The community of advantage a behavioural economists defence of the market

OUP CORRECTED PROOF – FINAL, 12/5/2018, SPi The Community of Advantage OUP CORRECTED PROOF – FINAL, 12/5/2018, SPi Praise for The Community of Advantage ‘In this book, Sugden brings together his work over twenty years in experimental economics and economic/political philosophy to develop a defence of the liberal market order in terms of “advantage”, understood not in terms of preference satisfaction nor in objective metrics of well-being (such as Rawls’ primary goods) but rather in terms of expanded opportunity sets Sugden is one of the most interesting and creative minds working at the interface between economics and ethics these days; and his engagement with this ambitious project is a contribution of major significance.’ —Geoffrey Brennan, Professor of Political Science and Moral and Political Philosophy, Australian National University, Australia ‘For many years Robert Sugden has opened new pathways in economics and philosophy This highly original monograph finally weaves together his views on rational decision, paternalism, freedom, and markets Sugden’s contractarian approach provides a much-needed alternative to libertarian paternalism, demonstrating that classic liberalism can be brought up-to-date with the latest research in behavioural economics The Community of Advantage will become a compulsory reading for all philosophers and social scientists interested in the moral and political implications of economic science.’ —Francesco Guala, Professor of Philosophy and Economics, University of Milan, Italy ‘Robert Sugden’s The Community of Advantage is a daring response to the findings of behavioural economics that show that preferences that people reveal in their choices cannot serve as a foundation for normative economics Instead of conjuring up rational preferences that supposedly hide beneath the flawed ones we observe, Sugden proposes a radical transformation of normative economics which assesses policies by the freedom they offer interacting individuals Sugden’s arguments are a serious challenge to normative economics as we know it, and his proposals offer a fascinating unexplored path toward a replacement.’ —Daniel M Hausman, Herbert A Simon and Hilldale Professor, Department of Philosophy, University of Wisconsin-Madison, USA OUP CORRECTED PROOF – FINAL, 12/5/2018, SPi ‘In this magisterial book, Robert Sugden provides a sophisticated defence of the market from a contractarian perspective and in doing so mounts a serious challenge to the argument that behavioural economics provides a justification for government paternalism A must-read for all those interested in the respective roles of the market and government in making the world a better place.’ —Julian Le Grand, Richard Titmuss Professor of Social Policy, London School of Economics, UK ‘In this book, behavioural economics insider Robert Sugden levels a powerful and erudite argument against the use of behavioural economics to justify paternalism Adopting the “contractarian” perspective proposed by James Buchanan, Sugden draws on philosophy, historic and contemporary economics and political science to burnish the age-old idea that people should be given the freedom to chart their own course, and engage in free exchange with others who wish to so Even to readers who neither embrace Sugden’s arguments nor accept his conclusions—a group among which I classify myself—this book is critical reading for those wishing to gain an understanding of the vigorous and vibrant debate taking place over the ethical and policy implication of behavioural economics.’ —George Loewenstein, Herbert A Simon University Professor of Economics and Psychology, Carnegie Mellon University, USA ‘Sugden is on a mission: to take off his pedestal that haloed figure of normative economics, the welfare planner It’s not any planner’s business to nudge you away from supposed “psychological errors” and restore some putative rationality to your choices Sugden is a true pioneer in the analysis of both the positive and the normative dimensions of behavioural economics His book, which weaves together arguments from economics, philosophy and psychology, is provocative, engaging, and tightly argued It poses a fundamental challenge, from a liberal perspective, to behavioural welfare economics, and it is a must-read for all social scientists.’ —Marco Mariotti, Professor of Economics, Queen Mary University of London, UK ‘Can liberty be preserved while people are “nudged” to avoid decision errors they say they not want to make? Read Robert Sugden, a classical liberal behavioural economist, on how opportunities for market discovery provide an answer in The Community of Advantage.’ —Vernon L Smith, George L Argyros Endowed Chair in Finance and Economics, Chapman University, US Winner of 2002 Nobel Memorial Prize in Economic Sciences ‘Robert Sugden is one of the world’s most brilliant and deepest thinkers A philosopher and an economist, he gets to the very core of the liberal tradition—and he offers bold new perspectives on freedom, the role of the state, and the limits of paternalism This is, I think, his best work, and one of the very few most important explorations of liberty in the last half-century.’ —Cass R Sunstein, Robert Walmsley University Professor, Harvard University, USA OUP CORRECTED PROOF – FINAL, 12/5/2018, SPi OUP CORRECTED PROOF – FINAL, 12/5/2018, SPi The Community of Advantage A Behavioural Economist’s Defence of the Market Robert Sugden OUP CORRECTED PROOF – FINAL, 12/5/2018, SPi Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Robert Sugden 2018 The moral rights of the author have been asserted First Edition published in 2018 Impression: All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2017962346 ISBN 978–0–19–882514–2 Printed in Great Britain by Clays Ltd, St Ives plc Links to third party websites are provided by Oxford in good faith and for information only Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work OUP CORRECTED PROOF – FINAL, 12/5/2018, SPi Preface To explain why I wanted to write this book, I must go back to the year 2000 By then, I was already an old hand in what was just beginning to be called ‘behavioural economics’ Graham Loomes and I had been working together in this area (which we preferred to call ‘experimental economics’) for almost twenty years, alongside a growing number of like-minded economists and psychologists Our own informal research group—which had expanded to include Chris Starmer, Judith Mehta, Robin Cubitt, and Alistair Munro— had carried out many experimental tests of received assumptions about rational individual choice We had identified an array of so-called ‘anomalies’— regularities in people’s decision-making behaviour that were inconsistent with standard economic theory We had developed and tested new, psychologically-based theories that went some way towards explaining these observations We had also spent a lot of time investigating the problems that anomalies cause for surveys that are designed to elicit individuals’ valuations of non-marketed goods, such as environmental quality and publicly financed health care I think that by then we were—I know that I was—fairly sure that the failures of standard theory were not isolated epiphenomena Nor were they (as some more mainstream economists still maintained) the result of errors that would disappear if decision-makers had sufficient incentives and experience Rather, they were evidence that the mental processes that underlie normal human decision-making not correspond very closely with models of rational choice What we had found was that a typical individual’s choices between given options often vary according to factors that seem irrelevant when viewed in the perspective of rational choice, but whose effects are both predictable and psychologically understandable I could see no reason to suppose—indeed, no credible way of making sense of the idea—that ‘true’ preferences with the properties assumed in rational choice theory existed somewhere beneath the psychology of actual mental processing It seemed to me that the biggest outstanding challenge for behavioural economics was to find a way of doing normative analysis—for example, to answer questions about how far markets should be regulated, or about whether public goods should be supplied by government and if so, which goods in which quantities Up to 2000, behavioural economics had barely OUP CORRECTED PROOF – FINAL, 12/5/2018, SPi Preface begun to develop its own answers to such questions Normative economics, as conventionally practised, assumed that individuals had well-articulated and rational preferences over all relevant options; it used the satisfaction of those preferences as its criterion This criterion was generally seen as embodying the principle that economists’ recommendations should not be paternalistic: it was for each individual to judge what mattered to him or her But how could this criterion be used if individuals lacked well-defined preferences? The challenge, as I saw it, was to develop a form of normative economics that did