Report

Teaser, summary, work performed and final results

Periodic Reporting for period 2 - NormativeEconomics (Reconstructing normative economics on a foundation of mutual advantage)

Teaser

Economics has traditionally assumed that individuals seek to satisfy coherent and asocial preferences, and has used the satisfaction of those preferences as a normative criterion. This ‘neoclassical’ approach has supported a view of the market as an institution in which...

Summary

Economics has traditionally assumed that individuals seek to satisfy coherent and asocial preferences, and has used the satisfaction of those preferences as a normative criterion. This ‘neoclassical’ approach has supported a view of the market as an institution in which privately-motivated individual actions tend to produce socially beneficial consequences. These ideas have been called into question by recent developments in behavioural economics, which point to the cognitive limitations of economic agents, the instability of preferences, and the existence of pro-social motivations. A common inference is that traditional presumptions in favour of the market and against paternalism are invalidated. The objective of the project is to develop an approach to normative economics, and a corresponding understanding of the role of markets, which do not require neoclassical rationality assumptions but may still support those presumptions.

My approach is innovative in two ways. First, the criterion for normative analysis is opportunity, not preference satisfaction. Even if individuals lack coherent preferences, opportunities for mutually advantageous transactions can be defined in a normatively significant way, and competitive markets can be shown to be effective in providing such opportunities. Second, using a new version of the theory of ‘team reasoning’, the relationship between parties to a market transaction can be construed in terms of a joint intention to achieve mutual benefit. This motivation can support practices of trust and cooperation without disabling market incentives. Using the methods of theoretical and experimental economics and analytical philosophy, I aim to formalise and integrate these ideas and extend them to provide a new understanding of the role of government in the economy.

The work of the project is organised around two main themes. The first theme is the reconciliation of normative and behavioural economics, using opportunity as the primary normative criterion. There are five sub-themes: ‘The opportunity-based approach and market regulation’, ‘The opportunity-based approach and the compensation test’, ‘The opportunity-based approach and the distribution of income’, ‘Do individuals want to constrain themselves?’, and ‘Are well-being judgements context-dependent?’ The second theme is the theory of team of reasoning. There are three sub-themes: ‘Developing a new theory of team reasoning’, ‘Testing the new theory of team reasoning’, and ‘The influence of fairness considerations on market behaviour’.

Work performed

1. Monograph

At the time I wrote my proposal, I was in the process of writing a monograph on the use of opportunity as a normative criterion. I said that, as part of my Horizon 2020 research, I would write a companion monograph on team reasoning. Both would be addressed to wider academic and quasi-academic audiences than are normal journal publications. Together, they would present my ideas about how normative economics can be reconstructed on a foundation of mutual advantage. Subsequently, I decided that it would be a better strategy to combine the two themes in a single, larger monograph. In the period from 1/1/16, I have completed the manuscript of this monograph. This involved a lot of theoretical work on both of the project’s themes (described in more detail below).

I submitted the first version of this manuscript to Cambridge University Press (CUP), Oxford University Press (OUP), and Princeton University Press (PUP) in the early summer of 2017. All three publishers sent the manuscript out to review, received highly favourable referees’ reports, and offered contracts. One anonymous reviewer wrote: ‘I believe that it is a quite major and enduring contribution, one that will greatly deepen the discussion of behavioral economics and liberalism. Sugden is a highly unusual and in some ways unique figure. He understands economics from the inside and he understands philosophy from the inside, and he is a major contributor to both…. Sugden has made a major contribution here, not least because he develops, more than anyone ever has, [John Stuart] Mill’s concept of a community of advantage, and shows that it can be seen as central to liberal thought and practice’. Another wrote: ‘The Community of Advantage is extremely ambitious, intelligent, and well-informed. It should cement Sugden’s reputation as a leading scholar – or perhaps the leading scholar working at the boundaries between economics and philosophy’.

I chose OUP as the publisher and spent a large part of summer and autumn 2017 refining the arguments of the book in the light of the comments I had received from all three publishers’ referees. The book is now in press and is expected to be published in July 2018:

-- Robert Sugden, The Community of Advantage: A Behavioural Economist’s Defence of the Market. Forthcoming from Oxford University Press. (Approximately 150,000 words.)

The book will be the subject of a session organised by the International Network for Economic Method at the American Economic Association meeting in January 2019.

2. Developing the theory of team reasoning

One of the main objectives of the project was to develop a new version of the theory of team reasoning in which team reasoners aim to play their respective parts in mutually beneficial practices (rather than, as in current versions of the theory, to play their respective parts in maximising some ‘team utility’ function). Working with Isoni, I have achieved this objective. We have found a way of defining a class of ‘voluntary interactions’ (essentially: games that are played if and only if all players so choose) which includes both ordinary market transactions and many forms of cooperation in civil life. For such interactions, we have been able to define ‘mutual benefit’ without making any assumptions about the preferences of the players. The essential idea is that if an individual chooses to enter a voluntary interaction, knowing what behaviour to expect from her co-participants, and if the interaction takes place as expected, she is treated as benefiting from the interaction. For any given type of voluntary interaction, a ‘practice’ is defined as a commonly-known set of expectations about behaviour within that interaction, by individuals who have chosen to enter it. An individual who uses team reasoning is motivated to conform to practices, provided that her co-participants conform too. Given this approach, the analysis of

Final results

The \'summary of context and overall objectives\' explains the importance and novelty of the project. The whole approach of basing normative economics on mutual advantage and using opportunity rather than preference-satisfaction as the normative criterion is beyond the current state of the art. The Community of Advantage provides an overview of this approach in a form that is accessible to a cross-disciplinary readership. I expect it to become a controversial and influential point of reference in discussions about the normative and policy implications of behavioural economics. The ‘new theory of team reasoning’ is radically different from existing theories of social preferences and also from existing theories of team reasoning. One particularly significant difference is that the new theory makes minimal assumptions about individuals’ rationality and about their knowledge about one another’s preferences, beliefs and intentions. In this respect, it is aligned with the recent trend towards explaining pro-social behaviour as driven by social norms; it can be interpreted as a model of a particular class of norms, namely norms about mutually beneficial cooperation. Another important difference is the emphasis on voluntariness. The ‘honest trading’ game (see the section ‘Testing a new theory of team reasoning’ above) uses a novel experimental design in which a trust game is played if and only if both potential players choose to participate.

The issues that the project will address are set out in ‘Summary of the context and overall objectives of the project’. As the work involves the development and testing of new theories, it is not possible to predict \'expected results\' in detail. How far our experimental findings will give empirical confirmation to the theories of behaviour we have developed so far is outside our control. But in any case, my work is primarily a contribution to normative economics, based on the ‘contractarian’ approach of James Buchanan. Its aim is to produce recommendations that can be addressed, not directly to ‘social planners’, but to citizens, understood as potential parties to mutually beneficial agreements. Whatever the degree to which individuals actually act on a norm of mutual benefit, a specification of this norm and a demonstration that it works to everyone’s advantage would still be a significant contribution to normative economics and to public understanding of economics.