1978 Book DecisionTheoryAndSocialEthics

DECISION THEORY AND SOCIAL ETHICS
THEORY AND DECISION LIBRARY
AN INTERNATIONAL SERIES
IN THE PHILOSOPHY AND METHODOLOGY OF THE
SOCIAL AND BEHAVIORAL SCIENCES
Editors:
GERALD EBERLEIN, University of Technology, Munich

WERNER LEINFELLNER, University of Nebraska
Editorial Advisory Board:
K. BORCH, Norwegian School of Economics

and Business Administration
M. BUNGE, McGill University
J. S. COLEMAN, University of Chicago
W. KROEBER-RIEL, University of Saarland
A. RApOPORT, University of Toronto
F. SCHICK, Rutgers University
A. SEN, University of London
W. STEGMULLER, University of Munich
K. SZANIAWSKI, University of Warsaw
L. TONDL, Prague
VOLUME 17
DECISION THEORY
AND SOCIAL ETHICS
Issues in Social Choice
Edited by
HANS W. GOTTINGER
University of Bielefeld, Bielefeld, ER.G.
and
WERNER LEINFELLNER
University of Nebraska, Lincoln, Nebraska, U.S.A.
D . REIDEL PUBLISHING COMPANY

DORDRECHT:HOLLAND/BOSTON :U .S.A.
LONDON:ENGLAND
Library of Congress Cataloging in Pub6cation Data
International Symposium on Decision Theory and Social Ethics, Schloss

ReisensbUl:g, 1976.
Decision theory and social ethics.
(Theory and decision library ; v. 17)

A selection of papers, with additional material, from the conference held
June 24-30, under the sponsorship of the Bavarian Academy of Sciences
Includes bibliographies and index.
1. Social choice-Congresses. 2. Decision-making-
Congresses. 3. Social ethics-Congresses. 4. Social justice-
Congresses. I. Gottinger, Hans-Werner. II. Leinfellner,
Werner. III. Akademie der Wissenschaften, Munich. IV. Title.
HB99.3.I56 1976 301.11 78-18513
ISBN-13: 978-90-277-0937-0 e-ISBN-13: 978-94-009-9838-4
DOl: 10.1007/978-94-009-9838-4
Published by D. Reidel Publishing Company,

P.O. Box 17, Dordrecht, Holland
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by D. Reidel Publishing Company, Inc.
Lincoln Building, 160 Old Derby Street, Hingham,
Mass. 02043, U.S.A.
All Rights Reserved

Copyright © 1978 by D. Reidel Publishing Company, Dordrecht, Holland
Softcover reprint of the hardcover 1st edition 1978
No part of the material protected by this copyright notice may be reproduced or

utilized in any form or by any means, electronic or mechanical,
including photocopying, recording or by any informational storage and
retrieval system, without written permission from the copyright owner
T ABLE OF CONTENTS
PREFACE Vll
LIST OF PARTICIPANTS xxi
PART 1/ PHILOSOPHY AND ETHICAL PRINCIPLES
JOHN C. HARSANYI/ Rule Utilitarianism and Decision Theory 3

WERNER LEINFELLNER / Marx and the Utility Approach to the
Ethical Foundation of Microeconomics 33
MENAHEM E. YAARI / Endogenous Changes in Tastes: A
Philosophical Discussion 59
PART 2/ SOCIAL AND COLLECTIVE CHOICE THEORY
SALVADOR BARBERA / Nice Decision Schemes 101

JOHN A. FEREJOHN / The Distribution of Rights in Society 119
PETER C. FISHBURN / Acceptable Social Choice Lotteries 133
ALLAN GIBBARD / Social Decision, Strategic Behavior, and Best
Outcomes 153
WULF GAERTNER and ACHIM HEINECKE / Cyclically Mixed
Preferences-A Necessary and Sufficient Condition for Tran-
sitivity of the Social Preference Relation 169
LUCIAN KERN / Comparative Distributive Ethics: An Extension
of Sen's Examination of the Pure Distribution Problem 187
CHARLES R. PLOTT/Rawls's Theory of Justice: An Impossibility
Result 201
HEINZ J. SKALA/ Arrow's Impossibility Theorem: Some New As-
pects 215
DA VID SCHMEIDLER and HUGO SONNENSCHEIN / Two Proofs of
the Gibbard-Satterthwaite Theorem on the Possibility of a
Strategy-Proof Social Choice Function 227
v
VI T ABLE OF CONTENTS
PART 3/ SPECIAL TOPICS IN SOCIAL CHOICE
KARL BORCH / Ethics, Institutions and Optimality 237

HANS W. GOTTINGER / Complexity and Social Decision Rules 251
DEEPAK K. MERCHANT / Discrete Optimization and Social Deci-
sion Methods 271
REINHARD SEL TEN / The Equity Principle in Economic Behavior 289
PATRICK SUPPES / The Distributive Justice of Income Inequality 303
INDEX OF NAMES 321

INDEX OF SUBJECTS 323
PREFACE
Ethics, as one of the most respectable disciplines of philosophy, has

undergone a drastic and revolutionary change in recent time. There are
three main trends of this development. The first trend can be described
as a tendency towards a rigorous formal and analytical language. This
means simply that ethics has created beside its own formalized set-
theoretical language a variety of new formalized, logical and mathemati-
cal methods and concepts. Thus ethics has become a formalized meta-
or epidiscipline which is going to replace the traditional concepts,
principles and ethical methods in the realm of social sciences. It is clear
that a formalized form of ethics can be used more easily in social,
economic and political theories if there are ethical conflicts to be
solved. This first trend can be regarded as a conditio sine qua non for
application in, and imposing ethical solutions on, social scientific
theories.
The second trend may be characterized as an association- or
unification-tendency of a formalized and analytical ethics with decision
theory. Decision theory as a new interdiscipline of social sciences is
actually an assemblage of a variety of subtheories such as value-utility
theory, game theory, collective decision theory, etc. Harsanyi has
called this complex of subtheories a general theory of human behavior.
Analytical or formal ethics is actually using this general theory of
human behavior as a vehicle simply because this theory deals from the
beginning with conflict solution, i.e. to find the optimal actions or
decisions from a given set of open alternatives. Rational decision
theories do not deal always with ethical conflicts. By an ethical conflict
we understand, according to Harsanyi and Leinfellner, solely the
conflict between individual (egotistical) interests and collective inter-
ests or collective welfare. If such a conflict appears, the theory of
rational decision making needs ethical principles such as equality,
freedom, non-dictatorship, justice, etc., as additional criteria to solve
the ethical conflict. The startling origin of using or importing ethical
principles into decision theory marked a new area in 'ethification' of
decision theories. Arrow's famous result of imposing the principles or
conditions (as he called it U & P & I & D) on a theory of collective
Vll
viii PREFACE
choice showed, at least according to Sen's interpretation, that the

principles of U = unrestricted choice, P = Pareto optimality, 1=
independence of irrelevant alternatives and D = non-dictatorship were
too weak. Since then stronger and more detailed and elaborate princi-
ples borrowed from traditional ethics have been reformulated and used
in this field. Sen's classical book describes this trend in a meticulous
and dramatic way.
Finally there is a third main trend, which goes beyond the scope of
the analytic formalizing tendency as well as beyond the imposition of
ethical principles on rational decision theory. It is clear that the
conversion of decision theories in ethical ones-if there exists an
ethical conflict-has to be done from a systematic point of view. Here
at this moment the old systematic doctrines of traditional ethics have
been introduced by the present adherents of these doctrines. Thus we
are in a renaissance and critical reconstruction of utilitarian ethics
(Sen, Harsanyi), of contractarian theory of society (Rawls), of liber-
tarian ideas (Nozick) and finally of Marxian ethical foundations of
economics as the basis of societal life (Leinfellner, Kern), just to
mention a few of these systematic reconstructions and reformulations
of historical ethical views.
From June 24-30, 1976, an international conference on the topic
'Decision Theory and Social Ethics' took place at Schloss
Reisensburg/Ulm, West Germany under the sponsorship of the
Bavarian Academy of Sciences, Munich, West Germany. The papers
published in this volume demonstrate very clearly the present status of
social ethics. They testify that this discipline is not only capable of
providing detailed and specialized analyses and solutions of ethical
conflicting problems and of far-going cooperation with all social sci-
ences but can contribute to outline new systematic approaches to solve
the social problems of our present societies. At this conference thirty-
four invited papers were presented and discussed; the current volume
includes fifteen of those, and the remaining two have been solicited
from outside to achieve a reasonable balance of current trends in social
ethics and decision theory with a view toward further integration.
Furthermore, in this volume, an attempt is made to give potential
newcomers to the field an authoritative guide to the multiple cross-
links between the two areas. In recent years there have been several
attempts to treat problems of social ethics, in particular those relating
to 'social justice', in a rigorous and analytical fashion. In this endeavor
PREFACE IX
various disciplines have been involved: philosophy, economics, sociol-

ogy, political science, statistics and law. Much of the theory is still in
flux, but already at this stage we observe that modem social ethics is
deeply interconnected with rational decision making: on the one hand
by the extensive use of decision criteria and the formalism of rational
decision theories, on the other hand by superimposing on rational
decision making ethical principles borrowed from traditional ethics. Of
course, this is not too surprising in view of the historical origins of
decision theory. On the other hand, decision theory over the past
twenty years has generated its own dynamics, motivated by intrinsic
(mathematical) problems of itself, thus creating highly sophisticated,
technical subdisciplines (statistical decision theory, for instance, is fully
integrated in mathematical statistics). However, in this development a
potential danger is involved: some decision theorists may lose contact
to problems in other areas requiring decision-theoretic tools. Con-
versely, those working in more applied fields may not follow up
technical results in decision theory that could be of potential interest to
them. If decision theory wants to keep its vitality it is contended that it
should be open to substantial problems in more applied fields. There-
fore, in this volume an attempt is made to discuss the status of decision
theory (in view of most recent results) relevant to social ethics. It should
also facilitate communication between more mathematically inclined
decision theorists and those more interested in practical and
philosophical aspects of the general area of social ethics (including
voting theory, theory of democracy, theory of social and environmental
indicators, collective and social choice theories).
To give an example of how principles are used and how 'ethicizing'
of social and economic theories is dependent on fundamental
philosophical views, we want to discuss briefly three different ap-
proaches to solve ethical social conflicts. One could regard here the
fundamental attitude of egalitarianism, of utilitarianism and of liber-
tarianism as some kind of Kuhnian paradigm; as entrenched beliefs
which have led in fact to revolutionary development of systematic
theories by Rawls, Harsanyi and Nozick. It is perhaps good here to
trace the major problem areas that characterize the substantive issues
of social ethics and justice and that set up the interface between social
ethics and decision theory. Without denying historical roots in the
discussion of problems of justice, it is of interest here to point out that
basically three problem areas of societal organization have received
x PREFACE
renewed attraction in the modern discussion on ethical values:

(1) Which principles form a just society and under which cir-
cumstances are social and economic inequalities justifiable?
(2) Does there exist a catalogue of generic individual or collective
rights on the basis of natural law which leads to incompatibilities
between freedom and equality?
(3) Which normative principles of social ethics generate statements
on social or public policy embracing those on the allocation of collec-
tive and individual resources within society?
For approaching these questions at least three fundamental proce-
dures, rules or problem solving mechanisms, appear to be available:
the libertarian, the egalitarian and the utilitarian approach.
In the natural tension between freedom and equality, or between the
libertarian and egalitarian view, we could discuss the controversial
views of R. Nozick (State, Anarchy and Utopia, 1974) and John Rawls
(A Theory of Justice, 1971).
Rawls' theory of justice directly addresses to the problem of what is
a just distribution in society, are inequalities justified and if so, what
kinds and amounts of inequalities. According to Rawls only those
inequalities are justified which work to the benefits of the most
disadvantaged. The straight justification is that some inequalities of
position or of resources may bring greater productivity and therefore
greater benefit to all. Nozick's point of departure is different. He
points out that inequalities are not created by some central authority,
or 'accident by birth' but result from individuals innate or acquired
differences in skills, capabilities and other resources. Rawls' principle
seems to assume that these resources and products are collectively
held, and that individuals have no rights (entitlements) to them.
Nozick's theory is opposed to this assumption. Instead he assumes that
each person has a set of natural rights which entitles the individual to
the best (personal) use of his resources, and that the problem of justice
must be applied to this criterion, thus it is irrelevant whether in
particular situations equality or inequality prevails.
Both philosophers set out from fundamental positions, in an axioma-
tic way, whereas the utilitaristic position (as represented by J. C.
Harsanyi) is more pragmatic, economically oriented. According to the
libertarian position, imposition of equality in benefits constitutes a
significant loss of rights, not only for the 'haves' but also for the
'have-nots' (for after redistribution, they must be restrained from
PREFACE Xl
market transactions that would destroy the pure equality and reinstate
inequality). Rawls' position implies erasing all 'the accidents of birth'
which give one person more opportunity than another. This necessi-
tates removing the child from all influences of the family-and raising
him as a ward of the state, subject to precisely the same conditions as
any other child. Nozick's view implies, in contrast, no system of public
education at all, since public education is redistributive, and by
Nozick's 'entitlement' principle each child is entitled to the fullest
untaxed benefit of his family's resources, in so far as it chooses to use
these resources for his benefit. Obviously these are extreme positions:
neither position can be a correct description of a just society. But these
positions make clear what we gain or lose by moving in either
direction. By moving in the direction of equality we lose individual
liberty to a central authority which imposes equality, by moving in the
direction of individual liberty, we lose equality to the accidents of birth
reinforced by the markets.
From the egalitarian point of view since the factors which make for
success are simply luck, there is no ethical foundation for large
disparities of income and status, and since one cannot equalize luck in
order to create equal opportunity, one should seek to equalize results.
But if equality of result is to be the main object of social policy it
cannot succeed unless it is rooted in some universal ethical system that
provides a philosophical foundation-a conception of fairness-for a
communal society. Is Rawls' conception compatible with equality of
opportunity or equality of result? The liberal principle accepts the
elimination of social differences in order to assume an equal start, but
it justifies unequal result on the basis of natural abilities and talents.
For Rawls, however, natural advantages are as arbitrary or random as
social ones.
The only way inequality can be justified according to Rawls is on the
basis of the so-called difference principle: an application of the maxi-
min theorem of decision theory. It states that if some persons are to be
better off the less advantaged are also to be better off. If one gains so
must the others. (Rawls takes the metaphor of the family as a model
for this principle. There are obvious links to the gift economy, repres-
enting altruistic behavior.) Rawls rejects the idea of meritocracy be-
cause it violates his conception of fairness, because equality of oppor-
tunity means an equal chance to leave the less fortunate behind in the
personal quest for influence and social position, because it maintains
xii PREFACE
and perpetuates the power structure of the most successful without

working to the advantage of the less successful.
The difference principle has two implications for social policy:
(1) Redress or compensation. Since inequalities of birth and natural
endowment are undeserved, these inequalities are to be somehow
compensated for (counteracting the natural or genetic lottery).
(2) Personal resources are collectively held. Talent is a social asset,
and its fruit should be available to all, especially to the less fortunate.
The difference principle works in such a way that those who have
been favored by nature may gain from the good fortune only on terms
that improve the situation of those who have lost. There are certain
difficulties with Rawls' position.
(i) First, he denounces meritocracy, but always pretends that ad-
vancement in meritocracy is based on pure luck, rather than 'merit'
or 'effort'. There is no discussion of how to compensate for effort, and
if no effort should be rewarded how can effort be made to work for the
advantage of the less qualified or successful. This raises the issue of
incentives.
(ii) A discussion is lacking of what 'disadvantaged' really means. A
person usually accepts different roles in different situations, physically
and naturally. A person may be black, a woman, and under thirty years
of age. Should she get three votes? She may be disadvantaged accord-
ing to one criterion, but advantaged according to another criterion.
The scale between advantage and disadvantage is not one-dimensional.
But unfortunately Rawls suggests a definition solely in terms of relative
income and wealth with no reference to social position. Thus, all
persons with less than half the median income and wealth may be
taken as the least advantaged segment. It focuses attention on the
'social distance' between those who have the least and the average
citizen.
(iii) If Rawls' principle should have some practical implications, then
in society Rawls' disadvantaged are identifiable largely in group terms,
and the principle of equity is linked with quota representation. How-
ever, this raises the claim of group rights against individual rights and
brings ambiguities into the conception of social justice, e.g. by the
degree and extent of representation by groups, and by the potential
dominance of group rights over individual rights.
(iv) What if the 'disadvantaged' are there by their own choice? Do
PREFACE Xlll
we have to teach them that they are disadvantaged? How do we