not depend on untenable assumptions about preferences while still respecting individuals’ choices about how to live their own lives My thinking about this problem was influenced by my still earlier experience of working in a different area of economics Back in the 1970s, many economists and philosophers were struggling with the problem of how to represent the value of individual liberty within the formal framework of social choice theory Amartya Sen had proved a theorem that purported to show the impossibility of combining respect for ‘protected spheres’ of individual liberty with acceptance of a very weak principle of preference-satisfaction—that if everyone prefers one state of affairs to another, the first state is better than the second More worryingly, it turned out that if Sen’s method of representing liberty was correct, respect for individual liberty could not be guaranteed—full stop These results revolved around the possibility that people might have ‘meddlesome’ preferences about one another’s private affairs One of the most common responses to these results was to look for criteria for defining meddlesomeness and then to find some way of purifying preferences to remove this normatively unacceptable property In the first paper I ever wrote that made any significant impression on my fellow economists, I argued that this literature was a misguided attempt to express ideas about individual liberty while viewing society from the perspective of an autocratic social planner who was entitled to decide what use to make of data about individuals’ preferences The whole problem dissolved if one forgot about preferences and defined each individual’s protected sphere in terms of his opportunities for choice How each individual chose to use these opportunities was up to him, and irrelevant for the definition of liberty Throughout the 1980s and 1990s, I had seen myself not only as an experimental economist drawing on ideas and research methods from psychology, but also as a philosophical economist, working in the liberal tradition of David Hume, Adam Smith, and John Stuart Mill I had never thought that these two aspects of my work were in tension On the contrary, I had come to see Hume’s scepticism about human rationality and his clear-sighted investigation of actual human psychology as anticipating key insights of behavioural economics When, in 2000 or thereabouts, I set about trying to find a form of normative economics that was compatible with behavioural findings, I followed the viii OUP CORRECTED PROOF – FINAL, 12/5/2018, SPi Preface same broad strategy as I had done in responding to Sen’s theorem In place of the preference-satisfaction criterion of traditional welfare economics, I substituted a criterion of opportunity By defining people’s opportunities independently of their preferences, I hoped to cut through the problems caused by the inadequacy of the standard assumptions of rational choice theory By attributing normative value to individuals’ opportunities without taking any view about how those opportunities should be used, I saw myself as upholding the non-paternalistic traditions of liberal economics The first finished product of this programme of work was a paper, ‘The opportunity criterion’, published in the American Economic Review in 2004 This paper showed how some of the classic theoretical results of welfare economics could be reformulated in terms of opportunity It turned out that I had not been the only person trying to reconcile normative and behavioural economics In 2003, two important papers appeared in American law journals, proposing an approach to that reconciliation problem that was very different from the one I was developing Each of these papers had a prominent legal scholar (Cass Sunstein in one case, Samuel Issacharoff in the other) as one of its authors The other authors were a roll call of the great and the good of American behavioural economics: Richard Thaler (writing with Sunstein) and Colin Camerer, George Loewenstein, Ted O’Donaghue, and Matthew Rabin (all writing with Issacharoff) The titles of these papers were significant, and significantly similar: ‘Libertarian paternalism’ and ‘Regulation for conservatives’ The implication was clear: the findings of behavioural economics provide justifications for paternalistic interventions in the economy, and these justifications are not vulnerable to traditional objections to paternalism Both papers were written as manifestos for what can conveniently be called behavioural welfare economics According to these manifestos, behavioural