Property and Power (Units 5.0-5.7)

Pirate Institutions

• The Royal Rover’s Articles outline rules governing the crew:
  • Article I: Every man has a vote in affairs; equal rights to provisions.
  • Article IV: Lights and candles extinguished by 8 PM; after that, drinking allowed on deck only.
  • Article X: Distribution of prize shares:
  • Captain & Quarter Master: 2 shares
  • Master, Boatswain, Gunner: 1.5 shares
  • Other Officers: 1.25 shares
  • Crew Members: 1 share

Institutions as Rules of the Game

• Institutions include the written and unwritten rules governing interactions and product distribution.
• Types of institutions:
  • Constraints: Rules like no drinking after 8 PM on pirate ship
  • Incentives: Rewards, e.g., best pistols for spotting a ship.
• Institutions affect:
  • How games are played.
  • The size of the economic pie (resources available).
  • Bargaining power regarding the pie's division.

Power and Distribution of Profits

• Institutions determine power—people’s ability to operate against others' interests.
• Economic power manifests in two forms:
  1. Setting terms of exchange (offering contracts).
  2. Imposing costs (e.g., contract termination).
• In capitalism, private property bestows power:
  • Employers over workers
  • Monopolists over consumers
  • Lenders over borrowers

Evaluating Institutions and Outcomes

• Economic interactions yield allocations that describe:
  • Contribution of each individual.
  • Product of the project.
  • Distribution of that product.
• Efficiency and fairness criteria are used to evaluate outcomes:
  • Efficiency: Objective standard
  • Fairness: Subjective standard

Evaluating Efficiency

• Efficiency does not mean:
  • The most sensible way (engineering).
  • The most profitable way (business).
• An allocation is Pareto efficient if no one can be better off without making someone worse off.
• Multiple efficient allocations exist; they may not be the best or fairest outcomes.

Vilfredo Pareto (1848-1923)

• Advocated for fact-based economics and sociology.
• Proposed the Pareto principle:
  • A small group holds the majority of wealth (often 80/20 rule).
• Argued competition is driven by wealth appropriation versus production.
• Known for defining economic efficiency.

Efficiency in the Prisoners’ Dilemma

• Social dilemma: Self-interest leads to an inferior collective outcome.
• Nash equilibrium: Outcome where individual rational choices do not lead to the best collective outcome, often Pareto inefficient.
• Payoff structures exemplified in the dilemma.

Evaluating Fairness

• Fairness is subjective, complicating efficiency evaluations.
• John Rawls's method for fairness:
  • Consider all individuals equally.
  • Employ a veil of ignorance—not knowing personal traits (gender, race, wealth).
  • Support institutions promoting the minimal payoffs for the worst-off (the maximin principle).

Angela and Bruno: Ownership Dynamics

• Angela: Initial land ownership.
• Bruno: Landlord who must negotiate with Angela under ultimatum game rules.
  • Bruno forces Angela to work and must offer a favorable deal to secure her agreement.

Allocation Dynamics Under Bruno's Control

• Angela's decisions based on maximum utility, considering free time and grain production.
• Allocation points analyzed for work hours and crop yields, examining marginal rates of transformation and substitution.

Technically Feasible Allocations

• Bruno’s allocations depend on constraints from technology and biology (survival constraints).
• The objective is to maximize grain seizures while maintaining feasible conditions.

Economically Feasible Allocations

• If Bruno can't coerce, allocations depend on technological limits, biological needs, and Angela’s preferences.
• Reservation options dictate the least Angela will accept for work (minimum grain for survival).

Take-it-or-Leave-it Offers

• Previously coerced arrangements become constrained by Angela’s acceptable limits.
• Optimizing offers involve maximizing distance between feasible frontiers and reservation curves, ensuring mutual consent.

Allocations and Efficiency

• Allocations where both parties engage freely uphold efficiency—maximizing economic surplus and aligning interests.
• Fairness in profit sharing questioned: does Bruno's acquisition of surplus justify his position?