distinguish the genuine disadvantaged from those who are not?
One could very well imagine that the Rawlsian as well as the
libertarian principle will lead to different, often controversial conclu-
sions when applied to issues of social and public policy. Some of these
issues will be briefly discussed as follows:
(a) The most direct clash of the two principles of liberty and
equality, pertaining to Nozick's and Rawls' positions respectively, has
occurred over the imposition of compulsory busing within school
districts in the United States. Compulsory busing means the assign-
ment of children by a central authority to schools at some distance
from their home to ensure that all schools have a similar racial
composition. How is the issue of busing affected by the principles of
Rawls and Nozick? With compulsory busing there are associated two
ideas: first, that different children, because of different backgrounds,
constitute resources for the learning of other children, and second that
a central authority has the right to redistribute such resources 'equally'
among all children. (There is an analogy here to the formation of
'Gesamtschulen', e.g. comprehensive education in primary and secon-
dary schools, in the Federal Republic of Germany, where learning
potentials are intended to be redistributed equally among all students.)
Opposition to compulsory busing accepts the first idea, but rejects the
second. If there is a redistribution, opponents of busing hold that it
should be left up to individual parents who, through their choice of
residence, decide where their children go to school. Advocates of
compulsory busing subscribe to the premise underlying the arguments
for equality: Resources or benefits are under the legitimate control of a
central authority, not of individuals. Much can be said for and against
both positions. Thus there are two policy options left reflecting these
positions, and a third one which will be discussed. Rather than with-
drawing rights from those who have the (economic) power to exercise
them effectively, one could enlarge the rights of others. In the case of
busing the libertarian alternative would be to provide any child in a
metropolitan area the right to transfer to a school of his choice, so long
as the receiving school has a smaller proportion of his race than the
school he leaves. The school would be required to accept children from
outside its attendance zone, up to its capacity. Thus the right to choose
school by residence remains, but the right is added to choose a school
XIV PREFACE
in a different residence-according to one's like-and this right re-

duces inequality. By this alternative full equality is not realized, nor is
full liberty of the economically advantaged to maintain homogeneous
schools realized.
(b) Equality of opportunity-as a program of the Kennedy and
Johnson administration-emphasized compensatory education. But the
Coleman Report showed that schooling has little effect in raising the
achievement of disadvantaged groups in society. Although there was
little difference between black and white schools as regarding physical
facilities, formal curricula, teachers' qualifications etc. it found that a
significant gap in achievement scores between black and white children
was already present in the first grade-and the gap between the two
groups widened by the end of elementary school. The only consistent
variable explaining differences in scores within each racial group was
the educational and economic backgrounds of the parents. But there
was no consistent variable to explain the difference between racial
groups-beyond the family background-which is why some persons
have fallen back on genetic explanations. The logic of the argument
has been pushed forward by Harvard psychologist R. Herrstein. He
argues that 80 percent of a person's LO. is inherited while environ-
mental factors accord for only 20 percent. The following chain of
reasoning is employed:
(1) if differences in mental abilities are inherited,
(2) if success in society requires those abilities,
(3) if the environment is 'equalized',
then social standing will be based primarily on inherited differences.
The dispute is first whether Western Society-because of social class
privilege or culture advantage (biased LO. tests) actually provides
genuine equality of opportunity, and second, whether a society, in
which genuine equality of opportunity does prevail, and a new form of
income and status inequality based on merit does result, would be
desirable. According to the Rawlsian position, equality of opportunity
is seen as leading to a new hierarchy and the current demand requires
the reduction of all inequality-and this requires the creation of
equality of result. The main sociological and philosophical objections to
meritocracy pertain to
(i) meritocracy is purely a selection by intelligence, but intelligence
is based on inherited genetic differences. Therefore privilege is ob-
PREFACE xv
tained on the basis of an arbitrary genetic lottery, the antithesis to

social justice,
(ii) there can never be a pure meritocracy because high status
parents seek to pass privileges to their children,
(iii) even in a society which proclaims to be meritocratic there are
intangible or random factors that decide on economic success.
Thus a situation of inequality exists which is justified on the basis of
achievement, but is virtually due to other (random) factors such as luck
or being in the right place, and degrees of inequality are not justified.
This short discussion of some main positions in social ethics and
especially the difficulties arising in Rawl's system show very clearly the
urgent need for more precise and rigourous formulations, for systema-
tic reconstructions of Rawls position as recently done by Sen et al. in
the journal Theory and Decision. It demonstrates very clearly that the
pending problems in this field can only be solved by intensifying the
development of ethics by trying firstly to get better and more precise
formal analytical ethics, secondly by working out the interrelation of
traditional philosophizing with ethical principles and decision theory
and finally by specifying in an exact sense the basic positions in ethics
in such a way that they may be used to solve ethical conflicts in our
society. But this is exactly the main theme of this volume and the goal
of this collection of papers.
The present collection of papers deal with some of the above-
mentioned theoretical and technical problems on the basis of three
levels of organization:
Part I: 'Philosophy and Ethical Principles',
Part II: 'Social and Collective Choice Theory',
Part III: 'Special Topics in Social Choice'.
In Part I John C. Harsanyi analyzes and discusses various concep-
tions of utilitarianism, as a third avenue (besides those of Rawls and
Nozick) to approach social justice. He makes a useful distinction
between Act Utilitarianism (AU) and Rule Utilitarianism (RU), and
shows that RU includes long-run considerations leading to quite differ-
ent policy conclusions as compared to AD. In particular, he demon-
strates that former 'proofs' on the equivalence between AU and RU
are false, relying on former results of Gibbard (1965) and Ezorsky
(1968); furthermore, some examples on social decision processes are
provided to lend support to this thesis. Since RU seems to respect
other people's basic rights and long-run considerations of beneficial
xvi PREFACE
outcomes it therefore escapes undesirable implications of AU that

violate elementary principles of justice.
w. Leinfellner addresses himself to the problem of merging the
utilitarian approach and the Marxist theory of destribution to a com-
prehensive, general value and welfare theory. He constructs an elabo-
rate axiomatic system that includes the key features of different, partly
contradictory ethical and value theories in use. Moreover he integrates
the different ethical approaches of the traditional ethical systems and
the present ones into an episystem of 'ethicizing' social, economic and
political theories of today.
M. E. Yaari uses a simple paradigm on the bargaining situation
between the whisky-seller and the Indian demonstrating the phenome-
non of 'commodity-dependence' (addicton) which sheds new light on
the concept of 'consumer sovereignty' and 'rationality'. Under the
hypothesis of 'endogeneous changes in preferences' one could explain
very strange looking pricing strategies (from the seller's side) that
initially set prices at relatively low levels but then suddenly jump to
sharply higher levels and stay there for some time to come. The
analysis of markets where these phenomena occur leads to considera-
tions under which it seems justified to interfere into market interac-
tions for reasons of consumer protection. The paper illustrates in a
rather deep way under which particular set of assumptions market
mechanisms may fail in providing morally sound results that are
socially acceptable.
Part II addresses special aspects of social and collective choice
theories per se.
S. Barbera makes a step toward constructing a truly stochastic social
choice or decision scheme that given previous social choice configura-
tions to be deterministic leaves the final choice subject to chance. He
applies the construction to weighted voting schemes.
J. Ferejohn points to some incompatibilities in proving the pos-
sibilities of democratic or liberal decision procedures, in particular, he
is interested in weakening the consistency axiom and explores one type
of consistency axiom which is shown to be in conflict with the
strengthened Pareto axiom.
P. C. Fishburn provides reasons for the acceptability of the use C?f
social lotteries. He discusses and compares two important cases, for
which social lotteries apply: the case of Condorcet alternatives which
are preferred by the majority of non-indifferent agents (concerning
PREFACE XVII
other alternatives) to every other alternative, and the case of Pareto

lotteries where lotteries are not unanimously less preferred than other
lotteries. Some examples on voting behavior for the two cases are
given.
A. Gibbard reports on technical results of a game-theoretic analysis
to show that in particular social choice systems people may have an
incentive to misrepresent their preferences because it makes them
better off. In other words, he demonstrates that only a narrow class of
uninteresting systems can make truthful revelation of preferences
always a dominant strategy. This situation is quite important practically
for voting behavior in the public policy domain.
W. Gaertner and A. Heinecke present a new necessary and sufficient
condition for transitivity of the social relation under a simple majority
decision regime. Equivalent relationships are established between the
condition of 'cyclically mixed preferences' and other known restrictions
on the social welfare function. It is shown that this condition yields a
Social Welfare Function of the Arrow type under the majority decision
rule.
L. Kern extends Sen's pure distribution problem for making allow-
ance for a conservative rule as well as for a Marxian rule of distribu-
tion. He argues that the Rawlsian maximin criterion plays a mixed role
between the conservative and the Marxian conception.
C. Plott analyzes some difficulties in the Rawlsian system of justice
which fully reformulated on a strictly axiomatic basis would lead to
moral conclusions that almost anyone would reject. Difficulties of that
sort have also been pointed out in the literature, e.g. by K. Arrow and
J. C. Harsanyi. Furthermore, Plott discusses Rawls' theory in its
possible impact to economics.
H. J. Skala approaches social choice theory with Boolean valued
models. He demonstrates convincingly and elegantly some kind of
relativity in Arrow's theorem, for example that Arrows' results are
dependent on the choice of the underlying logic. If one chooses a
non-Boolean, non-classical type of logic or even set theory the dictator
would vanish. However, he discovers some logical difficulties in finding
constructive proofs in the field of social choice theory. Another result
of his paper is that the dictator appears and reappears depending on
the number (cardinality) of the members of a society.
D. Schmeidler and H. Sonnenschein provide a new proof of a
particular version of Arrow's General Possibility Theorem, in this form
XVlll PREFACE
essentially due to A. Gibbard and M. Satterthwaite, where the assump-

tion of independence of irrelevant alternatives can be relaxed. Further-
more, the theorem is extended for permitting strongly ordered prefer-
ences (i.e. those which omit indifference relations). Under this qualifi-
cation the concept of a Social Choice Function (instead of a Social
Welfare Function) is used. Then the following general result is proved:
if the social choice function is nonmanipulable and the set of social
preference relations contains at least three elements then the Social
Choice Function is dictatorial (this essentially is a corollary of Arrow's
famous General Possibility Theorem).
Part III is devoted to specific aspects of social choice theories of
those which have not been treated in social choice theory per se but
which are of interest for constructing the theory.
K. Borch observes limiting factors in game situations given by
institutional and ethical constraints or by tradition and customs, that
create 'bounded rationality' of decision-makers. His considerations are
exemplified in a simple model of insurance behavior where non-
cooperative behavior prevails.
In a more general context H. W. Gottinger argues that many
restrictive and partly paradoxical results in social choice theory are due
to the implicit assumption of 'optimizing' for every decision-maker and
that axioms of consistency or rationality often exceed the 'computa-
tional budget' of the decision-maker. A theory of complexity is needed
to treat effectively computational limitations of the decision making
process. A novel approach is suggested here by looking at decision
rules in an automata-theoretic algebraic framework where there is a
natural theory of complexity. Search and complexity appear to be
intimately related-as we encounter choice problems with problem
spaces as large as those of chess.
D. K. Merchant is interested in dual aspects of the aggregation of
individual preferences to social choice~, by finding procedures to
induce a social ranking out of the given individual preference profiles.
He uses methods of discrete optimization.
R. Selten analyses the impact of a less-known principle, the equity
principle on social or distributive justice which is also interesting in the
light of not requiring too much 'computational power', and possibly
coming closer to empirically observed human behavior. He shows that
in particular market-game situations people tend to allocate rewards
according to the equity principle although other allocation principles
PREFACE xix
are available and some seem even more reasonable to apply in this
situation.
P. Suppes deals with the problem of justification of hierarchical
societies such as meritocracies, he looks at different 'ideal-type'
societies in which inequality is an intrinsic feature and compares the
degree of inequality with empirical measurements for various de-
veloped and developing nations. His approach is based on a qualitative
theory of relations between class intervals, relations indicating the
degree of inequality, which has been proven useful for purposes of
measurement theory. Numerical representation of inequality relations
leads to an alternative measure of inequality. Surpes' arguments
against first-principle-egalitarianism are a convincing approach to a
formal reconstruction of meritocracy as a social system.
Finally we want to thank all authors who contributed to this volume
and D. Reidel for friendly cooperation.
We also like to thank Mrs U. Schlomann and Mrs R. Goergel,
Bielefeld, for secretarial assistance and Dr Hal Berghel, Lincoln.
WERNER LEINFELLNER H. W. GOTIINGER
University of Nebraska, U.S.A. Universitiit Bielefeld,
Germany
LIST OF PARTICIPANTS
BARBERA, SALVADOR-Universidad Autonoma de Madrid, Depar-

tamento de Teoria Economica, Facultad de Ciencias Economicas
Madrid, Spanien.
BaRcH, KARL-The Norwegian School of Economics and Business
Administration, Institute of Insurance, Helleveien 30, 5000 Bergen,
Norway.
FEREJOHN, JOHN ARTHUR-Division of Humanities and Social Sciences,
California Institute of Technology, Pasadena, CA. 91125, U.S.A.
FISHBURN, PETER C.-The Pennsylvania State University, Business Ad-
ministration Bldg., University Park, PA. 16801, U.S.A.
GIBBARD, ALLAN-University of Pittsburgh, Faculty of Arts and Sci-
ences, Dept. of Philosophy, Pittsburgh, PA. 15260, U.S.A.
GAERlNER, WULF-Universitat Bielefeld, Fakultat fUr Wirtschaftswis-
senschaften, 4800 Bielefeld 1, B.RD.
GOTTINGER, HANS W.-Universitat Bielefeld, Fakultat fUr Soziologie,
4800 Bielefeld 1, B.RD.
HARSANYI, JOHN C.-University of California, School of Business Ad-
ministration, 350 Barrows Hall, Berkeley, CA. 94720, U.S.A.
KERN, LucIAN-Universitat Bielefeld, Fakultat fUr Soziologie, 4800
Bielefeld 1, B.RD.
LEINFELLNER, WERNER-University of Nebraska, Lincoln, NE. 68508,
U.S.A.
MERCHANT, DEEPAK, K.-The Graduate School of Management, The
University of Rochester, Rochester, New York 14627, U.S.A.
PLOTI', CHARLES R-California Institute of Technology, Division of
the Humanities and Social Sciences, Pasadena, CA. 91125, U.S.A.
SELTEN, REINHARD-Universitat Bielefeld, Institut fur Mathematische
Wirtschaftsforschung, Postfach 8640, 4800 Bielefeld 1, B.RD.
SKALA, HEINZ J.-Gesamthochschule Paderborn, 4790 Paderborn,
B.RD.
SCHMEIDLER, DAVID-Tel-Aviv University, Dept. of Economics, Tel-
Aviv, Israel.
xxi
XXlI LIST OF PARTICIPANTS
SONNENSCHEIN, HUGo-Department of Economics, Princeton Univer-

sity, Princeton, N.J. 08540, U.S.A.
STEGMiJLLER, WOLFGANG-Universitat Munchen, B.R.D.
SUPPES, PATRICK-Institute for Mathematical Studies in the Social
Sciences, Ventura Hall, Stanford University, Stanford, CA. 94305,
U.S.A.
Y AARI, MENAHEM E.-The Hebrew University Jerusalem, Department
of Economics, Jerusalem, Israel.
PART 1
PHILOSOPHY AND ETHICAL PRINCIPLES