economics shows not merely that people’s choices are often inconsistent with rational choice theory, but also that these inconsistencies result from mistakes that people would prefer not to make Fortunately (it is claimed) behavioural economics also shows how, without the need for heavy-handed restrictions of 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following a locator indicates an endnote acting self 87–8 advantage, community of 1–4, 277–81; see also mutual benefit agent, responsible 106, 133–6, 272 Akerlof, George 216, 231, 279 akrasia 79–82 Allais, Maurice 9, 11, 54, 75–9 Allais Paradox 9–11, 54, 75–9, 283n5 altruism 212, 220–1, 224–5, 231, 272–4, 292n10 Alzheimer’s disease 285n9 ancillary conditions 287n2 Anderson, Elizabeth 169–70, 208–12, 276–7, 291n5 Andreoni, James 223–7, 293n13 Aquinas, Thomas 295n16 arbitrage opportunity 125, 138 Ariely, Dan 71 Aristotle 208, 280 intrinsic value over instrumental value, ranking of 209 market relationships are non-virtuous, idea that 213 virtue ethics 208, 211, 281 Armstrong, Mark 289n13 Arneson, Richard 89 Arrow, Kenneth 124, 204, 287n7, 288nn10, 12, 291n6, 292n8 asocial market behaviour 207, 230–1 motivations 207 Atkinson, Anthony 200–1 attention 8, 11, 54, 65, 69, 73 lack of [?] 42, 45, 65 distribution of 69, 79 and loss-aversion experiments, findings of 11 attribute(s), salient 70 autocrat(s), benevolent 19–24, 28–9, 41–2, 49–51, 171, 284n4 autonomy 63–7, 97–8, 209–13 and the model of the inner rational agent 63–7 Bacharach, Michael 122, 220, 232–5, 241, 250, 293n3 baiting 157 Bardsley, Nicholas 217, 291n1, 293nn2–3, 295n13 Bar-Gill, Oren 284n7 Battigalli, Pierpaolo 220 Bebchuk, Lucian 201 Becker, Gary 218 behavioural economics 7–15, 18, 21, 44, 53–7, 60–7, 75, 82, 126, 143, 151, 154, 160, 205–7, 212–19, 223–6, 232, 283n4, 284n6, 293n15 liberal tradition and the challenge from 1–15 reconciling normative and behavioural economics 13–15 behavioural utility function 60 Bem, Daryl 212 benevolence 15–16, 33–4, 206, 221, 265, 269 benevolent autocrat 19–24, 28–9, 41–2, 49–51, 171, 284n4 benevolent spectator, conception of 19–20, 283n3 Berg, Joyce 10–12, 214, 293n15 Berg, Nathan 66 Bernheim, Douglas 18, 21–2, 57–8, 274–5, 287n2 Berridge, Kent 286n2 Bershears, John 60–1 Bicchieri, Cristina 226–9, 256, 293n14, 294n6 Binmore, Ken 283n6, 294n6, 295n14 Blair, James 295n1 Blair, Karina 295n1 Blaug, Mark 283n1 Bleichrodt, Han 58–60, 77–9 Bolton, Gary 215 Bordalo, Pedro 69–72, 79, 114, 285n5 Botti, Simona 289n4 Bown, Nicola 143 Bratman, Michael 237, 293n2 Brennan, Geoffrey 212, 268, 284n4 Bruni, Luigino 280, 291nn12–14, 296n18 brute luck 176–95, 202–4 Bryan, James 223 OUP CORRECTED PROOF – FINAL, 17/5/2018, SPi Index Buchanan, James 14, 21, 29, 38, 40, 165–6, 174, 280, 284nn4–5 buy-now discounts 157 Camerer, Colin F 18, 56–7, 166 Casajus, André 293n3 Chaminade, T 296n10 Charness, Gary 292nn9–10 Choi, James 60 choice, tyranny of 144–8 choice architect 20, 45–6, 51, 54–6, 61, 64 choice overload 143–8, 288n3 Cialdini, Robert 268 Cinyabuguma, Matthias 296n8 Cohen, Gerald 177 collective intentionality, concepts of 293n2 Collectively Intending Mutual Benefit, schema of 250, 295n13 common standards 158, 289n16 compensating variation 161 competitive equilibrium 6, 111–12, 119–41, 158–63, 287n7, 288n8, 290n8 complex offers 157 Confidence Game 220f considered preferences 89 continuing person, the 100–6 contractarian -ism 14–16, 29–52, 284n5, 285n9 and children 286n3 and Hobbes 30–33 and Hume 33–7, 284n1 and individual opportunity 83–4, 87, 93, 96, 286n1 and paternalism 42–50 and Principle of Mutual Benefit 256, 262–4, 271 and psychological stability 174–5, 191, 195–8, 201–2, 291n10, 294n9 and public goods 169–173 and regulation of markets 140–3, 158–9, 163, 284n7 and self-constraint 149 and team reasoning 234 convention 11, 33–7, 39, 146, 158, 196–7, 229, 236–7, 239, 251–2, 294n6; see also moral/ conventional distinction Cook, Philip 201 cooperation; see also team reasoning economy as cooperative scheme 204 in Market Game 229–31 and Mill’s conception of social life 2, 140 intentions, cooperative 232–55 in Public Good and Trust Games 217, 222, 229–30 rational 295n14 Core, John 201 314 correspondence of sentiments 275–6 cost–benefit analysis 41, 165–70, 188 Cournot, Antoine Augustin 160 Crossley, Thomas 289n11 crowding out 207; see also intrinsic motivation Cubitt, Robin 285n6, 294nn6, 11 Darwin, Charles 137 Debreu, Gerard 124, 287n7, 288nn8, 10, 12 Decety, Jean 296n10 Deci, Edward 211 decision-making, distinction between private and collective 87 declaration node 