An economic approach to social interactions and institutions
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Abstract
Recent mainstream economic theory has been almost totally confined to analyzing situations in which the rules of the game are fully defined. Such rules ordinarily limit the types of social interaction which can occur. In particular, the vast majority of economic writings consist of an indefinite number of variations on one simple interaction form: exchange.
There are many other widely prevalent forms of interaction, however. These include extortion, theft, congestion, and charitable gifts. In principle, there is no reason why the sophisticated language and analytical techniques of exchange theory cannot be applied to these less fashionable types of social contact, although such application is not easy. The purpose of the dissertation is to demonstrate the widespread relevance of analytical techniques which have previously been associated primarily with economic exchange theory.
The second chapter of the dissertation, entitled "Social Choice in Anarchy," is concerned with the construction of an operational definition· of social interaction. Since purposeful social interaction can be said to be precipitated by external effects, it begins by presenting a typology of external effects in a simple two-person model. Since social interaction also requires knowledge of reciprocity, the chapter proceeds with a discussion of the difficulties that are associated with incorporating the concept of knowledge into analytical models.
A model of social interaction is also a model of institutional formation, since institutional mechanisms arise either as a result of, or in anticipation of, social interaction. Chapter III, "The Government as an Institution of Social Choice," and Chapter IV, "The Monetary System as an Institution of Social Choice," show how the model of social choice developed in Chapter II can be used to construct a useful definition of these particular institutions. The definition of government goes one step beyond that developed by Buchanan and Tullock and by Downs and that which is used implicitly in the economic literature on property rights. It explicitly recognizes the potential redistributive effects of government as a coercive institution and incorporates these effects into the definition.
A somewhat different approach is taken with respect to the monetary system, although the principles employed are identical. The current system is compared with a theoretical construct which is based solely on the ability of a monetary system to raise the efficiency of exchange. The demonstrated differences between the two can be attributed to the redistributive effects of a monetary system which is supported by a coercive authority.
Chapter V, "An Economic Approach to Riot Analysis," analyzes a somewhat different type of social phenomenon, that of riots. Although rioting is a form of social interaction, it is not usually defined as an institution. Yet, it is only through a proper definition that one can proceed to meaningfully evaluate and predict riots. The model of social interaction developed in Chapter II is used implicitly to analyze riots within the context of attempting to solve the practical problem of how to prevent them.