JOHN C. HARSANYI
RULE UTILITARIANISM AND DECISION THEORY
~BSTRAcr. The purpose of this paper is to show how some of the controversial questions
concerning utilitarianism can be clarified by the modelling techniques and the other
analytical tools of decision theory (and, sometimes, of game theory). It is suggested that the
moral rules of utilitarian ethics have a logical status similar to that of the normative rules
(theorems) of such formal normative disciplines as decision theory and game theory.
The paper argues that social utility should be defined, not in hedonistic or in ideal-
utilitarian terms, but rather in terms of individual preferences, in accordance with the
author's equiprobability model of moral value judgments.
After describing the difficulties of act utilitarianism, rule utilitarianism is discussed as a
possibly superior alternative. Brandt and Lyons have tried to show that these two forms of
utilitarianism are actually equivalent. To test Brandt's and Lyons's equivalence thesis, a
decision-theoretical model for utilitarian theory is proposed. The model shows that the
thesis is definitely false. The basic difference between the two theories results from the
expectation effect and the incentive effect, which, surprisingly enough, have been almost
completely neglected in the philosophical literature. The paper illustrates these two effects
in connection with the moral duty of promise keeping.
Yet, even if we do neglect the expectation and the incentive effects, and concentrate on
the coordination effect, as most of the philosophical literature does, it can be shown that rule
utilitarianism and act utilitarianism have very different practical implications. This is
demonstrated by analysis of three voting situations. Hence, the equivalence thesis fails even
under the assumptions most favorable to it.
1. INTRODUCTION'
In recent years there has been a good deal of controversy in the

philosophical literature (with some participation by economists, other
social scientists, and lawyers) about the strengths and weaknesses of
utilitarianism as an ethical theory; about the role that moral rules are to
play in a properly formulated utilitarian ethics (the problein of rule
utilitarianism vs. act utilitarianism); and about the logical status of moral
rules and moral value judgments (and, in particular, about whether a
utilitarian interpretation of these rules and value judgments necessarily
involves an illegitimate transition from factual statements to normative
statements, such as Moore (1903) called the 'naturalistic fallacy').
The main purpose of this paper is to show how decision theory (and, to
a lesser extent, also game theory) can help us in solving certain substantive
3
Hans W. Gottinger and Werner Leinfellner (eds.), Decision Theory and Social Ethics,
Issues in Social Choice, 3-31. All Rights Reserved.
Copyright © 1977 by D. Reidel Publishing Company, Dordrecht, Holland.
4 JOHN C. HARSANYI
problems of ethics: how it can help us in modelling moral decisions in an

appropriate way, and in formulating utilitarian theory in a satisfactory
manner. But let me note that a study of decision theory and of game
theory can also help us to solve certain meta-ethical problems, and to
gain a better understanding of the lor,:cal status of moral rules and moral
value judgments.
Many philosophers tried to assimilate moral rules to various empiri-
cally given contingent social rules, shaped by the accidental course of our
past history, such as social customs, legal rules, etiquette rules, rules of a
game, etc. In my own opinion, however, the basic moral rules of a
rationally chosen moral code can be better compared to the logically
necessary normative propositions (theorems) of such formal normative
disciplines as decision theory and game theory. Indeed, as I have argued
elsewhere (Harsanyi, 1975, Section 5), decision theory (utility theory),
game theory, and ethics, are branches of the same basic normative
discipline, viz. the general theory of rational behavior.
Consequently, moral rules have essentially the same logical structure
as the normative rules of decision theory and of game theory: they can be
interpreted as hypothetical imperatives of the form, "If you want your
behavior to satisfy axioms AI> A 2 , • •• ,Am then do X (or, refrain from
doing Y)" (see Harsanyi, 1958, Section 5; cf. also Harsanyi, 1955,
Section III).
At the same time, if anything is to be learned from the debate about the
so-called 'naturalistic fallacy', then it is the fact that the list of axioms we
use as a basis for our ethical theory can never be more than a tentative list,
one always open to possible revision. The same is true also about the
axioms we use in decision theory and in game theory. Should the axioms
of my ethical theory turn out to possess morally unacceptable practical
implications, contrary to my expectations, then I must be always willing to
revise my axioms - in the same way as I must not hesitate to revise my
decision-theoretical or game-theoretical axioms if they turn out, unex-
pectedly, to have counter-common-sensical practical implications. Yet,
as long as I feel that my present ethical, decision-theoretical, and game-
theoretical axioms do express my normative beliefs in a satisfactory
manner, there cannot be any valid philosophical objection to my use of
these axioms as criteria for evaluating ethical, decision-theoretical, and
game-theoretical situations.
RULE UTILITARIANISM AND DECISION THEORY 5
2. THE PROBLEM OF DEFINING 'SOCIAL UTILITY'
In any utilitarian theory, maximization of 'social utility' (or of the total

amount of 'good' in our social environment) plays a fundamental role.
Yet, this 'social utility' has been defined by different utilitarians in
different ways. The classics of utilitarianism used a hedonistic definition:
they considered social utility to be the total amount of pleasure -less the
total amount of pain - if each instance of pleasure and of pain is properly
weighted according to its duration, intensity, and similar characteristics.
In contrast, Moore (1903) proposed an ideal-utilitarian definition, which
would measure social utility by the total amount of 'mental states of
intrinsic worth'.
Both definitions gave rise to serious difficulties. The hedonistic defini-
tion was based on a now completely obsolete hedonistic psychology,
which assumed that human actions were always motivated by seeking
pleasure and avoiding pain, as if people could not be motivated by a
desire for money, social status, success, knowledge, or by a genuine
concern for the interests of other people - regardless of the possible
pleasures they mayor may not expect to derive from attainment of their
objectives. On the other hand, Moore's ideal utilitarianism assumed that
'mental states of intrinsic worth' differed from other mental states in
having some special 'nonnatural qualities' - a metaphysical theory most
of us find hard to accept (and would find even harder to support by
credible arguments even if we were willing to accept it).
Yet, as I have argued in a paper already quoted (Harsanyi, 1958,
Section 7), we can easily avoid the difficulties associated with either of
these two theories if we follow the economists in defining social utility in
terms of the preferences (and, therefore, the utility functions) of the
individual members of society. This approach I will call preference
utilitarianism.
This approach can be justified by the biblical- as well as Kantian-
principle that we should treat other people in the same way as we want to be
treated by them. For how do we want to be treated by other people? To
this question the only answer true without qualification - because it is a
tautologically true answer - is that we want to be treated in accordance
with our own wants and preferences. Therefore, unless there are strong
reasons to the contrary, our basic moral duty is to treat other people in
6 JOHN C. HARSANYI
accordance with their own wants and preferences. This means that we
should help them to obtain pleasure or to avoid pain, or to attain 'mental
states of intrinsic worth', or to achieve any other objective, only as far as
they want to achieve this objective, and only because they want to achieve
it. We should help them to attain what they want, rather than what we
might want for them, or what we might think to be 'good' for them.
How can the different individuals' - often strongly conflicting-
preferences be used for defining one consistent concept of social utility?
Some time ago, I have proposed the following decision-theoretical model
for this purpose: Suppose that a given individual expresses his personal
preference between two alternative social policies, two alternative
institutional frameworks, or two alternative codes of human behavior,
etc. Under what conditions can we say that his judgment of preference
expresses a moral value judgment? Clearly, we can say this only if he
chooses between the two alternatives, not in terms of his personal
interests or the interests of his close associates, but rather in terms of
some impersonal and impartial criteria. Yet, this requirement of imper-
sonality and impartiality would always be satisfied if he had to choose
between the two alternatives without knowing - or at least by voluntarily
disregarding - what his own personal SOLa. position would be in the
resulting social system. More specifically, these requirements would
be satisfied if he had to choose between the two alternatives on the
assumption that he had the same probability of occupying any of the
existing social positions, from the very highest to the very lowest. (This
model I shall call the equiprobabi/ity model of moral value
judgments.)
According to modern decision theory, a rational individual placed in
this hypothetical choice situation would always choose the alternative
yielding him the higher expected utility - which, under this model, would
mean choosing the alternative yielding the higher average utility level to
the individual members of society. Thus, under this model, making a
moral value judgment involves trying to maximize the arithmetic mean of
all individual utilities. Therefore, social utility - i.e., the quantity to be
maximized in moral value judgments - must be defined as the arithmetic
mean of all individual utilities (Harsanyi, 1953, and 1955).
This conclusion is at variance with the classical utilitarian tradition,
which defined social utility, not as the arithmetic mean, but rather as the
sum, of individual utilities. Actually, the two definitions are mathemati-

cally equivalent if the number of individuals making up the society is
assumed to be constant. But if this number is assumed to be a variable (as
it will be, e.g., in analysing the problem of optimal population policies),
then the two definitions will have quite different policy implications and,
in my opinion, the definition relying on the arithmetic mean of individual
utilities will always yield much more reasonable results.
Of course, the arithmetic mean (or the sum) of individual utilities will
have no clear mathematical meaning unless we can make interpersonal
comparisons of utility. For a discussion of how this problem of interper-
sonal utility comparisons can be resolved within the conceptual
framework of preference utilitarianism, see Harsanyi (1955, Section V).
3. SOME QUALIFICATIONS TO PREFERENCE UTILITARIANISM
Common sense distinguishes between sensible preferences (sensible

wants) and foolish preferences (foolish wants). It would be absurd for any
ethical theory to disregard this distinction: nobody can seriously assert
that we are just as much duty-bound to help other people to satisfy their
utterly foolish preferences as we are duty-bound to help them to satisfy
their very sensible ones.
Both hedonistic utilitarianism and ideal utilitarianism can easily
accommodate this distinction. They can simply say that sensible prefer-
ences are preferences directed toward objects having a real capacity of
producing pleasure, or of producing 'mental states of intrinsic worth',
whereas foolish preferences are preferences directed toward objects
lacking this capacity. But it may appear that, once we make the various
individuals' personal preferences our final criterion of social utility, this
distinction will be lost.
In actual fact, this distinction can be very well preserved without
reference to any standard other than each individual's own personal
attitudes. It is, of course, well known that a person's preferences may be
distorted by factual errors, ignorance, careless thinking, rash judgments,
or strong emotions hindering rational choice, etc. Therefore, we may
distinguish between a person's explicit preferences, i.e., his preferences as
they actually are, possibly distorted by factual and logical errors - and his
'true' preferences, i.e., his preferences as they would be under 'ideal
8 JOHN C. HARSANYI
conditions' and, in particular, after careful reflection and in possession of

all the relevant information. In order to exclude the influence of irrational
preferences, all we have to do is to define social utility in terms of the
various individuals' 'true' preferences, rather than in terms of their
explicit preferences.
Indeed, in my opinion, we have to add a further qualification to the
preference-utilitarian approach. We have to disregard, not only prefer-
ences distorted by factual or logical errors, but also preferences based on
clearly antisocial attitudes, such as sadism, resentment, or malice. I
cannot see how it could be my moral duty in any way to help anybody to
satisfy his sadistic or resentful or malicious preferences. But, if we decide
to exclude antisocial preferences from our concept of social utility, then
we have to find a clear theoretical criterion for identifying such prefer-
ences, which raises philosophical problems of some difficulty. But it is
beyond the scope of this paper to discuss these problems.
4. RULE UTILITARIANISM
At Jeast on the face of it, utilitarianism is a very attractive ethical theory

intellectually, and also from a practical point of view. It proposes to
explain our multifarious and seemingly logically rather disconnected
moral value judgments in terms of one fairly simple and readily under-
standable moral postulate, that of maximizing social utility. In principle at
least, it also offers a conceptually clear practical criterion for resolving our
real-life moral perplexities: it tells us what to do when two or more, prima
facie equally compelling, moral rules seem to impose mutually conflicting
moral obligations upon us. It even tells us how to choose between two
alternative comprehensive moral codes, say, between the traditional
mores of our society or of our narrower social group, and any alternative
moral code we may wish to consider for possible adoption.
Yet, as many philosophers have argued, utilitarianism, at least under
one of its possible interpretations, would achieve these apparent intellec-
tual and practical advantages at intolerably high moral costs. Tradition-
ally, utilitarianism has been usually interpreted as act utilitarianism,
which holds that the utilitarian criterion should always be applied directly
to individual acts. Thus, always that particular action will be morally right
which here and now seems to yield the highest social utility. (Actually, it is
somewhat controversial whether John Stuart Mill and some other classics
of utilitarianism were in fact act utilitarians, or rule utilitarians.} But act
utilitarianism seems to have many practical implications inconsistent with
some of our most firmly held moral convictions, such as the belief that
considerations of social expediency cannot simply override the demands
of elementary justice, and cannot justify infringements upon fundamental
rights of other people.
For example, according to our common-sense morality, we should
keep our promises, except if this would impose disproportion ally great
hardships on us or on some other people. But act utilitarianism seems to
imply that we should a/ways break our promises whenever this will have
better, even if only slightly better, direct social consequences than
keeping our promises would.
Likewise, according to common-sense morality, in other than
emergency situations, we should refrain from taking other people's
property without their consent (or without a lawful transfer of ownershi~
in some other way). But act utilitarianism seems to imply that, whenever
we feel we have a somewhat stronger need for a given object than the
rightful owner has, then we are morally permitted to take possession of it
without any further ceremony.
Indeed, act utilitarianism seems to have much more sinister implica-
tions. According to commonsense morality, we should not take the life of
another person, except in self-defense, or in a just war, or in carrying out a
lawful death sentence. But act utilitarianism seems to imply that it is in
many cases morally permissible - and, in fact, it is our moral duty - to kill
one innocent man if this is the only way of preventing the murder of two
or more innocent individuals. More generally, act utilitarianism has to
deny the principle, very basic to our common-sense morality, that our
moral duty to refrain from highly unjust actions (such as a killing of
innocent people) normally takes absolute precedence over our moral
duty to prevent other people from committing such unjust actions. (Cf.
Williams, 1973, Section 3.)
To be sure, act utilitarians have argued that act utilitarianism does not
really have these undesirable implications, if proper attention is paid to
the socially detrimental effects that such actions as promise breaking,
taking other people's property without their consent and, in particular, a
killing of an innocent person, will have on people's mutual trust and on
10 JOHN C. HARSANYI
their propensity to obey customary moral rules. But this argument is

rather unconvincing. One act of promise breaking, or stealing, or even of
murder, will seldom have a significant effect on people's mutual trust in
general (though it may very well have a significant effect on people's trust
in the person who has actually engaged in promise breaking, in stealing,
or in murder). Nor is it likely to have any sizeable effect on the general
propensity to obey customary moral rules. Indeed, if these acts are
committed in complete secrecy, then all negative effects of this kind will
be totally absent; but this does not make secret acts of this kind morally
permissible.
In view of the difficulties associated with act utilitarianism, the
economist Harrod (1936) proposed a revised form of utilitarianism, now
often called rule utilitarianism. (The terms 'act utilitarianism' and 'rule
utilitarianism' themselves were introduced by Brandt (1959, pp. 380 and
396).) Harrod suggested that the utilitarian criterion should be applied in
the first instance, not to each individual act, but rather to the moral rule
governing this act (and. to the general social practice that would result
from common conformity to the relevant rule).
Thus, an individual act should be considered to be morally right if it
conforms to the correct moral rule applying to this type of situation-
regardless of whether it is the act that will or will not yield the highest
possible social utility on this particular occasion. On the other hand, the
correct moral rule should be defined as that particular rule of behavior
that would yield the highest possible social utility in the long run if it were
followed by everybody in this type of situation.
For example, in most cases it will be our moral duty to keep our
promise ev~n if breaking it would yield a higher social utility than keeping
it would on that particular occasion - because in the long run society will
be better off if people can confidently expect that promises will be kept in
all but some rather special cases. (But even the question of what excep-
tions should be made to the general rule of promise keeping must be
decided by asking what particular set of exceptions would maximize
social utility in the long run - on the assumption that everybody would
know what these permitted exceptions were.)
Likewise, except for certain emergency situations, it is our moral duty
not to steal, even if stealing would increase the social utility produced by
us on that particular occasion - because in the long run society will be
better off if people can confidently expect that private property will be
respected except in certain emergency situations. Again, it is our moral
duty not to take the lives of innocent people, even in order to achieve
some very noble objectives - because in the long run society will be better
off if innocent people need not fear being murdered for the purpose of
achieving some very noble objectives. (It is bad enough that many
societies cannot ensure reasonable safety from murder by criminals; but
at least they should ensure safety from murder by people guided by the
highest motives, and acting in the very name of morality.)
The emergence of rule utilitarianism has given a new turn to the debate
about the value of utilitarianism as a moral theory. If rule utilitarianism
can really avoid the undesirable implications of act utilitarianism, then it
may be possible after all to retain the intellectual and the practical
advantages that utilitarianism seems to provide, without being forced to
give up some of our deepest moral convictions and embrace a thoroughly
distasteful super-Macchiavellistic morality. But, of course, rule
utilitarianism cannot possibly avoid these undesirable implications unless
it has a genuinely different logical content from act utilitarianism.
Two distinguished philosophers, Brandt (1963) and Lyons (1965),

have published 'proofs' purporting to show that rule utilitarianism is in
actual fact logically equivalent to act utilitarianism in its practical implica-
tions. Very soon thereafter, Gibbard (1965) and Ezorsky (1968) have
pointed out that this equivalence thesis is demonstrably false, and that the
proposed 'proofs' lack logical validity. But, surprisingly enough, many
philosophers discussing the subject still quote Brandt's and Lyons's
equivalence thesis with approval, as if Gibbard and Ezorsky had never
written.
I now propose to investigate what light, if any, the modelling tech-
niques and the other analytical tools of decision theory (and of game-
theory) can shed on this equivalence thesis. I will try to show that, if the
utilitarian moral decision problem is correctly modelled, then it becomes
immediately obvious that rule' utilitarianism and act utilitarianism are
very far from being logically equivalent; but it becomes equally obvious
that this non-equivalence is primarily due to quite different considera-
tions from those which have been adduced in this connection in most of
the literature.
12 JOHN C. HARSANYI
5. A MODEL FOR THE UTILITARIAN MORAL DECISION