243–6 De Jasay, Anthony 284n1 DellaVigna, Stefano 152–3 Denant-Boemont, Laurent 296n8 de Waal, Frans 273, 296n11 Dias, Maria 259 Dickhaut, John 10, 214, 293n15 Dictator Game 12, 205–6, 291n1, 293n13 discovered preference hypothesis 285n3 division of knowledge 180–5, 192 division of labour 108, 213 dominance, concept of 113–15, 130 drip pricing 157, 289n13 dual-process theory 67 Dufwenberg, Martin 220, 292nn9, 11–12 Dupuit, Jules 160–6, 199, 289nn17–18 Dupuit’s bridge 160–6 Dworkin, Ronald 175–85, 193–4, 290nn3–4, economics, behavioural; see behavioural economics economics, welfare; see welfare economics Ederer, Florian 221 Edgeworth Box 280 Edgeworth, Francis Ysidro 288n8 Edwards, Carolyn 295n2 effort, degree of 178 Ekelund, Robert 289n18 Ellison, Glenn 289nn13–15 equal reward for equal effort 178, 183–4 equality of opportunity 175–85, 190–2 of resources 175–7, 193–5, 290n4 starting-line 178, 183–4, 192–3 equilibrium, competitive 6, 110–12, 119–41, 158–63, 287n7, 288n8, 290n8 eudaimnonia 208 Evans, Jonathan 67 exchange economies 112–15 experimenter demand effect 291n1 exploding offers 157–9, 289n13 extended choice problem 58 OUP CORRECTED PROOF – FINAL, 17/5/2018, SPi Index fairness 12, 175, 206–7; see also equality and markets 190–2 and price discrimination 163 and psychological stability 174 and the role of a mediator 38 justice as, Rawls’s theory of 260–1 Falk, Armin 219, 231, 292n10 Fehr, Ernst 215–19, 231, 254 fellow-feeling; see sentiments, correspondence of Fischbacher, Urs 217–19, 292n10 fixed costs 160–4 Flegal, Katherine 285n8 focusing illusion 153 Folbre, Nancy 213 Foot, Philippa 295n16 Forsythe, Robert 291n1 forward, looking 193–7 Four Alls, The 50–2 frame 21, 58, 287n2 Frank, Robert 201, 267, 295n5 Frederick, Shane 114 free-rider problem 167, 245 Frey, Bruno 212 Fried, Jesse 201 Fudenberg, Drew 151–2 Fundamental Theorems of welfare economics 6, 15, 108, 123–5, 139, 283n1 Gabaix, Xavier 289n14 Gächter, Simon 217 Gale, David 247–8 Gaudeul, Alexia 289n16 Gauthier, David 39, 89, 260, 267, 294n9, 295n5 Generalized Interactive Opportunity Criterion 130–1 Generalized Irrevocability 246–9, 252 Generalized Opting In 246–9, 252 Generalized Opting Out 246–9, 252 Generalized Strong Interactive Opportunity Criterion 131–8 Generalized Strong Market Opportunity Theorem 132–3 Gennaioli, Nicola 69, 114 George, Henry 199 gift exchange 216, 231, 279 Gilbert, Margaret 293n2 Gilovich, Thomas 267 Gingrich, Newt 145–6 Gneezy, Uri 212, 291n6 Gold, Natalie 293n2, 295nn13, 16 Greatest Happiness Principle Greene, David 211 Griefeneder, Rainer 288n3 Griffin, James 89 group agency, concepts of 293n2 Guala, Francseco 295n6 Güth,Werner 218 gym membership 152–3 Habermas, Jürgen 26 Haidt, Jonathan 259 Hammitt, James 289n19 Handy, Femida 212 happiness 208, 211, 290n1 Harsanyi, John 232, 283n6 Hausman, Daniel 55, 60, 63–6, 74–5, 90–5, 169–70, 283n2 Hayek, Friedrich von 179–80, 196–7, 201–2, 284n4 Hayek Island 180–5, 193, 202–3 Hébert, Robert 289n18 Herrmann, Benedikt 296n8 Heyes, Anthony 212 Hobbes, Thomas 10–11, 30–9, 214, 266 Hodgson, David 232 hold-out problem 168, 172 Holthausen, Robert 201 Horowitz, John 289n19 Houthakker, Hendrik 288n9 Hume, David 4, 10–11, 296n16 common interest, sense of 35–7 convention 34–7, 39–40, 236–7, 251–2 decision theory 286n4 justice 34–7, 228 morality a matter of empirical psychology 36, 257–8 property 34–7, 196–7, 252, 293n4 reason vs desire 95 sensible knave 266–7, 269 social contract theory 34 Hurricane Charley 190–1, 210 ignorance, veil of 284n4 impartial spectator 17–20, 25 impartiality in public reason 25–8 income, distribution of 176, 179, 199–201 Individual Opportunity Criterion 83–106, 150, 287n4 inequality aversion 215–16, 219, 292n10 Infante, Gerardo 283n3, 285n1 informed desire(s) 22, 89 initiation game 243–9, 252 inner rational agent 53–82, 98, 105, 151, 166, 225, 272 institutional facts 295n3 insurance, social 145, 176–7, 183–4, 202–4 integrated preferences Intending Mutual Benefit, schema of 221, 248–52, 264, 280, 294n12, 295n13 Interactive Opportunity Criterion 111–26, 130–8, 161–3, 287nn1, 4, 288n8 intrinsic motivation 211–13, 278–9 315 OUP CORRECTED PROOF – FINAL, 17/5/2018, SPi Index invisible hand 6, 107–10, 137–9, 185–9, 197–9 Irrevocability 243–4 Irrevocability, Generalized 246–9, 252 Isoni, Andrea 114, 284n6, 289n20 Issacharoff, Samuel 56 Iyengar, Sheena 144, 147, 289n4 Janssen, Maarten 293n3 Jevons, William Stanley Johnson, Eric 71 joint feasibility, concept of 113–15, 287n3 Jones, Peter 286n1 jury as model of politics 27, 30, 284n3 justice as fairness, Rawls’s theory of 