Economics, Economic Policy, and Social Justice

The course is partitioned in Four parts.

Part I. The introduction of the course present the basic problems of an economic theory of institutions (including both market and non market institutions) and the necessary interconnection with social justice and the social contract.
Then part I covers the neoclassical economics belief that the market is the main economic institution and also the one that displays the best qualities in terms of efficiency and social welfare. A considerable portion of this part 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 fascinated by the ideal that society should resemble to 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.
Part II introduce some basic concept of the economics of institutions stemming from the awareness of market failures and the existence of public good, social costs, the commons etc. A 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 from economic interactions. Such conclusion is reinforced by consideration of the institutions that can avoid the "tragedy of the commons" as illustrated by Elinor Ostrom, who showed that the governance of the commons cannot be identified with the market but with community self-governance understood as self-sustaining social contracts - this exemplifies also a type of economic analysis quite far form neoclassical models.
At this point a game theoretical definition of institution (Aoki) and the discussion of both normative e positive issues raised by such comprehensive definition, is give, which player as a guide for the following parts
Part III addresses contemporary normative theories of economic policy aimed at granting social justice against the background of increasing inequalities in western societies. This part considers first the most general way in which the inquiry on the possibility of desirable institutions based on individual preferences and social choices can be asked. The answer is negative and it was given in Arrow impossibility theorem.
Then a first way-out form impossibility, identified by the idea of the social contract as unanimous collective choice is considered according to James Buchanan's "constitutional political economy". The positive contributions and deficiencies will be considered, both in terms of distributive justice and stability.
This will carry to a more precise analysis of the normative claims that social justice imposes on institutions and the choice rules to make collective decisions on them. Therefore we will consider the theory of justice and social welfare (wellbeing) according to Harsanyi, Rawls and Sen aimed at the optimal shape of institutions. Social contract theories of the constitutional agreement take a relevant part here, as they are understood through the economic models of bargaining (Nash bargaining theory) and coalition games.
Then, in part IV, remembering Aoki's definition of institution, an introduction to the game theoretic analysis of the implementation conditions 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 (Ken Binmore on game theory and the social contract) 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,

Section A: Introduction
a. Substantive: beyond the fixation with the perfect competitive market, the main problem of the day : 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? A presentation of the course structure and logic

Section B: What institution can lead to the best outcomes in terms of welfare and other desirable properties? 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.
Part II,
The raise of the economics of institution beyond the limits of neoclassical economics and the idea of perfect competitive market
a. Externalities, social costs, the Coase theorem and the need to explain both market and non market institutions
b. An example of economics beyond neoclassical view point: The tragedy of the commons and the perspective of non-market & non authoritarian democratic self-governance of the commons (in the institutionalism and behavioral economic approach)
c. The economic definition of institution (Aoki): rules of the game end game of rules, institutions as result of equilibrium selection process based on the social contract , normative and positive perspectives in the design and explanation of institutions.

PART III,
Section A: collective choice on institutions, the impossibility of optimal social welfare choices and the limits of the constitutional contract
a. 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
b. Buchanan's constitutional contract, the constitutional basis for the market, its indefiniteness and instability
Section B: Theories of justice in the language of economics and the possible design of desirable institutions
c. Harsanyi's preference utilitarianism, the possibility of social choice and the non-inter-observer validity of the utilitarian social choice function.
d. 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
e. 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.
f. 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 IV,
section A: The game theoretical analysis of institutions as conventions
a. Convention in simple games
b. Conventions in repeated games, and the repeated PD
c. Multiple equilibria and equilibrium selection, eduction VS evolution
Section B
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.