PROBLEM
By a moral decision problem I mean the problem of deciding what actions

are morally right in a given situation, or class of situations.
Our model will consist of a finite number of moral agents, each of them
having a specified utility function, 2 and having the ability to choose among
a finite number of possible actions at any given time. Each agent can find
himself in anyone of a finite number of different situations.
The actions of each agent are governed by a strategy, which is a
mathematical function assigning one specific action to each possible
situation - subject to the restriction that two different situations between
which the agent cannot distinguish on the basis of the information
available to him, must always have the same action assigned to them.
In our formal model, the mathematical concept of a strategy will
completely replace the concept of a moral rule (or of a moral code,
defined as a comprehensive set of moral rules). In a mathematical analysis
of our model, this approach will have some technical advantages. But its
purely philosophical advantages are no less important. It shows that, in
describing the behavior required by our moral standards, there is a viable
and indeed, in my opinion, clearly superior alternative to the rather
clumsy legalistic language traditionally used by moral philosophers, and
involving such notions as 'general rules', 'exceptions' to these general
rules, 'second-order rules' specifying priorities among the first-order
rules, etc.
Suppose the purpose of our model is to decide what actions are morally
right for a particular moral agent A in a given class, C, of possible
situations. Then, this agent A will be called the decision maker.
Moreover, agent A himself, as well as all other moral agents who are or
will be in a situation belonging to class C, will be called the primary agents.
All moral agents whose interests are directly or indirectly affected by
what the primary agents do in situations of class C, will be called
secondary agents. All moral agents who are neither primary or secondary
will be called tertiary. (Of course, the classes of primary and of secondary
agents will often overlap.)
I will also distinguish between flexible agents and rigid agents. The
former are agents whose strategies will be determined within our model
by application of the appropriate utilitarian criteria; whereas the ll!ttet

are agents whose strategies will be regarded as being given. Any
nonutilitarian agent must always be classified as a rigid agent: this will
include agents whose strategies are determined by nonmoral considera-
tions (e.g., by self-interest), or by moral considerations of a nonutilitarian
type (e.g., by traditional morality), or by some mixture of the two.
On the other hand, the treatment of the utilitarian agents will vary,
depending on whether we are dealing with a rule utilitarian or an act
utilitarian moral decision problem. Act utilitarianism asks each utilitarian
agent to try to maximize social utility, on the assumption that the
strategies of all other agents are given. Therefore, in considering an act
utilitarian decision problem, the decision maker himself will be the only
flexible agent, and all other agents, including all other utilitarian agents,
will have to be treated as rigid agents. In contrast, rule utilitarianism asks
all utilitarian agents together to maximize social utility, on the assumption
that all of them will use the same strategy. Therefore, in considering a
rule utilitarian moral decision problem, all utilitarian agents must be
treated as flexible agents. 3 , 4
Another important difference between the act utilitarian and the rule
utilitarian approaches is this. In computing the social utility produced by
any given strategy (T, an act utilitarian decision maker must restrict his
attention to the direct causal consequences that would result from his
own adoption of this strategy (T.
In contrast, a rule utilitarian decision maker will have to compute the
social utility of a given strategy (T on the assumptions that
(a) All utilitarian agents and, in particular, all utilitarian primary
agents, will use the same strategy (T. (This assnmption has already been
mentioned in discussing the choice of flexible agents.) Moreover:
(b) All agents, whether utilitarian or not, and, in particular, all
secondary agents will know, and will act on the knowledge, that these
primary agents will use strategy (T.
Assumption (a) follows from the very definition of rule utilitarianism.
On the other hand, assumption (b) follows from the fact that, by solving
the appropriate maximization problem, any agent can compute the
optimal strategy (T maximizing social utility according to the rule
utilitarian criterion. (This argument has to be restated in a somewhat
more complicated form if there are more strategies than one, maximizing
14 JOHN C. HARSANYI
social utility. But I will restrict my analysis to the case where the social
utility maximizing strategy is unique.)
Assumption (a) implies that a rule utilitarian decision maker must
consider, not only the causal consequences of his adoption of a given
strategy, but also the causal consequences of all utilitarian primary
agents' adoption of this strategy. On the other hand, assumption (b)
implies that he has to consider, not only the causal consequences of
adopting this strategy, but also the noncausallogical implications of its
adoption as optimal strategy.
Assumption (a) gives rise to what I will call the coordination effect: as a
result of this assumption, as we will see, in many situations, rule
utilitarianism is in a better position than act utilitarianism is to coordinate
the primary agents' strategies in a socially desirable manner.
Assumption (b) gives rise to what I will call the expectation effect and
the incentive effect. By the expectation effect I mean the effect that the
adoption of any given strategy will have on the secondary agents'
expectations, on their very ability to form definite expectations, and on
their feelings of confidence and security. By the incentive effect, I mean
the effect that the adoption of any given strategy will have on the
secondary agents' incentives to engage in various types of socially benefi-
cial behavior.
I find it rather surprising that, in discussing the practical implications of
rule utilitarianism and act utilitarianism, and in comparing the implica-
tions of these two theories, most of the philosophical literature has
focussed on the coordination effect, with an almost complete neglect of
the expectation and the incentive effects - even though the latter two
effects actually playa much more fundamental role than the coordination
effect does in determining the moral significance of each version of
utili tarian theory.
6. AN EXAMPLE TO ILLUSTRATE THE EXPECTATION AND THE

INCENTIVE EFFECTS
The basic objection to act utilitarianism has always been that it cannot
come to grips with the great moral importance most of us assign to justice,
and to respect for the basic rights of other people. Rule utilitarianism was
proposed as a supposedly superior alternative to act utilitarianism,
because it was assumed that it would not be subject to this objection. Yet,
if the only difference between the two theories were in terms of the
coordination effect, then rule utilitarianism would be in no better position
than act utilitarianism is to accommodate our moral attitudes toward
justice and the rights of other people. If rule utilitarianism is to have any
advantage in this respect, then this advantage can be based only on the
expectation and the incentive effects.
Suppose we want to decide to what extent it is the moral duty of any
agent A to keep a promise he made to another agent B. Clearly, for the
purposes of this problem, the primary agents are A himself, as well as all
other agents who made promises to other people. On the other hand, the
agents to whom promises were made are secondary agents.
Will the two versions of utilitarianism reach different conclusions about
the conditions under which promises ought to be kept? Surely, if they are
to reach different conclusions at all, this will have nothing to do with the
coordination effect. Admittedly, we do sometimes make promises which
can be fulfilled only by our undertaking coordinated efforts with other
people. But the moral problem posed by promise making would not
essentially change if we never made promises that could be fulfilled only
by such coordinated activities, so that the possibility of a coordination
effect (i.e., of coordination with other people who have promises to fulfill)
would not even arise.
In contrast, the problem of promise keeping does give rise to very
important expectation and incentive effects. If the secondary agents knew
that the primary agents had adopted a strategy permitting many easy
exceptions to promise keeping, then they would have much less ability to
form definite expectations about these primary agents' future behavior,
and in general would feel less confident and less secure about the future.
They would also have much less incentive to plan their future activities
on the expectation that promises made to them would be kept (e.g., that
their friends would actually turn up at the places and times they had
promised to). Similarly, they would have much less incentive to perform
useful services for other people on the mere basis of promised future
rewards, without any immediate compensation, etc.
Whereas a rule utilitarian decision maker will take full account of such
expectation and incentive effects in evaluating any particular strategy, an
act utilitarian decision maker will be precluded by his ethical theory from
16 JOHN C. HARSANYI
doing so. Of course, also an act utilitarian decision maker will have to
consider the unfavorable causal consequences of any individual act of
promise breaking, including the effects that such an act will have on other
people's expectations and incentives. But, barring some very special
situations, the causal consequences of one isolated act of promise break-
ing will be very, very small, because people will not infer - and cannot
rationally infer - from one such act that promise breaking has suddenly
become a general practice in their society.
In contrast, rule utilitarianism will evaluate any strategy prescribing
low standards of reliability in keeping promises, precisely on the assump-
tion that, if this strategy were in fact the optimal rule utilitarian strategy,
then all interested parties would know that this strategy would represent
the general practice in matters of promise keeping. (To repeat, within rule
utilitarian theory, the assumption that people would know what the
strategy about promise keeping was, is not a causal postulate about
physical transmission of information from some agents to some other
agents, but rather is a quasi-logical postulate about the nature of optimal
strategies, and about free access of information to all agents concerning
the nature of these optimal strategies.)
7. THREE EXAMPLES TO ILLUSTRATE THE

COORDINATION EFFECT
To illustrate the coordination effect, I will now consider to what extent we

have a moral duty to vote in an important election deciding the fate of a
socially very desirable policy measure M.. when voting involves some
minor inconvenience. (I will assume that the only purpose of voting is to
ensure adoption of the desired measure; but that there is no advantage in
getting the measure adopted by a larger than the required majority; and
that, if the measure is defeated, then it does not matter whether it is
defeated by a large or by a small margin.)
Case 1: All n voters are known to favor measure M But M will be
actually adopted only if all n voters go to the polls and vote for it.
In this case, rule utilitarianism will obviously require that all voters
should vote for the measure. In contrast, act utilitarianism will suggest
that each voter should vote only if he expects all the (n -1) other voters to
vote; otherwise, he should not vote.
I will describe any given outcome as an equilibrium outcome if:

(A) All agents follow an optimal strategy (as defined by their own
ethical theory) in terms of their expectations about the other agents'
strategies; and if at the same time
(B) The expectations of each agent about the other agents' strategies
fully agree with the latter's actual strategies.
Under. this terminology, in Case 1, if all agents are rule utilitarians, then
the only equilibrium outcome will be voting by all n agents. In contrast, if
all agents are act utilitarians, then there will be two possible equilibrium
outcomes, viz. voting by everybody, and voting by nobody.
Case 2: 50,000 voters are known to favor measure M, but only 40,000
votes are needed for passing it. (For example, a simple majority is needed
for passage, and it is known that exactly 39,999 negative votes will be
cast.) Mixed strategies are not possible. (Moreover, each supporter of the
measure must make an independent decision about voting or not voting,
without being able to observe how many other supporters have voted or
plan to vote.)
In this case, a rule utilitarian decision maker can choose only between
two joint strategies: either all 50,000 supporters of the measure should
vote, or none of them should. The social optimum of only 40,000
of them voting is not achievable by means of rule utilitarian joint
strategies. Consequently, rule utilitarianism will recommend that all
supporters should vote (since this will be better than if none of them
did).
On the other hand, an act utilitarian agent will vote only if he thinks
that exactly 39,999 other agents will cast an affirmative vote. If he expects
this number to be higher or lower, then he will not vote. This, of course,
means that he is very unlikely to vote.
In Case 2, if all agents are rule utilitarians, then the only equilibrium
outcome will be voting by all 50,000 supporters of the measure. In
contrast, if all agents are act utilitarians, then in theory there will be two
classes of equilibrium outcomes:
(a) In Class 1, there will be only one outcome, viz. no voting by any
supporter of the measure.
(b) In Class 2, there will be a very large number of possible outcomes,
viz. all outcomes where exactly 40,000 supporters of the measure vote
whereas 10,000 supporters refrain from voting. (There will be as many
18 JOHN C. HARSANYI
different outcomes in this class as there are ways of selecting 40,000

elements from a set of 50,000.)
Obviously, it is very unlikely that any equilibrium outcome of Qass 2
should actually occur since it would require a very improbable coinci-
dence. The one outcome belonging to Class 1 is much more likely.
Case 3 is like Case 2, except that mixed strategies are permitted. s
Before discussing this case from the viewpoints of the two utilitarian
theories, I will first analyze it as a noncooperative game played by the
50,000 agents supporting measure M, on the assumption that all these
agents are trying to maximize social utility (i.e., all agents have the same
payoff function, equal to social utility). This game will have an enormous
number of equilibrium points, which fall into several classes:
(aa) Class 1 contains only one eqUilibrium point at which all players
use the pure strategy of not voting.
(bb) Qass 2 contains a very large number of different equilibrium
points at which exactly 40,000 players (selected in anyone of the many
possible ways) use the pure strategy of voting, while the remaining 10,000
players use the pure strategy of not voting.
(cc) Class 3 contains the symmetric mixed-strategy equilibrium points,
at which all 50,000 players use the same mixed strategy f.L(p) which
assigns a positive probability p to voting, and a positive probability (1 - p)
to not voting. It can be shown that there are exactly two equilibrium
points of this class. One uses a probability p = p* lying between
40,000/50,000 = 4/5 and one, while the other uses a probability p = p**
lying between zero and 4/5. The former corresponds to a maximum of
the social utility function whereas the latter corresponds to a minimum of
this function. 6 The smaller the utility cost of voting as compared with the
utility of getting measure M adopted the closer will be the probabilities
p* and p** to one and to zero, respectively.
(dd) There are a great many other classes of equilibrium points in
addition to these three classes, but I will not discuss them in detail.
Now, going back to a utilitarian analysis of Case 3, rule utilitarianism in
this case will require all supporters of measure M to adopt the same
mixed strategy f.L(p) = f.L(p*) as used at one of the two equilibrium points
of Qass 3. 7
In contrast, act utilitarianism will suggest much the same behavior as in
Case 2: each agent supporting the measure should vote only if he expects
exactly 39,999 other agents to vote 'yes'. (In case this agent has prob-
abilistic expectations then act utilitarianism suggests a slightly more
complicated rule.)
It is interesting to note that, in case an act utilitarian agent expects all
other agents to follow the mixed strategy jL(P*) prescribed by rule
utilitarianism, he will have no real incentive to join them in using the same
mixed strategy. To be sure, this mixed strategy jL(P*) will be an optimal
act utilitarian strategy for him, but so will he also the pure strategy of
voting (with probability one), the pure strategy of not voting (with
probability one), as well as any possible mixed strategy jL(q), with any
probability number q whatever assigned to voting. This follows from a
well-known property of mixed-strategy equilibrium points. 8
As to equilibrium outcomes, if all agents are rule. utilitarians, then the
only equilibrium outcome will be the situation where all agents use the
mixed strategy jL(P*). In contrast, if all agents are act utilitarians, then
every possible game-theoretical equilibrium point will be an equilibrium
outcome, including the equilibrium point of Class 3, where all agents use
the mixed strategy jL(P*). Yet, 'while this last outcome will be a stal1le
equilibrium outcome in the rule utilitarian case (because the system will
return to it after any disturbance), it will be an unstable equilibrium
outcome in the act utilitarian case. This follows from the fact, already
mentioned, that an act utilitarian agent will have no real incentive to stick
to the strategy jL(p*), even if he expects all his fellow agents supporting
the measure to use this strategy.
Thus, in all three cases, rule utilitarianism and act utilitarianism have
very different moral implications. In each case, there are some moral
strategies approved by one of the two utilitarian theories, yet disapproved
by the other. Indeed, in Case 2, the moral strategies recommended by the
two theories are completely disjoint, with no overlap at all.
8. CONCLUSION
Our analysis clearly shows that rule utilitarianism and act utilitarianism
are ethical theories with very different moral implications. The crucial
difference between them lies in the expectation and the incentive effects
which arise if moral strategies are evaluated in terms of the rule utilitarian
criteria, but which are absent when these strategies are assessed in terms
20 JOHN C. HARSANYI
of act utilitarian criteria. These two effects enable rule utilitarianism to