260–1 Kahan, Alan 291n4 Kahneman, Daniel 7–13, 59, 67–8, 114, 205–7, 283n4, 285n3 Kant, Immanuel 257, 269–70, 277–80, 296n7 Karpus, Jurgis 241 Katz, Eliakim 212 Kelly, Daniel 295n2 kindness 207, 221–3, 225, 228–9, 250–1, 253–4, 271–2 Kirchsteiger, Georg 292nn11–12 Knetsch, Jack 7, 12, 205 knowledge, division of 180–5, 192 Koller, Silvia 259 Kőszegi, Botond 59–61 Kuehn, Manfred 296n15 labour, division of 108, 213 Laibson, David 60, 289n14 Lange, Oskar 179 Larcker, David 201 latent preference, concept of 13, 63, 68–72, 79 empirical content 68–72 latent rationality 63, 285n3 latent reasoning 62 Lazear, Edward 293n13 Le Grand, Julian 46, 61, 65 Leeuwen, Barbara van Lepper, Mark 144, 211 Levine, David 151–2, 231, 292n10 Lewis, David 236, 239, 294n6 liberal tradition of economics 1–15, 62, 107, 141, 160, 190, 198, 206–7, 280–1 Lichtenstein, Sarah 71 Lindahl, Erik 165–6 List, Christian 284n5, 293n2 Locke, John 181, 193, 202 locus of responsibility 106, 136 Loewenstein, George 18, 56, 194 Loomes, Graham 283n5 loss aversion 7–8, 11, 54, 59–60 316 luck brute 176–95, 202–4 option 175–7, 182, 193 luxury, concept of 186–7, 190 McCabe, Kevin 10, 214, 216, 293n15 McConnell, Kenneth 289n19 Macfie, Alec 290n5 MacIntyre, Alisdair 208, 296n17 McQuillin, Ben 126, 133, 287nn1, 4, 288n11 Madrian, Brigitte 60 Malmendier, Ulrike 152–3 Manzini, Paola 58, 62 marginal revolution 4–5, 17, 160 Mariotti, Marco 58, 62 market(s) can everyone expect to benefit from the market? 197–201 Market Game 230–1, 255 Market Opportunity Theorems 122–4, 126, 132–3, 141, 150, 158, 160, 242, 290n8 market relations as asocial 207–10, 230–1 market relations as cooperative 2–4, 15–16, 108, 140, 191, 204, 208, 230–1, 233, 262, 277–81 moral limits of 169, 190–1, 207–11 politics as generalization of 284n5 simulation socialism 179–80 unfairness intrinsic to 190–3, 202 virtue-ethical critique of 207–11 wealth-creating features of 202 Mehta, Judith 288n2 Meier, Stephan 212 Menger, Carl Messi, Lionel 204 meta-analysis of choice overload experiments 288n3 Milanovic, Branko 200 Mill, John Stuart community of advantage, concept of 1–4, 16, 140, 280–1 equality of opportunity 175, 180, 190 human well-being, ideas about liberty and paternalism mercantilism 198 moral feelings 2, 258 value, theory of 4–5 women and family life 2, 99–100, 213, 275–6 Miller, Kaarlo 293n2 Misyak, Jennifer 295n14 Moffatt, Peter 217 monopoly, natural 160, 166 monopoly power 141 moral character 208; see also virtue ethics moral/conventional distinction 258–9 moral feeling, origin of OUP CORRECTED PROOF – FINAL, 17/5/2018, SPi Index moral limits of market 169, 190–1, 207–11 moral rules and social norms, distinction between 227–9, 257–9 morality and convention 34–7 and norms 226–9, 256–9 contractarian perspective on 260–2 morals by agreement 260 motivation, intrinsic 211–13, 278–9 multi-part tariffs 157 multiple-self models 104–6, 136, 151–2, 224–5 Munro, Alistair 114 mutual advantage; see mutual benefit mutual benefit; see also advantage, community of; cooperation; contractarianism; Intending Mutual Benefit, schema of; team reasoning and team reasoning 235 and the contractarian perspective 30–42 as a governing principle of social life 1–4 as a source of psychological stability 174, 193–201, 264–9 as telos of the market 280–1 baseline for defining 240–8, 293n1, 294n9 desires for 272–7 in Public Good, Trust, Ultimatum and Market Games 252–4 intentions for, contrasted with kindness 229–31, 272–3 opportunities for mutual benefit enhanced by market regulation 141–3, 156–64 opportunities for mutual benefit in provision of public goods 164–73 opportunities for mutual benefit provided by markets 107–39, 191 Principle of Mutual Benefit 16, 256–81, 295n4 underwriting expectations of 201–4 voluntariness, identification with 235, 245, 248 Nagel, Thomas 18, 24 natural monopoly 160, 166 natural selection, concept of 137 negative reciprocity 218–19, 222, 254 Nelson, Julie 212–13 neoclassical consumer, concept of 116–17 neoclassical welfare economics 4–7 New, Bill 46, 61, 65 Nikiforakis, Nikos 292n7, 296n8 nonfairness 12, 206 non-paternalism, principle of 4, norm avoidance 269 normative preferences 60–1 norms 223–9, 256–9, 264–9 Nozick, Robert 192 Nucci, Larry 295n1 nudge(s) 11–12, 45–56, 63–4, 72, 80, 143, 154–5, 256 Nussbaum, Martha 89 O’Donaghue, Ted 56 obfuscation 156–9 Ockenfels, Axel 215 offers complex 157 exploding 157–9, 289n13 Office of Fair Trading 289n13 One Price, Law of 120–5, 132, 158 opportunity; see also Market Opportunity Theorems collective 107–10 equality of 175–85, 190–2 individual 83–106 