for each topic presented and discussed in classes. Each main question will be articulated in sub-questions which will be useful as a guide for students. The aim of the exam is to verify whether students well understand the theories and their applications, whether they are capable to explain them in clear language and to make examples. Since formal models of microeconomics will be taught, the ability to report coherently formal models and to explain their meaning will be highly appreciated. However, the aim of the exams is not testing the mathematical skills of the students (so students will not be asked to solve exercises). The aim is rather to verify whether they have apprehended critically how economic reasoning works.
SECS-P/02 - ECONOMIC POLICY - University credits: 9
Lessons: 63 hours
Professor: Sacconi Lorenzo