give much greater weight than act utilitarianism can, to the requirements
of justice and to respect for the basic rights of other people.
For this reason, it is rather surprising that most philosophical discus-
sions about the logical relationship between the two utilitarian theories
focussed only on the coordination effect, with a virtual exclusion of the
expectation and the incentive effects. But, given that the coordination
effect had been the center of attention, it has been interesting for us to
find that, even in terms of this coordination effect alone, rule utilitarian-
ism and act utilitarianism are far from being equivalent, as can be seen
from our analysis of the three voting examples.
These examples also indicate the reason for this nonequivalence. To
be sure, both versions of utilitarianism are trying to maximize the
same quantity, viz. social utility. But this maximization problem is
subject to very different mathematical constraints under the two
theories.
First of all, act utilitarianism requires the decision maker to regard the
other agents' strategies as given, while the rule utilitarian decision maker
is not subject to this constraint. It is because of this difference that, in Case
1, rule utilitarianism will always achieve the unconstrained· (global)
maximum of the social utility function (where everybody votes), whereas
act utilitarianism may get stuck at a constrained (local) maximum (where
nobody votes).
On the other hand, rule utilitarianism imposes the constraint that all
utilitarian agents must follow identical strategies whereas act utilitarian-
ism does not impose such a constraint. This fact explains why, in Case 2,
rule utilitarianism must require all 50,000 supporters of measure M to
vote, even though voting by only 40,000 of them would represent the true
social optimum. In contrast, act utilitarianism does in principle permit
asymmetric equilibrium outcomes, where only 40,000 of the 50,000
supporters vote - even though it does not suggest any practical way of
achieving such an outcome, but rather must rely on a very unlikely chance
coincidence to attain it.
How is it possible that such distinguished philosophers as Brandt and
Lyons completely misjudged the situation? Clearly, the answer is that
they tried to use mere verbal reasoning, without any mathematical
analysis, to decide a philosophical problem whose solution depends on
some well-defined mathematical facts. (Does rule utilitarianism pose a

maximization problem logically equivalent to that posed by act
utilitarianism or not?)
Let me add that the differences in the way the two utilitarian theories
handle the problem of strategy coordination are greater in such abstract
models as we have been considering than they are in the real world-
though, even in the real world, they are not unimportant.
For example, in Cases 2 and 3 we have assumed that, for the purposes
of rule utilitarian analysis, all supporters of measure M are flexible
agents. In the real world, in similar cases, a rule utilitarian decision maker
will often have persuasive empirical information (based on past experi-
ence) that may enable him to predict the behavior of many of his fellow
agents with reasonable certainty. For instance, he may be fairly sure that
(say) 39,000 supporters of the measure will participate in the voting,
regardless of what rule utilitarian theory may tell them to do. This means
that these 39,000 people will have to be classified as rigid agents. Only the
remaining 11,000 supporters of the measure can then be regarded as
being flexible agents, whose strategies are to be determined by rule
utilitarian considerations.
Indeed, it may happen even that our rule utilitarian decision maker will
be fairly sure that (say) 41,000 supporters of the measure will vote. This
of course, will release him, as well as all other utilitarian agents, from any
obligation to vote, since the measure will get enough votes even without
these latter agents' cooperation.
Any increase in the number of rigid agents, obviously, will automati-
cally diminish the differences between the practical implications of rule
utilitarianism and act utilitarianism. (Indeed, in the extreme case where
the number of flexible agents is reduced to one, the two theories do
become logically equivalent, at least as far as the coordination effect is
concerned - but this extreme case is rather rare.)
On the other hand, those differences between the two utilitarian
theories that are connected with the expectation and the incentive effects
do retain their full importance even if we take account of those real-life
complications that we neglected in the abstract models we were
considering.
To conclude, whatever valid objections there mayor may not be to
utilitarian theories, the contention that rule utilitarianism has the same
22 JOHN C. HARSANYI
moral implications as act utilitarianism has is not one of them. This

contention is simply false.
MATHEMATICAL NOTE I
1. The purpose of this Note is to describe the structure of the decision

model suggested in Section 5, in greater mathematical detail. Suppose
our society consists of n moral agents, all of them utilitarians. They will be
called agents 1, 2, ... , n. The decision maker himself will be called agent
i (i = 1, 2, ... , n).
If this agent i is an act utilitarian, then he must try to maximize social
utility, U, on the assumption that he is free to choose his own strategy Si in
any way he desires, but must regard the other (n -1) agents' strategies as
given (as constant). In our terminology, he must treat all other agents as
rigid agents, and treat only himself as a flexible agent. This is so because
he has direct physical control only over his own behavior, and has no
direct control over any other agent's behavior. Let S denote the set of
possible strategies available to any particular agent. (It will be assumed
that all agents have the same set of possible strategies available to them.)
Under these assumptions, agent i can choose his own strategy Si only on
the basis of his expectations about the other agents' strategies. I will
assume that agent i will expect the other agents, viz. agents 1, ... , i-I,
i + 1, ... , n, to use the strategies r}, ... , ri-I> ri+1> ... , rn> respectively.
Accordingly, agent i will have to solve the following mathematical
problem
(A) Maximize U = U(sJ, ... , Si-h Si, Si+1, ... , sn),
subject to the constraints:
(A*) Si E S, and
(A**) Sj = rj = const. for j = 1, ... , i-I, i + 1, ... , n.
In contrast, if agent i is a rule utilitarian, then he must try to maximize
social utility, U, on the assumption that he is free to choose strategies for
all n utilitarian agents simultaneously, subject to the restriction that he
must assign the same strategy to every utilitarian agent. In our terminol-
ogy, this means that he must treat all utilitarian agents, both himself and
the other (n -1) agents, as flexible agents. He has to follow this approach
because, according to rule utilitarian theory, he must choose a specific

moral rule (that particular moral rule whose general observance will
maximize social utility); but this is the same thing as saying that he must
choose a specific strategy for all utilitarian agents, the same strategy for
every agent.
Thus, in the rule utilitarian case, agent i will have to solve the
mathematical problem
(B) Maximize U = U{S1> ... , Sj, ... , sn),

(B*) Si E S, and
(B**) SI = ... = Si = ... = Sn.
2. In the rule utilitarian case, the maximization problem described

under (B) determines all the n utilitarian agents' strategies simultane-
ously and, therefore, provides a full solution to the moral decision
problem.
In contrast, in the act utilitarian case, the maximization problem
described under (A) provides only a partial solution, because it deter-
mines the decision maker's strategy Si only under the assumption that his
expectations about the other (n - 1) agents' behavior - i.e., the strategies
rl> ••• , ri-I> ri+1> ••• ,rn - are given. Accordingly, the model described
under (A) will be called a partial moral decision model for the act
utilitarian case.
In order to obtain a more complete model, we have to specify the
method by which agent i will form his expectations about the other (n -1)
agents' behavior. More particularly, we must make use of the fact that
these agents, also, are assumed to act in accordance with rule utilitarian
theory, in the same way as agent i himself is assumed to do. This means
that in the same way as the strategy Si of agent i must maximize U when
the other (n -1) agents' strategies are held constant, the strategy Sj of any
agent j must likewise maximize U when the strategies of the remaining
(n -1) agents are held constant.
When we apply this requirement to the strategy Si of any given agent i,
we obtain a certain mathematical equation (or possibly a set of two or
more equations). By letting i take all the n possible values i = 1',2, ... , n
24 JOHN C. HARSANYI
consecutively, we will obtain a system of simultaneous equations which

will simultaneously determine the strategies of all n act utilitarian agents,
without making use of any expectations determined from outside of this
system.
It can be shown mathematically that, if the moral agents of our model
are permitted to use mixed strategies, then this system of simultaneous
equations will always have a solution (though it may have more than one
solution). But if they can use only pure strategies, then in many cases our
simultaneous equations may have no solution, which means that no
strategies satisfying the act utilitarian requirements will exist. (This
mathematical fact, of course, is an argument against act utilitarianism as
an ethical theory. But act utilitarianism can overcome this particular
difficulty by permitting the use of mixed strategies.)
In contrast to the partial act utilitarian model discussed in § 1 of this
Note, where requirement (A) was applied only to the strategy Si of one
particular agent (since the other agents' strategies were regarded as
'given'), the present model where this requirement is being simultane-
ously applied to all n agents' strategies will be called a total moral
decision model for the act utilitarian case.
Any strategy Si of a given agent i that satisfies the requirements of the
partial model will be called an optimal act utilitarian strategy - or, more
exactly, a strategy optimal against the expected strategies
Sb ... ,Si-b Si+b ... ,Sn of the other (n -1) agents. On the other hand,
any n-tuple Sl> ... ,Sn of strategies satisfying the requirements of the total
model will be called a set of mutually optimal act utilitarian strategies
against one another. It will also be called an act utilitarian eqUilibrium
outcome.
In the rule utilitarian case, of course, no distinction needs to be made
between partial and total models, since requirement (B) immediately
yields a total model, which simultaneously determines all the n utilitarian
agents' strategies. A strategy Si satisfying requirement (B) will be called
an optimal rule utilitarian strategy. Moreover, any situation in which all n
agents use the same optimal rule utilitarian strategy will be called a rule
utilitarian equilibrium outcome.
3. Moral philosophy must be able to tell us what our moral duties would
be in an ideal society, in which all moral agents always followed morally
optimal strategies. But moral philosophy must be able to tell us also what
our moral duties will be in a far-from-ideal society, in which for various
reasons many moral agents may follow morally more or less objection-
able strategies. Common sense makes us expect that the specific content
of our moral duties will be very different in these two cases. For instance,
it would be foolish to handle our fellow citizens with the same trust and
confidence in a society of crooks as would be appropriate in a society of
very honest individuals. (Surprisingly enough, this obvious truth has been
denied by some philosophers - cf. the debate about 'ideal rule
utilitarianism'.)
Accordingly, we have to ask the question, what happens if, besides the
n utilitarian agents, our society also contains m nonutilitarian agents, i.e.,
agents that the decision maker expects not to use utilitarian strategies -
because he thinks they will follow nonutilitarian moral codes (e.g., moral
codes possibly influenced by irrational social traditions, or by irrational
religious or political ideologies), or perhaps will fail to follow any moral
code whatever. These m non utilitarian agents will be called agents
n + 1, n + 2, ... , n + m. Suppose' the decision maker expects them to
follow some specific nonutilitarian strategies tn+1> tn+2' ... , tn+m, respec-
tively.
To take the rule utilitarian case first, if our decision maker, agent i, is a
rule utilitarian, then he will now regard the strategies of these
nonutilitarian agents as given, i.e., he will have to treat them as rigid
agents. Thus, he will have to solve the following mathematical problem
(B') Maximize U= U(SI>"" S;"'" Sn, Sn+I>"" sn+m),

(B*) Si E S,
(B**) SI = ... = Si = ... = Sn, and
(B***) Sk = tk = const. for k = n + 1, ... , n +m.
In the partial model for the act utilitarian case, agent i must now treat
two classes of agents as rigid agents, regarding their strategies as given.
One class consists of the other (n -1) utilitarian agents j, with j =
1, ... , i -1, i + 1, ... , n. The other class consists of the m non utilitarian
agents k, with k = n + 1, ... , n + m. Thus, he will have to solve the
26 JOHN C. HARSANYI
mathematical problem
(A') Maximize U = U(S1> ... , Si> ... , Sm Sn+1> ... , sn+m)'
(A*) Si eS,
(A**) Sj= rj = const. for j = 1, ... , i -1, i + 1, ... , n; and
(A***) Sk = tk = const. for k = n + 1, ... , n + m.
Once more, we obtain the total model for the act utilitarian case by
requiring that the strategy Si of every utilitarian agent i (i = 1, ... , n)
should satisfy requirement (A') with respect to the strategies Sj of the
other (n -1) utilitarian agents j and also with respect to the strategies Sk
of the m nonutilitarian agents k. Again, these n requirements of form (A')
will yield a system of simultaneous equations, and these equations
together will simultaneously determine the strategies of all n act
utilitarian agents if the strategies Sk of the m nonutilitarian agents are
given. 9
Thus, when the partial model is used, then both the strategies Sj of the
other (n -1) utilitarian agents and the strategies Sk of the m
nonutilitarian agents are assumed to be determined outside the model. In
contrast, when the total model is used, then only the m nonutilitarian
agents' strategies are assumed to be given from the outside while the
strategies of all n utilitarian agents are determined within the model.
MA THEMA TICAL NOTE II
1. In what follows, by 'agent' I will mean an agent supporting measure

M. I will number these agents as 1, ... , n (n = 50,000). The number of
agents needed to vote for M in order to ensure its adoption will be called
m (m = 40,000). The actual number voting for M will be called k.
I will write JLi(Pi) to denote the mixed strategy by agent i which will
make him vote with probability Pi and fail to vote with probability
(1- Pi). U(P1> ... , Pn) will denote the social utility that obtains if agents
1, ... , n use the strategies JLl(Pl), ... , JLn(Pn). Let a be the social utility
of adopting measure M. Let b be the utility cost of voting for each
individual agent. I will assume that the social benefit resulting from
RULE UTILITARIANISM AND DECISION THEOR Y 27
adoption of M is larger than the social cost of voting by m agents (the

number of voters needed for adoption), i.e., that a > mb.
Finally, let P(Pr. ... ,Pn) = Prob (k ~ m) be the probability that M will
be adopted if the n agents use the strategies 1L1(pd, ... ,lLn(Pn). Then, we
can write
(1) U(Pr. ... ,Pn) = aP(pl' ... ,Pn) - b I. Pi'

i
As P is a symmetric and multilinear function of Pr. ... , Pm the same is

true also for U
2. Let G be the game played by the n agents, on the assumption that all
agents have the same payoff function U Let ii denote the strategy
n-tuple ii = (ILl (PI), ... , ILn (Pn))·
LEMMA A. Let ii be an n-tuple of mixed strategies with 0 < Pi < 1 for
i = 1, ... , n. Then, for ii to be an equilibrium point of game G, it is both
sufficient and necessary that
(2) aUjapi =0 for i = 1, ... , n.

Proof. The n-tuple Ii will be an equilibrium point if and only if, for each
player i, the probability Pi chosen by this player maximizes U when the
probabilities p/j f:- i) chosen by all other players j are kept constant.
Equation (2) is a necessary condition for this. But it is also a sufficient
condition since U is a multilinear function. This completes the proof.
3. In the special case where PI = ... = Pn = p, I shall write
(3) yep) = U(p, . .. , p).
In view of (1), V has the mathematical form
(4) V(p) = aR (p) - nbp,
where R(p) = Prob (k ~ m) is now a cumulative binomial probability

function.
Rule utilitarianism requires all agents to maximize Vby an appropriate
choice of p. A necessary condition for this is
(5) dVjdp = O.
28 JOHN C. HARSANYI
LEMMA B.1f all agents i use their optimal strategies ILi(P;) = ILi(P*) as
defined by rule utilitarian criteria, then their strategies will form a
game-theoretical equilibrium point.
Proof. In view of (3), since U is a symmetric function of its arguments,
(5) implies (2). Therefore, by Lemma A, Lemma B follows.
4. I shall now prove:
LEMMA C. The optimal probability P = p* chosen by the rule utilitarian

criteria is unique.
Proof The cumulative binomial distribution function R is a strictly
concave function of P over the interval 1* = [ml n, 1], and is a strictly
convex function of P over the interval 1** = [0, min]. By (4), the same is
true for the function V. It is easy to verify that V will reach its maximum
value in 1*. But, in an interval of strict concavity, any function can have
only one maximum. This establishes the lemma.
LEMMA D. Game G has exactly two symmetric mixed-strategy

equilibrium points. One of them, the equilibrium point IL * =
(ILI(P*), ... ,ILn(P*» corresponds to a global maximum of the function
V, and is identical with the strategy n-tuple prescribed by rule
utilitarian theory; whereas the other, the equilibrium point
IL ** = (ILl(P**), ... , ILn(P**»' corresponds to a global minimum
of V.
Proof. By Lemma A, a mixed-strategy n-tuple ji, is an equilibrium point
if and only if it satisfies (1). On the other hand, if ji, is a symmetrical
strategy n-tuple with PI = ... = Pm then (1) is equivalent to (5). Since V
is strictly convex over the interval 1** and is strictly concave over the
interval J*, it can satisfy (5) at most at one interior point of 1** and at
most at one interior point of J*. Moreover, it is easy to verify by direct
computation that V does not satisfy (5) at the boundary points of these
intervals, i.e., at P = 0, at P = min, and at P = 1. Consequently, (5) is
satisfied only at one interior point P = p** of 1**, where the function V
takes its global minimum value; and at only one interior point of J*,
where the function V takes its global maximum value. Moreover, since
P = p* maximizes V, the strategy chosen by the rule utilitarian criteria is
the strategy IL(P*).
5. The last lemma we need is:
LEMMA E. Let G* be an arbitrary n-person game, where the payoff

functions of players 1, ... , n are Xl>"" X n • Suppose the strategy
n-tuple U = (Ul> ... , lTn) is an equilibrium point in G*, such that player
i's equilibrium strategy lTi is a mixed strategy, assigning the positive
'I"
probabIitles Pi"'"
1
Pi>j ... ,PiJ to h'IS fi rst J pure strategies.
d . . b b'I' . II
aj, ... , al> ... , ai' an asslgmng zero pro a Iities to ate at er pure
1 j J h h
strategies he may have. Let Tj be any other pure or mixed strategy of the
same player, assigning the pOSItive or zero probabilities
q i, ~j, • • • , q Ji to t he same J pure strategies,
1 . . . , '1 . andasslgmng
" zero
probabilities to all other pure strategies of this player. Then, player i can
shift from his equilibrium strategy lTi to this alternative strategy Ti without
changing his payoff, as long as all other players' strategies are kept
constant, i.e., we can write
(6) X* = Xi(lTh •.. ,lTj-h IT;, lTi+h ... ,lTn )
Proof· Let X/(lTl,"" lTi-1> a{,lTj+l>"" lTn)=X{. Then
(7) X*=LP{X{.
Since lTi is player i's equilibrium strategy, we must have

(8) X*~xl, for j= 1, ... ,1.
But (7) and (8) together imply that
(9) X*=X:= '" =X{.
Consequently
(10) X/(lTh ... , lTj-h Tj, lTi+h ••• , lTn) = L q{x{ = X* .

j
This proves the lemma.
University of California, Berkeley

30 JOHN C. HARSANYI
NOTES
1 The author wishes to thank the National Science Foundation for supporting this research
through Grant SOC7 5-161 05 to the Center for Research in Management Science, Univer-
sity of California, Berkeley. He also wishes to thank Professor Wolfgang Stegmiiller for
helpful comments.
2 I will now disregard the problems discussed in Section 3, concerning the use of people's
preferences and utility functions for defining social utility.
3 The distinction between flexible agents and rigid agents is an essential part of our model,
because it determines the mathematical constraints for maximizing social utility (see below).
In contrast, the distinction between primary agents and secondary agents serves only
expository purposes and could be omitted without changing the results of our analysis. It
only helps us in stating these results in a more intuitive way.
4 For a more detailed description of this matheinatical model, see Mathematical Note I at
the end of this paper.
S The theoretical interest possessed by mixed strategies from a utilitarian point of view has
been first pointed out by Smart (1961, p. 43).