nested opportunity set, concept of 101 set, concept of 70–1, 84–5 Opportunity Criterion 287n4 Opportunity Criterion, Generalized Interactive 130–1 Opportunity Criterion, Generalized Strong Interactive 131 Opportunity Criterion, Individual 83–5 Opportunity Criterion, Interactive 115–17 Opportunity Criterion, Strong Interactive 117–19, 288n8 option luck 175–7, 182, 193 otto per mille procedure 168–73 outside options 243–5 panic button 154 Paradox of Trust 223, 229–31 Parducci, Allen 71 Paretian liberal, paradox of the 284n4 Pareto, Vilfredo 283n1 Pareto-optimality, concept of Potential Pareto Improvement Criterion 41, 165 partial gift exchange 216, 231 partial social insurance 202–3 paternalism 3–4, 11–12, 42, 46–50, 53, 56, 61–2, 93, 105, 286n3 asymmetric 18, 56–7 government 61 intention, a matter of 46 libertarian 11, 18–21, 49, 53–6, 63, 82, 143–5; see also nudge(s) principle of non- 4, Pattanaik, Prasanta 283n6 pecuniary externalities 188–9, 192, 199 Pelligra, Vittorio 220–1 persuasion, rational 64 Pettit, Philip 90–5, 268, 284n5, 293n2 Pigou, Arthur 142 Piketty, Thomas 200 317 OUP CORRECTED PROOF – FINAL, 17/5/2018, SPi Index Pinto-Prades, Jose-Luis 58 Plott, Charles 285n3 plural subjects, concepts of 293n2 pluralist theory of value 209 policy implication(s), concept of 20–4, 44–5 politics as debate 42 as executive action 42 as generalization of the jury 29 as generalization of the market 29 as negotiation 42 Potential Pareto Improvement Criterion 41, 165 preference purification 57–8, 62–5, 69, 77 preferences considered 89 latent; see latent preference liable to change 96–100 ‘mere’ 88–96 revealed 19, 55–8, 60–2 social; see social preferences preference-satisfaction as normative criterion 6–7, 85–8 Prelec, Drazen 194 Preston, Stephanie 273 price gouging 190, 210 price discrimination 160–4 price partitioning 157 pricing strategies 289nn13–14 Principle of Mutual Benefit 256–81, 295n4 Prisoner’s Dilemma 241, 267 production 124–6 pro-sociality, generic concept of 207–8; see also social preferences psychological shell 65–7, 82, 225 psychological stability 174–204, 260, 264–7, 290n1 Public Good Game 216–17, 231, 252, 263 public goods 164–8 public reasoning 24–8, 32, 41–2, 51, 87, 171 publicly observed fact, concept of 248–9, 294n11 punishment 207, 217, 219, 223, 254–5, 260, 292n9, 295n6, 296n8 Putnam, Hillary 26 question too far, a 269–72 Rabin, Matthew 56, 59–61, 292nn10, 12 model of reciprocity 221–3, 251–4 Radzvillas, Mantas 241 Rangel, Antonio 18, 21–2, 57–8, 62, 287n2 Rao, Justin 223 rational persuasion 64 rationality, latent 63, 285n3 Rawls, John 26, 283n3, 284n4 justice as restricted form of morality 261 318 psychological stability 174, 194, 260–1, 264 society as cooperation for mutual advantage 195, 261 Read, Daniel 8, 143 reasoning failure 61, 65 latent 62 market 169, 173 public 24–8, 32, 41–2, 51, 87, 171 reciprocity 4, 212, 292n10, 293n15 and social norms 223–9, 256 and social preferences 219–23 experimental evidence of 214–19 in markets 231, 279 Rabin’s model of 221–3, 251–4 redistributive taxation 204 reflective self 87 Regan, Donald 232 regulation against monopoly power 141–2 against obfuscation 156–9 of carbon emissions 142–3 of natural monopolies 160–4 neoclassical arguments for 141–3 reluctant sharers 293n13 resentment 268–9, 295n6 resources, equality of 175–7, 185, 193–5, 290n4 responsibility, locus of 106, 136 responsible agent 106, 133–6, 272 revealed preferences 19, 55–8, 60–2 revolution, marginal 4–5, 17, 160 Rey-Biel, Pedro 212 Robbins, Lionel 14 Robinson, Terry 286n2 Roemer, John 177–9, 183–5, 190–2, 290n4 Rousseau, Jean-Jacques 242 Rubinstein, Ariel 21, 58, 62, 287n2 Rustichini, Aldo 212, 291n6 Ryan, Richard 211–12 Saez, Emmanuel 200 Salant, Yuval 21, 58, 62, 287n2 salience and consumer choice 69–72 Salop, Steven 289n12 Sandel, Michael 169, 173, 190–1, 208–12, 276–7, 291n5 Savage, Leonard 9, 70, 75–7, 285n7 saving for retirement 50–1, 144–5, 154–6 Scarf, Herbert 288n8 Scheibehenne, Benjamin 288n3 Schelling, Thomas 148, 234, 294n6 Schkade, David 71 Schmidt, Klaus 215, 231 Schmittberger, Rolf 218 Schubert, Christian 286n9, 287n10, 289n8, 296n15 OUP CORRECTED PROOF – FINAL, 17/5/2018, SPi Index Schwartz, Barry 143, 147 Schwarze, Bernd 218 Scitovsky, Tibor 289n12 Searle, John 293n2, 295n3 self; see also multiple-self models acting 87–8 reasoning 67 reflective 87 true 68, 96 self-constraint 147–56 self-control 44, 48, 55–6, 65, 74, 80–2, 88, 151–5, 225 self-determination theory 211 self-perception 211 Sen, Amartya 24–8, 89, 98–9, 284n4, 286n8 sentiments, correspondence of 272–7 