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On Philosophy, Politics, and Economics On Philosophy, Politics, and Economics Gerald F. Gaus University of Arizona THOMSON VVADSVVORTH Australia • Brazil • Canada , Mexico • Singapore • Spain United Kingdom • United States THC>IVISC>N VVADSVVORTH On Philosophy, Politics, and Economics Gerald F. Gaus Executive Publisher: Marcus Boggs Creative Director: Rob Hugel Acquisitions Editor: Worth Hawes Art Director: Maria Epes Assistant Editor: Patrick Stockstill Print Buyer: Linda Hsu Editorial Assistant: Kamilah Lee Permissions Editor: Bob Kauser Marketing Manager: Christina Shea Production Service: Tintu Thomas, Marketing Assistant: Mary Anne lntegra Payumo Copy Editor: Linda Ireland Marketing Communications Compositor: lntegra Manager: Darlene Amidon-Brent Project Manager, Editorial Production: Samen Iqbal © 2008 Thomson Wadsworth, a part Thomson Higher Education of The Thomson Corporation. 1 0 Davis Drive Thomson, the Star logo, and Belmont, CA 94002-3098 Wadsworth are trademarks used USA herein under license. ALL RIGHTS have reverted to author. For more information about our products, contact us at: Printed in the United States of America Thomson Learning Academic 1 2 3 4 5 6 7 11 10 09 08 07 Resource Center 1-800-423-0563 Library of Congress Control Number: For permission to use material 2007936260 from this text or product, submit Student Edition: a request online at http://www.thomsonrights.com. ISBN-13: 978-0-495-00898-9 Any additional questions ISBN-10: 0-495-00898-2 about permissions can be submitted by e-mail to [email protected]. Contents ABOUT THE AUTHOR VII LIST OF FIGURES AND TABLES VIII ACKNOWLEDGMENTS XII INTRODUCTION 1 1. INSTRUMENTAL AND ECONOMIC RATIONALITY 7 Overview 7 1.1 Instrumental Rationality 7 1.2 "Consumption Rationality" as Direct Satisfaction of Goals 15 1.3 Homo Economicus 19 Summary 27 Notes 28 2. UTILITY THEORY 30 Overview 30 2.1 Preferences: What Are They? 31 2.2 Ordinal Utility Theory 36 2.3 Cardinal Utility Theory 40 2.4 Is Utility Theory a Formalization of Instrumental Rationality? 50 2.5 Doubts from Psychology about Expected Utility Theory 56 Summary 66 Notes 67 V CONTENTS 3. EFFICIENCY 72 Overview 72 3.1 Rationality and Efficiency 72 3.2 Efficiency, Externalities, and Public Goods 84 Summary 92 Notes 93 4. GAME THEORY 95 Overview 95 4.1 Strategic Rationality and Zero-Sum Games 96 4.2 The Prisoner's Dilemma 102 4.3 Chicken and Other Games 125 4.4 Repeated and Evolutionary Games 135 Summary 142 Notes 144 5. SOCIAL CHOICE THEORY 147 Overview 147 5.1 The Market and the Forum 147 5.2 Axiomatic Social Choice Theory and May's Theorem 151 5.3 Arrow's Theorem 154 5.4 Collective Choice Rules 164 5.5 Strategic Voting 171 Summary 173 Notes 175 6. PUBLIC CHOICE THEORY 177 Overview 177 6.1 Downs's Economic Theory of Democracy 178 6.2 Is Voting Rational? 184 6.3 Majoritarian Inefficiencies 191 6.4 Constitutional Political Economy 195 Summary 202 Notes 203 CONCLUDING REMARKS 205 BIBLIOGRAPHY 208 INDEX 216 vi List of Figures and Tables FIGURES Figure 1-1: An Indifference Curve 23 Figure 2-1: Mapping Actions to Outcomes 35 Figure 2-2: Crossing Indifference Curves and the Endowment Effect 61 Figure 3-1: Efficient Consumption 74 Figure 3-2: A Simple Edgeworth Box 75 Figure 3-3: A Contract Curve 77 Figure 3-4: A Series of Paretian Moves 81 Figure 4-1: A Zero-Sum Game in Extensive Form 97 Figure 4-2: A Zero-Sum Game in Strategic Form 98 Figure 4-3: A Zero-Sum Game with a Weakly Dominated Strategy 99 Figure 4-4: An Example of the Maxim in Solution 100 Figure 4-5: A Game That Requires a Mixed Strategy 101 Figure 4-6: A Prisoner's Dilemma in Terms of Jail Time 103 Figure 4-7: The Prisoner's Dilemma in Ordinal Utility 104 Figure 4-8: The General Form of the Prisoner's Dilemma in Cardinal Ut,ility 105 Figure 4-9: A Specific Example of the Prisoner's Dilemma in Cardinal Utility 105 viii LIST OF FIGURES AND TABLES Figure 4-10: Hobbes's Deadly Prisoner's Dilemma 107 Figure 4-11: A Prisoner's Dilemma between Crusading Countries 109 Figure 4-12: A Multi-Person Prisoner's Dilemma 109 Figure 4-13: "Solving" the Prisoner's Dilemma by Transforming It into Another Game 111 Figure 4-14: An Assurance Game 111 Figure 4-15: Nozick's Solution to the Prisoner's Dilemma in Extensive Form 113 Figure 4-16: Alf's Reward 114 Figure 4-17: Alf's Trek 115 Figure 4-18: A Paradox for Modular Rationality 119 Figure 4-19: Lewis's Newcomb Problem/Prisoner's Dilemma 122 Figure 4-20: A Prisoner's Dilemma-like Contribution Game 124 Figure 4-21: A Public Goods Game of "Chicken" 126 Figure 4-22: The Game of Chicken 126 Figure 4-23: The Cuban Missile Crisis as a Game ofChicken 127 Figure 4-24: A Game of Chicken Where No One Chickened? 