6 See Lemma D in Mathematical Note II at the end of this paper.
7 See Lemmas C and D in Mathematical Note II.

S See Lemma E in Mathematical Note II.
9 It is assumed that all utilitarian agents have the same expectations about the nonutilitarian
agents' behavior (Le., all utilitarian agents' expectations correspond to the same expected
strategies tn+ 1 , ••• , tn+m). But it would be easy to restate our model with more general
assumptions about the various agents' expectations. Of course, the resulting model would
be quite a bit more complicated.
REFERENCES
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Brandt, R. B.: 1959, Ethical Theory, Prentice-Hall, Englewood Cliffs, N.J.
Brandt, R. B.: 1963, 'Toward a Credible Form of Utilitarianism', in H. N. Castaneda and G.
Nakhnikian (eds), Morality and the Language of Conduct, Wayne State University Press,
Detroit: pp. 107-143.
Ezorsky, G.: 1968, 'A Defense of Rule Utilitarianism Against David Lyons', Journal of
Philosophy 65, pp. 533-544.
Gert, B.: 1970, The Moral Rules, Harper and Row, New York.
Gibbard, A. F.: 1965, 'Rule Utilitarianism', Australasian Journal of Philosophy 43, pp.
211-220.
Hare, R. M.: 1952, The Language of Morals, Oarendon Press, Oxford.
Hare, R. M.: 1963, Freedom and Reason, Clarendon Press, Oxford.
Harrod, R. F.: 1936, 'Utilitarianism Revised', Mind 45, pp. 137-156.
Harsanyi, 1. C.: 1953, 'Cardinal Utility in Welfare Economics and in the Theory of
Risk-Taking', Journal of Political Economy 61, pp. 434-435.
Harsanyi, J. c.: 1955, 'Cardinal Welfare, Individualistic Ethics, and Interpersonal Com-
parisons of Utility', Journal of Political Economy 63, pp. 309-321.
Harsanyi, J. c.: 1958, 'Ethics in Terms of Hypothetical Imperatives', Mind 47, pp.
305-316.
Harsanyi, J. c.: 1975, 'Advances in Understanding Rational Behavior', Working Paper

CP-366, Centerfor Research in Management Science, University of California, Berkeley.
Hodgson, D. H.: 1967, Consequences of Utilitarianism, Clarendon Press, Oxford.
Hoerster, N.: 1971, Utilitaristische Ethik und Verallgemeinerung, Karl Alber, Freiburg and
Miinchen.
Lyons, D.: 1965, Forms and Limits of Utilitarianism, Clarendon Press, Oxford.
Moore, G. E.: 1903, Principia Ethica, Cambridge University Press, Cambridge, England.
Narveson, J.: 1967, Morality and Utility, Johns Hopkins Press, Baltimore, Maryland.
Rawls, 1.: 1955, 'Two Concepts of Rules', Philosophical Review 64, pp. 3-32.
Smart, J. J. c.: 1956, 'Extreme and Restricted Utilitarianism', Philosophical Quarterly 6,
pp.344-354.
Smart, 1. J. c.: 1961, An Outline of a System of Utilitarian Ethics, Melbourne University
Press, Melbourne, Australia.
Smart, 1. J. C. and B. Williams: 1973, Utilitarianism - for and against, Cambridge Univer-
sity Press, Cambridge, England.
Stout, A. K.: 1954, 'But Suppose Everyone Did the Same', Australasian Journal of
Philosophy 32, pp. 1-29.
Williams, B.: 1973. See Smart and Williams (1973).
WERNER LEINFELLNER
MARX AND THE UTILITY APPROACH

TO THE ETHICAL FOUNDATION
OF MICROECONOMICS
1. MARX' ETHICAL FOUNDATIONS OF MICROECONOMICS
Ethical foundations of collective choice theory and of game (utility)

theory have been recently discussed by Arrow, Harsanyi, Fleming,
Sen, Nash, et al. [1]. In this article it will be shown that Marx
established, in the Capital, similar ethical foundations of current mi-
croeconomics. Marx' foundation will be treated in Chapter 1; and the
different approach of today in Chapter 2. Finally, in Chapter 3, the
common features of each approach will be used as a general epitheory
for ethical foundations of economic and social theory.
Marx was possessed by the revolutionary idea of founding a new and
better human society. Communism and dialectical materialism were
only propagandistic labels for Marx' desire to be not only the re-
volutionary overthrower of the old capitalistic society, but the builder
of the new and better society of tomorrow based on ethical principles
of production.
Society as a superstructure is based, according to Marx' materialistic
views, on its substructure: the economy, which is rooted in the market
structure or microeconomics. Marx was convinced by his own empirical
experience that the Smith-Ricardo theory of a market was not only
wrong but immoral; and, because of its unjust and immoral character it
would necessarily lead to alienation and social revolution. In anticipa-
tion of the coming revolution, Marx prepared his own substructure
model of a micro economy based on the ethical principles of labor and
labor values.
The basic key to understanding Marx' new foundation was the
materialistic idea that society, to exist, has to be based on the creation
of goods necessary for its life and societal subsistence or, simply put,
on production. But, this production had to be ethically based. Marx'
formulation will be explained by using a Kuhnian paradigm: the labor
value paradigm. I will explicate this paradigm later, which stresses
33
Hans W. Gottinger and Werner Leinfellner (eds.), Decision Theory and Social Ethics. Issues in Social Choice, 33-58.
Copyright © 1978 by D. Reidel Publishing Company, Dordrecht, Holland. All Rights Reserued.
34 WERNER LEINFELLNER
from the beginning the independence of societal, economic, and cul-

tural values of the market. In Marx' labor value system it cannot be the
market nor the preferences (values in use according to Marx' terminol-
ogy) which create values. It can only be active labor. Marx regarded
economics, as did his predecessors, as the discipline dealing with values
based on men's ability to create these values by working. Working is
not only the creation of material goods, but it is also the creation of
our cultural world, and has to be regarded as the basis of our societal
life. I want to explicate this labor paradigm which, according to Marx,
should guarantee a better and ethical society.
1.1. Explication of the Labor Value Paradigm

1.1.1. (Principle of labor.) Labor (working or production) is the crea-
tion of goods and also the creation of values by human beings for the
'necessary' needs of the society. Labor is also the appropriation of the
world, the changing of the face of the world by human labor and is in
essence the embodiment of man's force of life in goods.
1.1.2. (Ethical justification of labor.) Labor and the amount of labor
time put into the creation of any goods is therefore nothing other than
fractions of human life incorporated in the newly produced goods and
fractions of the life of the individual workers, consumed in the produc-
tion and creation of goods.
1.1.3. (Equality principle of life.) All human beings are equal with
respect to their life and with respect to fractions of their life.
1.1.4. The creation of goods out of (valueless) raw materials, accord-
ing to Marx, increases their value. Only human labor increases value
(Marx foundation of values on abstract labor). And there is no increase
of values other than that produced by labor.
1.1.5. Any violation of the condition 1-4 leads to a conflict between
the individual and his society as a whole, which will cause alienation of
the worker resulting finally in revolution.
1.1.6. An ethically better society can be defined as a less alienated
society, i.e., a society showing few conflicts between the individual and
the society as a whole.
It is exactly this paradigm which sets Marx in direct conflict with the
Smith-Ricardo microeconomics which is based on preference values, a
MARX AND THE APPROACH TO MICROECONOMICS 35
completely different value foundation. We will see that the different

value systems lead finally to different ethical foundations of micro- and
macroeconomic theories in Marx and in the capitalistic system.
This labor paradigm of Marx has been discussed elsewhere in more
detail by the author [2] but we want to quote some of Marx' views in
support of this thesis 1.1.1-1.1.6. Marx agrees with Locke's and
Smith's [3] definition of the value in use (VU), as the natural worth that
goods may have for us when we use them, which is actually a
preference value in our modern sense, but he opposes vigorously that
the value in use should be dependent on the situation in the market, for
example, on supply and demand. In Smith's and Ricardo's mic-
roeconomics (see model (K, 1), 2.1), it is the market which may increase
(or decrease) the values of goo'ds even without any equivalent increase
of embodied labor. Marx opposes this, because it would devaluate
hUman labor and lead unavoidably to inequality of labor and to
alienation; i.e., for Marx, values cannot be influenced by fluctuating
prices on the market for ethical reasons. Labor values, according to
Marx, should be defined and fixed by the society with respect to the
social necessity of labor, and society has to guarantee, by active
regulation and control, that these labor values should never be in-
fluenced at all by changes in wages and prices in the market. He
defines values according to the labor value paradigm [4]:
"All that these things tell us is that human labor power has been expanded in their
production, that human labor is embodied in them. When looked at as crystals of this
social substance, common to them all, they are-values" [5].
The value commodity is therefore "the embodiment of one idealistic

social substance, viz. human labor". In contrast to Marx' abstract labor
values, our preference values in present utility theory are represented
preferences, obtained by value- or utility-functions (see the model
(K', 1'),2.2) modified by the supply and demand function as well as the
cost functions of a market under uncertainty and risk as expressed by
Axioms A2' and A3'. All of these functions determine the prices on
the market. But this cannot occur on a market where the ethically
founded abstract labor value is the standard and supply and demand is
not. Therefore the utility theoretical foundation, the self-regulating
free market system and Marx' labor value theory of a controlled market
system are two different foundations of economics, each of them
possessing its own ethical foundation [6].
Marx regards his labor theory of values as an objective ethical value

theory (as pointed out by Becker [7]) which cannot be dependent on
subjective demands and egotistic wishes without causing unavoidable
conflicts of individual and collective interests. But how does Marx
explain prices of goods on the market and how are his 'values in use'
related to the objective abstract labor values?
In the first two chapters of the Capital, Marx rejects the preferential
theory of values in favor of his objective and abstract ethical labor
value theory. Marx' rejection is of a dialectic nature: The preferential
theory is a first step to determine values, but this first step is only the
thesis which is negated by the antitheses-which is the labor value [7].
Exchange values are the dialectic synthesis of both, because only in the
moment of exchange can labor values be compared. This amounts to
the introduction of an order concept for values in use, exchange-, and
labor values by means of the relation 'at least higher in value','>,,-', and
by means of the relation '~', which means 'equivalent in value' (see
2.3). But, according to Marx, in any exchange situation, we never
compare the commodities A and B, which would lead to a fetishism of
goods. We compare only their abstract ethical labor values.
Marx' value equivalence compares values in use on the left side with
abstract labor values on the right side at the moment of exchange on
the market:
VU=LV
where the value in use is the variable value and the labor value the
equivalent or constant value [8]. In the Capital, for example, value in use
as relative value = labor value, or in abstract form: x commodities of
A = Y commodities of B, or in concrete form: 20 yards of linen = 1
coat, or 20 yards of linen = 2 ounces of gold or money [9].
The carrier of the value is the coat, the linen, and the gold; the
medium of comparison is the exchange value, the material standard of
comparison is gold or money [10,11] but the ethical standard unit "is the
unit of labor time embodied in the produced commodity" which is
identical with a quantum of the laborer's life energy or life [12].
It is important for Marx' ethical foundation of microeconomics that
B or the commodity B which serves as the carrier of the equivalent
value at the moment of exchange "figures as the materialization of
human labor" according to the Marxian paradigm of labor. The
equivalent value is abstract labor value, which exists always only in the
form of concrete labor, i.e., the time of production of a coat, etc.,
embodied as value, in the commodity. This value can be finally
converted into conventionally standardized money which again serves
only as the arbitrarily chosen value-carrier and equivalent. Thus labor
value is from this ethical point of view nothing other than an equival-
ent fraction of the laborers' lifetime consumed for manufacturing a
unit of goods. Astonishingly enough the problem of ethical foundation
of labor values seemed to be solved for Marx, without explaining how
interpersonal comparison of labor values could be established, for ex-
ample, for capitalists of big business earning a thousand times more than a
worker or for skilled and unskilled work. It seemed for Marx that equal
distribution of labor time and equal income (wages) would solve all
social problems. But it turned out that both distributions, the distribu-
tion of labor time and the distribution of wages (income, profit) are
'ethically' independent from each other. A society may introduce the
same labor time for each individual by determining the necessary
amount of labor for the whole society and divide it equally amongst
the workers, if the goal of the society in question is well established
and fixed. But then a specialist's work, since it may be more necessary
for the society has to be evaluated higher than an unspecialized work.
Then some kind of meritocracy has to be established by some kind of
'secondary evaluation', fixing the relation betw:een labor time of an
unskilled worker and labor time of a skilled worker by a standard of a
merit system. The equivalent between 'a capitalist's hour' or an 'Ein-
stein hour' and a worker's hour or 'layman's hour' apparently has to be
fixed by the meritorious standard with respect to the equality of work
done by the workers and with respect to achieving a self-imposed goal
of the society. (Here we have to get acquainted with the idea that
contradictions caused by reintroduction of inequality do not matter in
dialectic systems since they are allowed. Marx' first utopian solution has
been simply that each hour of work should be equivalent to any other
hour, regardless of the quality of the performed labor.) But this leads,
of course, to a devaluation of specialization, absolutely necessary for
the society, and generally to a devaluation of training and education.
Therefore in the Gothaer program Marx has proposed to evaluate the
specialists' work by a kind of 'secondary evaluation' by introducing
meritorious standards with respect to the products of labor. The Xn
(goods), produced by the specialized worker i are of higher value for
the society than the Xm (goods) produced by the unspecialized worker