Shafer-Landau, Russ 257 Shapley, Lloyd 247 Shleifer, Andrei 69, 114 short-selling 132–5 Shweder, Richard 295n2 similarity, concept of 239 Skyrms, Brian 294n6 Slovic, Paul 71 small-world model 242, 245 Smetana, Judith 259, 295n1 Smith, Adam 4–6, 26, 202, 290n5 benevolence or self-love as motivation in market 15, 206, 221, 230, 278, 291n2 fair competition as a race 190 family life, discusses 275, 296n12 fellow-feeling; see sentiments, correspondence of impartial spectator, conception of 283–4n3 invisible hand 6, 107–10, 116, 137–9, 197–9 mercantilism, argues against 198 ‘other invisible hand’ (redistribution of surplus) 185–9 sentiments, correspondence of 272–7, 291n2 spontaneous order of the market, expresses wonder at 107 sympathy; see sentiments, correspondence of trust 266 social contract theory 14, 32, 34, 196, 295n14 social feelings of mankind social insurance 145, 176–7, 183–4, 202–4 social norms 223–9, 256–9, 264–9 social norms and moral rules, distinction between 227–9, 257–9 social ontology 293n2 social planner 25 social preferences 214–15, 218–19, 221, 223–4, 229, 231, 238, 252, 254, 271, 293n15, 295n15; see also altruism, benevolence, inequality aversion, kindness, reciprocity socialism market 179–80 rise of 291n12 spectator, benevolent, conception of 19–20, 283n3 Stark, Oded 274–5 starting-line equality 178, 183–4, 192–3 StickK 149–50, 154, 289n7 Stiglitz, Joseph 289n12 storage economies 126–33, 137 Stremitzer, Alexander 221 Strong Axiom of Revealed Preference 288n9 Strong Interactive Opportunity Criterion 111–12, 117–19, 122–3, 126, 131–2, 135, 138, 161, 163, 288n8 Strong Market Opportunity Theorem 122–6, 132–3, 242, 290n8 Strotz, Robert 286n8 Sugden, Robert 39, 113–14, 126, 133, 218, 220, 232–4, 241, 283–96 Summers, Barbara 143 Sunstein, Cass 11–12, 18–22, 45–57, 61–3, 65, 67, 72, 80–2, 89, 143–4, 148, 154–5, 166, 256, 284n7 SuperReasoner 56, 72–7, 80 Supply and Demand, Law of 120–5, 158, 287n5 tariffs, multi-part 157 tax evasion 204 taxation, redistributive 204 Taylor, Fred 179 team reasoning 232–6, 241, 249–50, 276, 293nn1–2, 295n14 telos 208, 280–1, 296n17 Test, Mary Ann 223 Thaler, Richard 7, 11–13, 18–22, 45–57, 61–3, 67, 72, 80–2, 89, 143–4, 148, 154–5, 166, 205, 256, 284n6 Thomson, Judith Jarvis 295n16 Titmuss, Richard 212 Todd, Peter 288n3 Trachtman, Hannah 223 trading institution(s) 113–16, 125, 128–30, 135 translucency 267 Trust Game 10–13, 32, 207, 214–22, 227–31, 253–5, 263, 270–1, 292nn9–10, 293n15 Trust, Paradox of 223, 229–31 trust responsiveness 220–1, 292nn9–10 Tullock, Gordon 40, 284n4 Tuncel, Tuba 289n19 Tuomela, Raimo 293n2 Turiel, Elliot 295n1 Tversky, Amos 9, 59, 114, 283n4 Ubel, Peter 18 Ullman-Margalit, Edna 294n6 319 OUP CORRECTED PROOF – FINAL, 17/5/2018, SPi Index Ultimatum Game 218, 219f, 254, 263 uncertainty, veil of 284n4 unkindness; see kindness utilitarianism 2, 19, 25 cooperative 232 difference between act utilitarianism and rule utilitarianism 232 value, pluralist theory of 209 veil of ignorance 284n4 veil of uncertainty 284n4 Vickrey, William 283n6 view from nowhere 17–32, 40–9, 235, 262, 280, 283–4n3 virtual bargaining, theory of 295n14 virtue ethics 169, 190–1, 207–12, 231–2, 278–80 voluntariness 235, 240–8 voluntary exchange theory of public goods 165–6 Wakker, Peter 58 Wal-Mart 144–6 Walras, Léon 5, 113, 179, 289n18 wanting and liking, distinction between 286n2 320 Wason, Peter 67 weak dominance, concept of 101–2 Weaver, Ray 114 Welch, Brynn 63–6 welfare economics; see also Fundamental Theorems of welfare economics behavioural 13, 15, 18–24, 46, 53–66, 68, 72–6, 79–82 Hausman’s interpretation of 283n2 neoclassical 4–7, 10–19, 24, 115, 124, 141, 283n2 welfare economist’s viewpoint, that of a spectator 19 welfare states in Germany and Britain, creation of 291n12 Wicksell, Knut 165–6, 284n4 Wicksteed, Philip 43–4, 284n6 Willaschek, Marcus 296n15 William Hill (betting firm) 154 wine economy 133–6 Winter, Eyal 295n5 Young, Peyton 294n6 Zhou, Jidong 289n13 ... developing Each of these papers had a prominent legal scholar (Cass Sunstein in one case, Samuel Issacharoff in the other) as one of its authors The other authors were a roll call of the great and the. .. citizens, as a contractarian should, and try to persuade them of the advantages of living in a society that upholds a morality of mutual benefit * * * As I have explained, important parts of the book are... transactions as part of the community of advantage Mill’s concept of a community of advantage encapsulates what I see as three core components of a liberal tradition of economic thought The first is the