128 Figure 4-25: Bram's Modeling of the Cuban Missile Crisis 129 Figure 4-26: The Stag Hunt 131 Figure 4-27: The Assurance Game Version of the Stag Hunt 133 Figure 4-28: An Impure Coordination Game 134 Figure 4-29: Hawks and Doves (A Game of Chicken) 137 Figure 5-1: Single-Peaked Preferences 163 Figure 5-2: A Double-Peaked Preference: Condorcet Paradox Preferences 163 Figure 6-1: A Simple Spatial Model 182 Figure 6-2: Voters Distributed Normally on a Single Dimension 183 ix Table 6-1: Expected Gains from Yo..;� -:Ja-:-f '• -- --; ---=­ Makes It Rational to Cas:. a • o:e :� --; s· 1:2: Table 6-2: Vote Trading Leading to Overexpercw�e c­ Politically Secured Goods 194 xi Acknowledgments The roots of this little book go back to my days at the University of Queensland, when my good friend David Gow insisted that I read William Riker's Liberalism Against Pop11/ism. I had worked through A. K. Sen's great Collective Choice and Social Welfare as an undergraduate, but it was David and Riker who impressed on me the importance of this line of inquiry for politics and philosophy. Since then I have taught versions of this material to my students at the University of Queensland, the University of Minnesota-Duluth, Tulane University, the joint UNC-Chapel Hill/ Duke Philosophy, Politics and Econornics program, and at the Di Tella University Law School in Buenos Aires. Thanks to all those students for putting up with me thinking things through on my feet, and for so often helping me get things right. Fred Miller of Bowling Green State Univer­ sity used a draft of this book in one of his Philosophy classes; I appreciate him doing m, :mcl I have greatly benefited from the suggestions he provided after the course. My deep thanks also to Julian Lamont of the University of Queensland, who, as he always does, provided important and insightful comments. I also found very useful the suggestions and comments ofFred D'Agostino, Chandran Kukathas, Peter Vanderschraaf, and an anonymous reader. The book would not have been written ,vith­ out the encouragement of Bob Talisse, the editor of this series: I hope he is not disappointed. Special thanks are due to the Murphy Institute of Political Economy, and especially its director, Richard Teichgraeber III, who generously supported my work in this area for more than five years. Gerald F. Gaus Philosophy University of Arizona xii Introduction: The Economic Approach and Politics and Philosophy Social scientists and political philosophers are both concerned with how people act, and how they interact. One way to go about study­ ing how people act and interact is to appeal to psychological or social laws that allow us to predict what they will do in certain situations. Bue we almost always wane more than to merely predict the behavior of others-we w�nt to make sense of what they do, to see it as an intelligible way of acting. Making others intelligible to us is closely bound to seeing them as rational. True, sometimes it is intelligible to us why people are not rational, as we can understand all too well why someone who is drunk accepts a dangerous and silly dare. But usually, when we are confronted by simply irrational behavior, we don't understand what it is really all about. The persuasiveness of Sigmund Freud's work was in taking totally unintelligible behavior and making it more intelligible by showing it to be based on some sort of reasoning-so that in the end the behavior was not as bizarre as it first appeared. Consider one of his cases-a 19-year-old girl with obsessional sleep ceremonies: 1 INTRODUCTION Often it is said that economic analysis is based on a narrow conception of humans as selfish, or even worse "greedy," and such assumptions, even if appropriate to economics, are inappropriate to politics and social philosophy. Economists, in turn, wonder why a model that has been so enlightening for some human interactionsHomo should Economicus suddenly be inappropriate when applied to others. James Buchanan-a Noble Prize winning economist-has long insisted that ("eco­ nomic man") isHomo a general Economicus model of rational action, applying to politics as well as economics. He challenges those who would restrict the application of to economics with the argument from symmetry. Along with Geoffi:ey Brennan, he writes: The symmetry argument suggests only that whatever model of behaviorHomo is Economicusused, this model should be applied across all institutions. The argument insists that it is illegitimate to restrict to the domain of market behavior while employing widely different3 models of behavior in nonmarket settings, without any explanation how such a behavioral shift comes about.
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