j; therefore the worker's i working time ti may be less, i.e., fewer
hours than the worker's j working time ti , if the product of time and
the value of the produced goods is equal for all workers (i, j, k). But for
such a secondary meritorious evaluation the amount of necessary work
for the society has to be defined to yield a just ratio between the two
qualities of work. This idea has been taken up by Skinner in his Walden
II utopian society [13]. Firstly there are no 'capitalists' in Walden
II, and secondly the comparison between skilled and unskilled quality
of work is solved by a board of managers by mutual agreement. With
respect to Marx' ethically and conventionally founded labor values this
will certainly re-establish alienation, if we try to introduce inequality of
labor by a similar meritorious standardization. Because principally with
respect to one hour of the worker's lifetime all human beings are equal
and they should be equally compensated by the society. We run here
into ethical conflicts between the value of one individual's hour as a
fraction of his lifetime seen from the point of view of labor-equality,
and the value (of the quality) of one individual's hour for the society
willing to pay more rewarding compensations (wages) to the more
qualified individual. But according to Skinner, in all societies,
whether capitalistic profits are abolished or not, labor time and wages
are equalized or not, the extra merit for specialized work is a very
strong positive reinforcement to raise the quality of work [14]. Especially
'socialistic' compensations such as free education, free medicare, free
social welfare, free housing, etc. are hidden compensations for better
quality of work. The richer and more affluent the society is, and the
more ambitious their goals, the more merit compensations should be
available and should be distributed. If socialization makes any sense,
and if it tends towards equal wages, equal labor time, it has to
compensate this equalization by an 'inequal' merit system such as free
education for all who specialize. According to democratically elected
plans the merit system should increase the cultural, scientific, artistic
potency of the whole society by merit-contributions to the individuals.
We see here clearly that the application of equality with respect to
labor time results easily in an equal distribution of labor time, but
equal distribution of income for a sufficient social and economic
subsistence level of the individuals has to be complemented by a
'cultural merit system' which finally should result in an increase of
knowledge, science and technology in such a way that all are better off.
Therefore societal progress is another principle or ideal which we need

here. The Marxian labor paradigm, which initiates such a solution has as
one of its consequences abolishment of the (game theoretical) charac-
ter of the market under risk and uncertainty and the rejection of the
self-regulating supply and demand mechanism (the so called free
market). But in this case, an ideal of human progress has to be
defined to justify planned production, fixed goals of societal develop-
ment and meritorious evaluations of the quality of labor with respect
to the satisfactory fulfillment of self-imposed goals. Then and only
then can a democratic control be imposed by some kind of planning
authority on the life of such a society.
2. FORMAL RECONSTRUCTION OF MARX' LABOR VALUE THEORY
2.1. Any formalization and axiomatization of Marx' labor theory of

values has to express the following characteristic properties, which
Marx would have demanded:
2.2.1. Labor values and exchange values are systems of ordering and
comparing products or goods by means of the relations 'at least as
great in value as' symbolized by '»--' and 'equivalent in value' sym-
bolized by '~'. Values express and compare the amount of individual
labor put into the production of goods [15].
2.2.2. Labor values and exchange values are order equivalent at least
for the moment of exchange of goods on the market (L V ~ EV).
2.2.3. Labor values and exchange values cannot depend on value in
use, or preferential values, therefore the following dependency holds:
LV~EV~ vu.
2.2.4. Interpersonal comparison of labor values and establishment of
an interpersonal standard unit of labor time or labor value has to be
achieved by Marx' ethical principle of equality (E) of life and fractions
of life, which the laborer puts into the production (creation) of new
goods. (Ethical equivalence condition.)
2.2.5. Labor can be conceived as a function 1, which replaces our
utility-function u and assigns abstract labor-values to goods (Xi> Xi' Xk)
on the market.
2.2.6. Exchange on the market can equally well be formulated as a
function, m, which assigns exchange values to goods on the market, a
function which is basically the monetary value function 10 Marx'

system.
2.3. The structure of the labor value theory LV=df(X, W;?--,~, e) is

an order structure if the following conditions are fulfilled:
2.3.1. ~ is reflective and transitive or a quasiordering relation.
2.3.2. V* is a set of equivalence sets in V.
2.3.3. 1 is a real-valued, continuous mapping function, whose domain
is the elements of the set X: Xi> Xj' Xk E X and whose values are real
valued numbers and abstract labor values.
2.3.4. m is a real valued, continuous mapping function, whose domain

is the goods or commodities on the market X, elements of the set X, Xi'
Xj' Xk E X and whose values are real valued numbers or money, i.e.,
standardized labor values.
2.3.5. Ethical equivalence condition: i = j or the labor values for
worker i and worker j are interpsersonally exchangeable, i.e.:
We obtain two solutions, the utopian version of the equation with ti = tj

and a more socialistic solution, Marx' formulation of the 'Gothaer'
program with ti(x n ) = tj(x m ). The first version means that the hour of a
specialist's work is equal to the hour of the layman's work and is rather
utopian. The second version states that only the products of the value
of working time and the value of the products created, should be
equal: ti(x n ) = tj(xm ). It means that less working time of a specialist: ti,
'times' a greater value of his products: (x n ), should always be equal to
more working time of a layman 'times' less value of his products of
labor, (xm).
2.4. The structure of the Marxian value in use theory

VU=df(X, U;~,~) is an order structure if the following conditions
are fulfilled:
2.4.1. ~ is a reflective and transitive or a quasiordering relation.
2.4.2. U* is the set of equivalence sets in U.
2.4.3. U is a one-one mapping function, whose domain is the objects

Xj, Xj' Xk E X and whose values are values in use Uj, Uj' Uk E U.
2.4. >"'- 'at least as good as' is called a weak preference, it can be
expressed in terms of a strict preference in the following way:
2.4.1. xj>-xj = xj >"- Xj & - (x j>"- Xj).
2.4.2. Xj - Xj = Xj>"'- Xj & xj >"'- Xj.
We have introduced a weak ordinal scale of values in use, which can be
expressed in terms of preferences. Now we are able to compare, in a
simple way, different values in use in the sense of the first chapters of
the Capital. It is clear that Marx' exchange values are nothing else than
standardized abstract labor values, therefore:
LV~EV
holds. Equally well, we may conclude that for tj = tj and for n = m or

n¢m
LV~EV~VU
or
lj(xn) = lj(xm) ~ m(xn) = m(xm) ~ u(xn) - u(xm)
Ij(xn) > lj(xm) ~ m(xn) > m(xm) ~ u(xn)>,,- u(xm).
2.5. Conclusions
It is clear that Marx has either confused (as Gibbins assumes [15])
throughout the Capital the exchange value with prices, because they
have similar order structure, but are completely different with respect
to their origin, or Marx wanted to eliminate the price function f, in
order to make exchange prices and values in use dependent on the
labor values. Prices are normally defined by the price function f in any
oligopoly (see the model 2.1):
where f is a continuously decreasing function, in contrast to the supply

function. Prices are market dependent and are in fact a function of the
supply and demand behavior of all participants on the market and they
fluctuate according to the demand and supply situation on the market.
If, for example, someone buys 100 pocket computers and stores them
at home, the computers will not change in value since 'laborless'
changes of values are forbidden for ethical reasons in Marx' labor
theory of values. Since prices are dependent on the market, Marx has
no other choice than to stabilize exchange values and equalize ex-
change prices and labor values. The abrupt introduction of the labor
theory into the Capital has been done solely for the purpose of an
ethical foundation of economics, especially microeconomics. It was
Marx' conviction that this was achieved for all future societies by the
labor theory of values. The labor theory of values depends in part
completely on the paradigm of labor and the 'equality of labor'
principle.
We get therefore
LV ~ BV ---+ UV for t; = tj (utopian solution),
provided LV is ethically justified. This means, for example, that the
personal use, the personal demands and needs of the consumer, should
be equal or equalized according to the overall needs of the society. If
this is done, the wages and distributions of all wealth, income, etc.,
should be equal too. This is the consequence of Marx' ethicizing
microeconomy. But any principle which permits one to equate t;(xn) =
tj(xm ) has to be established empirically by some kind of a fortiori
'Walden' controlling and planning board with authority to perform the
solution. Thus the concept of conflict replaces Marx' concept of
alienation by defining open conflicts as alienating factors for individu-
als and societies as a whole. There are many kinds of conflicts which
increase individual estrangement such as the rational and irrational,
non-ethical and ethical conflicts. We will call a conflict rational if it can
be described linguistically and if we possess theoretical methods
(theories) of solving the conflict. But individual, personal, economic,
and political conflicts may easily turn into ethical conflicts if and only if
they become conflicts of individual versus collective interests. Rational,
non-ethical conflicts in game and decision theories are caused by
competing and conflicting individual strifes to maximize each indi-
vidual's utility at the cost of the other's utility. But in the case of
individual interests versus common welfare we will need new addi-
tional criteria: altruistic principles to neutralize the egotistic maximes,
for finding an ethical solution. We will take these altruistic criteria and
principles, such as justice, equality, liberty, freedom from coercion or
non-dictatorship, from our cultural background knowledge and/or
philosophy. In any rational decision theory, which deals with non-
ethical conflicts of individual interests versus competitive interests,
where the conflict is caused by competitive individual interests, or by
conflicts of individual versus group, or group versus group interests, we
do not need, in most of the cases, principles, only a readiness for
compromise between or a rational insight into 'meritorious evaluation'.
For example, the paradoxical situation, in which two hours of a
specialist's work equal one hour of a layman's work needs a justifica-
tion, understood and approved by all, in order to be an ethical
solution. The amount of socially necessary labor has to be fixed
technocratically and conventionally or by some kind of social contract
or open agreement of all. Determination and computation of the
socially necessary amount of labor and the labor time equivalence
leads to a centralized, controlled and planned economy. But such a
society would not be dictatorial, in a strict sense, if the planning
authorities (the board) are elected by democratic elections and justify
their decisions in a form open to all. Plans and planning authorities can
be replaced at any time by general elections. Such a system comes
close to a socialistic form of government. It is obvious that Marx'
ethical foundation introduces a minimum of working time but has
nevertheless to restrict the freedom of the members by prescribing
labor time equivalences and merits for cultural and scientific progress.
Labor times, wages (income) for maintaining the social and economic
subsistence of all should be equally distributed. The merit system for
cultural, artistic, scientific etc. progress is not equally distributed. The
weights have to be fixed according to an ethically based key or
standard [1.6].
Summary. Marx' ethical foundation of microeconomics can be ex-
tended to macroeconomics. A Marxian model of macroeconomics,
hopefully free of alienation and based on the strict or the wider ethical
labor equivalence, puts the following future conditions on the free
market of today and production of goods by industries. There is a
general condition:
All kinds of regulations and planning interference with societal life have to be done
according to the principle of social (technological, scientific, socio-political, and
environmental-biological) progress, to eliminate alienation in the form of alienating

ethical conflicts. The principle states in its simple form that any planning interference
(regulation, control, etc.) of the society has to be done in an open and democratic way,
for example by majority vote. It has to increase in the shortest way possible, the
individual welfare of each single individual of the society as well as it has to increase the
welfare of the society as a whole, or it has, at least, to increase the welfare of only one
level of the society without decreasing the other level, if and only if both agree.
2.5.1. Creation (production) of goods, capital goods and commodities

have to be planned, controlled and regulated by the government (or an
equivalent authority) which determines the amount of all goods to be
produced solely according to the needs of the individuals or the total
needs of the society. This authority has to fix the necessary needs of
the society and has to establish equal distribution of labor and income
to maintain a socially tolerable subsistence of all individuals. It has to
establish a merit system for cultural, artistic, scientific and technological
progress.
2.5.2. In each industry one and only one method, namely the best
method of production for all firms should be used. (Abolishment of
competition [17].)
2.5.3. Each industry has to produce only one kind of output without
any byproducts. (Better control of a competition-free economy.)
2.5.4. There are no primary factors of production other than labor,
and labor time. The individual amount of income and labor has to be
determined by the socially necessary labor plus the meritorious key of
distribution of income for specialized and non-specialized labor. (Ethi-
cal equivalence condition.)
2.5.5. All capital goods, means of productions, and factories, instru-
ments and tools, etc. should have the same life span (unity period of
use) which will be fixed by the planning authorities. (Prevention of
unnecessary competition.)
2.5.6. All commodities and goods of the same type should be pro-
duced in the same period of production. (Convention about production
units.)
2.5.7. Each production process is of input-output type, in which inputs
are made at the beginning and outputs at the end of a period, and
labor is used only once in each period. These conditions would change
our competitive macro- and microeconomic system into a planned and

controlled economy, they would introduce an ethical 'distributive'
standard which is either an equally weighted or a hierarchically weigh-
ted unit of payment for wages. (Merit system for progress.)
2.5.8. Technological progress can only be developed openly under the
controlling authority, and if achieved, has to be introduced for all
producing industries at the same time.
3. ETHICAL NEUTRALITY OF MICROECONOMICS
The Marxian foundation of microeconomics abandoned the 'free mar-

ket' because it seemed to be unethical for Marx. Contrary to Marx'
ethical devaluation of the capitalistic market, we want to stress the
opinion of most of the economists, namely that the market is neither
ethical nor unethical, but rather ethically neutral. It is the game-
theoretical character which can make the market ethical or unethical in
its nature. The 'capitalistic' ethical foundation which developed as
some kind of counter-strategy to Marx' ethical foundation tries to
preserve this ethical neutrality of the market as a game in spite of the
fact that on the one side economic values (prices) are market depend-
ent, on the other side manipulable by the strategies or moves of the
participants of a market. The game theoretical character stems directly
from the paradigm of the game, which is a twofold belief. Firstly, that
the market is regarded by the participants, sellers, buyers, producers,
workers as a game under uncertainty and risk where the participants
nb n2, ... , 11n EN on the market behave like players whose goal is to
win egotistically. Secondly, if, for example, they have the possibility,
they will maximize their utility, but if not, or if it should be necessary,
they can 'ethicize' the game by making the rules more altruistic or
ethically better-basic message of Rule-Utilitarianism. This is done by
imposing altruistic principles in a symbolic paradigmatic form of instruc-
tions on the rules of the game which change the game and/or make the
rules better. The market is therefore the place which gives the indi-
vidual, the player, a fair chance to maximize his own utility egotistically
or to turn out a more altruistic, more ethical version of the game. It
is conceivable that the paradigm of a game has been developed as a
kind of counter-strategy to Marx' revolutionary rejection of the free
market. Games have the tremendous advantage that they incorporate
easily the dynamism or the self-regulating character of the market,

enforced by the interdependency of supply and demand (A4 and AS).
We may assume that even a Keynesian interventionism does not
change the gamelike character of microeconomy but is simply an
imposition of new rules in crises situations. We want to define the
following game structure of the market by means of two models. The
first is a model of a Smith-Ricardo-Shubik market theory and shows
the objective dynamic interdependency of values W, such as costs
(wages), prices, profits on the supply and demand structure and their
interdependence with the cost and production strategy. The Basic Mic-
roeconomic Structure is a game-theoretical framework. (K, 1) will be
the basic model of a microeconomic theory, K its kernel, I its
empirical interpretation. (K', I') will be its submodel or utility sub-
structure. (K,1) is usually called a Smith-Ricardo-Shubik game-
theoretical model of a market.
3.1. K =df (N, X, W; C, f) if the following conditions are fulfilled:

AI: N-:I 0 and finite, ni, ni , nk E N; N I, N 2, . .. , Nn c N.
A2: X-:I 0 and finite; Xi> Xi' Xk E X. There are upper bounds for
the subsets of X, Ii, Ii' Ik> i.e., 0 < Xi ,,;;;; Ii and 0 < Xi ,,;;;; Ii.
A3: W-:I 0 and finite, Wi> Wi' Wk E Wand WI, W 2, ••. , W k C W.
A4: Ci> ci are monotonically increasing utility functions, Ci> ~
their corresponding values, so that Ci = e;(Xi), ~ = c/~); c,
~cW.
AS: P-:I 0 and finite, Pi' ~ E P; pc W; f is a monotonically de-

creasing function, so that Pi = X;{(Xi + Xi)' Pi = xl(xi + Xi)·
Both functions C and f are twice differentiable functions. (If
K' c K then differentiability f-allows from the conditions
(Axioms A'I-A'8 of K').)
6: Winnings or profits are given by the following functions:
Wi (.x;, Xi) = XJ(Xi + Xi) - C(Xi) and ~(x;, Xi) = xd(xi + Xi )-
C(Xi )·
3.2. I = the empirical interpretation of K; N are all participants on a

market; N I , N2 are classes; X all goods produced; W all values
(utilities, money, prices); C the cost or supply function; f the demand

function; P the prices; Wi the profits as strategies of the participants.
3.3 The second model (K',1') defines the structure of a subtheory

of (K, 1), called utility theory under uncertainty and risk and shows the
subjective dependence of values on random events, (el, e2,' .. , en C
E), Axiom 2, and on risk.
3.4. K' =df(W, E, X; >, =, p, u) if the following conditions are fulfilled:
A'l: (W; >, =) is quasiordered.

A'2: (E, F; p) be an additive finite probability space, the a/s are
the probabilities: P(Ei)'
A'3: If Wk> Wj > W then there exists an a, so that Wj = (awi ,
(l-a)wk)'
A'4: If (awi> (l-a)wj)= m then m+q =(a(wi+q), (l-a)(wj+q)).
A'5: If Wi = Wj then (aw;, (1- a)wj = «1- a)wj, awi ).
A'6: If Wi ~ Wj then (awi, (1- a)wj) ~ (/3Wi (1- f3)Wj) ~ a ~ /3.
A'7: For all w's and aiwi's exist minimal and maximal elements.
A'8: Composed probabilities are reducible to simple ones.
3.5. Consequences and their interpretations.
T'l: If P(X;, Xj) or P(xi , X;) or [(X;, Xj) then Wi> Wi or Wi> Wi
or Wi = Wi' the so called representation theorem of utility
theory.
T'2: u(al WI, ••• , an Wn ) = u(xl)p(EI ) + ... + U(x,.)p(1;.).
T'3: U(X) = s(x')+q, s>O. Linear transformation of interval util-
ity scale.
There is no doubt that utility theory is based on gambling, and is an

offspring of the game paradigm. To demonstrate that: risk and uncer-
tainty can be regarded as gambling against uncertainty p(e) of random
events e. For such a purpose we have to reformulate A'3:
Strategy 1 aWi (1- a)wk where p(e 1) = a and
Strategy 2 aWi (1- a)wi p(e2) = 1-a.
From (K', 1') we easily obtain the consequence that individual prefer-
ences induce the values, vice versa, or values are isomorphic repre-
sentations of preferences contrary to Marx' assumptions: L V ~
BV ~ VU where we obtain V ~ rJ>i (rJ> = preference system, is equal
to VU). It is well known that Marx rejected both the Smith-Ricardo
structure (K, J) and the dependency of labor values on preferences
under uncertainty and risk (K',1'). His main argument was of an
ethical nature: violation of the labor value paradigm by 'laborless'
increase of values, either by demand and supply or by uncertainty, or
by manipulations of the players, producers, buyers, consumers, profits
is unethical, is dead-labor, stipulating egotistic and individual maximi-
zation, which again leads to alienation. Marx regards (K, 1) and (K', I')
as the real sources of alienation, competition, stress, profit maximiza-
tion, accumulation of capital and 'crises', pauperization of the under-
privileged and unemployed, etc. This becomes even more clear when
we draw the consequences from the axioms of (K, 1).
Under the influence of a strict maxime of individual maximization of
profit, the market immediately assumes, according to Theorem 1, the
features of an unlimited maximization. It becomes an unethical game
simply by increasing production, and monopolization according to T3
turns into competition according to T4 and class struggle between
Capitalists and workers according to T5. These theorems explain why
such a microeconomic system can never be made immune to crises and
alienation. In more detail: T1 explains that if one producer's production
is constant, then the other may maximize his profit by overproduction
without any regards to the consumers. If Xi = constant, then d WJdx i =
0, or if Xi = constant, then d "'j/dxj = O. The interpretation describes a
'Robinson Crusoe economy' or early capitalism. T2: SW;/Sxi dXi +
SWx;/SXj dXj = 0= dWi and S"'j/Sxi dXi + S"'j/SXj dXj = 0= d"'j; inter-
preted it means the end of limitless freedom, growing interdependency of
producers and therefore dependency of each producer's profit on the
other's profit, which was used by Marx to explain the transition
phase of industrialization. It presupposes Pareto Equilibrium (EQ).

T3: W;(~, Xj)+ ~(~, Xj) = max «~ + Xj)f(~ + Xj)-Ci(~)-C(Xj»' Inter-
preted it means monopolization and trust formation as unethical
means of bigger profits of big business, as described by R. Luxemburg.
T4: W+ = max min (W; -~) = min max (Wi - ~). Its interpretation
describes strict competition, fight for the knife between rivaling pro-
ducers. T4: If Nc.nNp=O, then v(Nd+v(Np)=v(N) describes the
class struggle between capitalists and workers (proletarians). T5:
veNd = amin (IN n Npl, IN n Nci) where a is the difference between
wages offered by the laborers and wages the capitalists are willing to
pay in the case of cooperative (union) bargaining. Marx' critic of the
crises theory of capitalistic microeconomics together with his alienation
theory, apparently had a cleansing-ethical impact on microeconomics.
It is certain that only the tendency to avoid social unrest in capitalistic
economy as well as alienation forced capitalism to use the Janus head
of the game paradigm for the present ethical foundations of economics.
Welfare and new welfare economics, the introduction of antitrust laws,
union bargaining, and even Keynes' interventionalism were only a
beginning, which will result finally in the socialistic measures of regula-
tions and control of the 'free market' system, and are the first steps
towards the radical goal of ethicizing economy. Rule utilitarianism
proposed always to introduce fairer and more just social rules into the
game-theoretical framework of a market with the result that games can
be made more ethical. Finally, the impact of new catastrophies, in
addition to the permanent reoccurring crises of capitalism, have pushed
ethical foundations of economic systems even further, i.e., the world-
wide pollution due to technical production, diminishing resources such
as energy. I will not discuss in detail all the different approaches
discussed in this volume which introduce ethical principles into the
game-theoretical framework of decision- and utility theory but want to
give an outline of a general epitheoretic approach to the problem of
ethical foundations of economic and social theories.
4. Is THERE A GENERAL METHOD OF ETHICAL FOUNDATION OF

ECONOMIC (SOCIAL) THEORIES?
Traditional ethics and Marxian labor theory of society have intro-

duced conditions and common methods of 'ethicizing' social theories,
which we want to describe and discuss in this chapter. The first main
points will describe the common conditions for ethicizing, the next will
describe methods for ethical foundations of any social theory insofar

that they are based on decision- or value theoretical frameworks.
The two main conditions are: the pessimistic thesis of man's social
nature and the existence of an ethical conflict. The methodic approach
will describe especially the function of ethical paradigms for solutions
of ethical conflicts and the superimposition of principles (and maximes)
on rational decision theories.
4.1. The Pessimistic Thesis of Man's Social Nature
According to this view, man's first or animalic nature is more or less
egotistical and asocially organized. Man seems to be born as individualist
and is always inclined to follow his maxime of maximizing his indi-
vidual utility as a first hard rule of social behavior. He possesses no
innate social instincts nor hereditary guidelines to reconcile his basic
egotistic demands with the demands of the society as a whole. In spite
of the fact that there are many adherents of the positive thesis, namely
that man is a born ethical and social being, there is agreement that
human beings are only able to live in small communities without social
conflicts. Small communities, families, hordes, where each one knows
his neighbor personally, are no effective preparation to solve the
ethical conflicts of the mass societies of the twentieth century. There-
fore the pessimistic view is that society is simply a Darwinian survival
of the fittest. Therefore the justification of competition is a gamelike
'regulated fight' in the jungle of a mass society. Christianity was the
first attempt to introduce the small community mentality by means of
the symbolic paradigm of friendship to 'love your neighbor as you love
yourself' into the millions of unknown fellow human beings of mass
societies. In spite of the pessimistic thesis that human beings are
asocial, it is man's second nature (his intellect and brain) which
invented culture, art, morality, ethics, religion, and finally science to
overcome social conflicts which man cannot master automatically by
following his nature. The Greek work 'ethics' and the Latin 'moral'
actually mean 'getting accustomed by constant training and learning
rules and patterns for a right and just social behavior'. Ethics conse-
quently means to avoid or solve ethical conflicts which alienate man in
and from his society sooner or later, as Marx has demonstrated very
efficiently. From this point of view, the learning of fairer rules and
patterns of social behavior, by means of the paradigm of a fair game
can also be understood as ethical education and training, if the game is
regarded as disalienating conflict solving, social behavior governed by

ethical rules and established for the purpose of common ethical
decision-making. The game is, from this point of view, like ethics, a
procedure one has to learn. It is a fair game where everybody has the
fair and equal chance to win. But the rules of fair behavior as well as
the principles of justice, equality, and freedom are certainly not rooted
in man's first egotistic nature, but are offsprings of his second nature
imposed by his mind on social conflicts to find fair solutions. From this
point of view theorization or rationalization of conflicts and of a
conflict solution in a game or decision theory is only a continuation of
a trend which began in the dawn of mankind.
4.2. The Ethical Conflict
The first point in trying to define ethical conflicts is that not all conflicts
are ethical conflicts or may turn into an ethical conflict. Quite generally
any conflict consists of open alternatives and the solution is nothing
else than the termination of the alienating conflict by choosing the best
or the optimal alternative with respect to the chances of winning and
loosing. But in any case of conflicts among individual and common
welfare we need the principles as a general guideline to obtain a
solution. If suddenly an ethical conflict should appear, then we need a
superimposition of principles firstly in paradigmatic form and secondly
in theoretical formulation. A rational decision theory may change
quickly into an ethical one, if a value (utility) theory or a game theory
or a theory of collective choice has to settle a given ethical conflict. In
such cases we need the superimposition of principles, which we will call
an ethical foundation. Sen's book: Collective Choice and Social Wel-
fare shows very convincingly how these superimpositions or foundations
can be achieved [18].
Therefore ethical foundations of theories of social sciences are
characterized as follows:
4.2.l. There has to exist a real ethical conflict of individual interests
versus common interests.
4.2.2. There has to exist a method of ethical-conflict-solution consist-
ing of a superimposition of ethical principles on maximes and rational
decision theories. Ethical foundations, or 'ethicizing', of social theories
are therefore applicable to value (utility), game, decision theories and
especially to theories of collective decisions. Marx' ethical foundation

of labor value theory is a special case of the above mentioned ethical
foundation of value theories.
It is clear that Marx' famous class struggle (a conflict of group
interest versus group interests) is therefore not necessarily an ethical
conflict if the society is not a two class society. Ethics, in this proper
sense, has to deal only with solutions of ethical conflicts involving the
whole society. Since this kind of conflict is a social conflict we may
regard social solutions as' instructions to reconcile and overcome con-
flicting individual and collective interests with the goal to terminate the
conflicts, and to make the society as a whole, better. The making of a
better society has to achieve the removal of conflicts as the main
source of alienation and to raise the individual as well as the social
(common) welfare which may be called a generalized strong utilitarian
desiderium. Or we may raise at least one welfare level without de-
creasing any other level. This may be called a generalized weak
utilitarian guideline, which includes in a certain sense Rawls' minimax
rule [19].
4.3. The Influence of Ethical Paradigms on Ethical Solutions
The reason why we introduce Kuhn's concept of a paradigm is that

principles [20], if imposed on decision theories are neither usual deontic
general statements of the form "You are obliged in order to be
just ... fair ... good, to do ... ", nor concepts as in traditional
philosophy, i.e., justice, equality, and liberty. In paradigms ethical
principles are not yet separated from their context (L) and their field
of application (D). They are context-laden and referential expressions
especially in pre scientific ethical paradigms (instructions). Paradigms
solve conflicts by examples for specific cases. As concrete models of
behavior, they help the individual to solve an ethical conflict. They
address each individual personally by the principles used in paradig-
matic symbolic form. Nothing has failed more to explain the function
of ethics, than the unnecessary abstraction of principles to empty
Platonistic tautologies, such as the "Highest good is that which trans-
cends yet includes all the others" or "liberty is a potentiality to act and
not to act". Even the Epicurean formulation that "pleasure is the
highest good" is completely empty of any empirical content. The
principle of equality (E) of labor in Marx' labor paradigm is the

concrete application (superimposition) of equality on microeconomics;
Harsanyi's impersonal paradigm [21] is superimposed on the theory of
choice and indirectly on microeconomic distributions. They finally
result in a different semantics of 'equality' and have led to different
results for microeconomic distribution of wealth and of labor time (see
Chapter 1).
Ethical paradigms, as symbolic instructions, have the tremendous
advantage that they influence even prescientific ethical behavior in a
direct way since they always propose a specific compromise or a
specific equilibrium between the altruistic principles and the egotistic
maximes. Therefore neither egotistic hedonistic maximes satisfying
only the individual's or the group's utility, nor altruistic platonistic or
stoic principles alone can help us to solve an ethical conflict. Rather it
is the concrete instruction of how to use principles versus maximes or
a weighted mixture of both simultaneously. It seems that paradigms
have the function to symbolize conflicts for the purpose of finding an
ethical solution of conflicts. This is the 'educational' function of the
ethical paradigm, which dramatizes the antagonistic human nature by
playing off the altruistic versus the egotistic poles and showing the
solution as a specific compromise, a concrete equilibrium. We may
even regard ethical paradigms as the historical result of hundreds of
years of experience in ethical conflict resolution, as some kind of
historical or genetic 'univerlizability'. Hare's 'univerlizability' [22] pre-
supposes an already explained generation long practice and experience
in ethical conflict solution which results finally in a paradigm which has
become stored in our linguistic memory bank as a helpful device in
solving present and future ethical conflicts. If paradigms and their
mythological symbolic instruction for solutions of ethical conflicts are
really of prescientific origin then we may regard all scientific or
theoretical solutions for ethical conflicts of the twentieth century as
'resolutions' (according to Rapoport). One may even assume that
principles and maximes are the byproduct of the prescientific
'mythological' experience of man in conflict solutions. This has a great
impact on the problem of what these principles and maximes in reality
are. We may reject the platonistic, the conceptualistic as well as the
nominalistic explanations in favor of their linguistic semantic origin, as
'frozen' or 'invariant meaning' of expressions in a certain context (L)
with respect to a certain field of application (D) [23].
The first well known example was Arrow's [24] introduction of an

ethically sound paradigm of democracy, into the theory of collective
choice. From the paradigmatic ideal of a democracy, Arrow condensed
the following principles, which he called conditions: Freedom as free-
dom of choice or unrestricted domain of choice = U, in Sen's notation,
the Pareto principle( = P) as a minimum requirement of an ethically
tolerable amalgamation of individual and collective preferences, the
independence of irrelevant alternatives (f) and freedom of coercion
or non-dictatorship (D). Arrow imposed this set of principles or
democratic conditions: UPID on the axiomatized theory of collective
choice (THeC) and obtained the paradox {( UPID & THCC) ~ D},
which amounts to the contradiction D ~ D. We know today that this
astonishing result was actually a consequence of imposition of ethical
conditions, which were too weak and not specified enough with respect
to their empirical application. It was an important result, because of its
convincing consequences that imposition of stronger conditions or
stronger principles on collective decision theory are necessary.
Harsanyi's impersonality paradigm is a further example of symbolic
persuasion: the individual should slip symbolically into the shoes of
the other individuals to experience equality (E). Only if the individual
can experience by some kind of empathy himself to be in the other's
place, will it eliminate all his private and egotistic individual prefer-
ences and create by doing so, in his mind, something which is called a
social conscience. The paradigm has to work in each individual's mind
and this can only be done in a symbolic act of empathy into the other's
social situation. In a second step Fleming and Harsanyi have for-
malized this paradigm and only the formalized version is imposed on
theory of collective choice. The ethical preference thus obtained must
in a strict and formal way, satisfy the imposition of being impersonal
[25].
Sen's book is actually the first general attempt to found and build up
a theory of collective choice or a theory of society, by imposing a
variety of principles in paradigmatic and formalized version on ax-
iomatized social theories. Rawl's theory of justice is another example,
where the paradigm of a social contract is introduced. A social contract
is not something which happened in 'the shady past', performed by
historic persons called the contractors, it is rather, a symbolic act in our
minds. Thus, we all are possible contractors if we are about to put
ourselves into the original situation and in this original symbolic
situation we can define the leading principles of a just social contract.

It is interesting that Nash was one of the first who used the paradigm
of an impartial hypothetical arbiter in a formal way to solve bargaining
problems. The ideal or paradigm of an arbiter, who represents the
common interests of the individuals is defined by the principles of
equality defined formally as symmetry, independence of irrelevant
alternatives I, and Pareto optimality P [21].
Finally Marx' labor value paradigm, together with his alienation
paradigm, are one of the first historical impositions of an ethical
paradigm on an economic theory. This is discussed in the first chapter
and elsewhere in more historical details by the author [2]. Ethical
paradigms present tried and invariant forms of solutions for western
societies. The principles in these paradigmatic instructions are there-
fore neither of platonistic, nor of external origin, for example, god-
given, neither of nominalistic nor of conceptualistic descendence but
originated from a longstanding successful, possibly very painful,
practice and experience of man with ethical conflicts. The same holds
for all maximes and one may even describe from this point of view the
history of ethics as a process of increasing secularization and de-
mythologizing of these principles. Today principles are as empirical as
maximes. They are in Harsanyi's, Sen's, and Rawl's formulation,
guidelines, and restrictions on the maximes for a certain context, for
example, a theory and a certain field D of application.
With respect to the solution, they all follow the criteria of the
enlightenment, especially Kant's or the utilitarian criterion for a solution.
Kant as well as the utilitarians (Bentham and J. S. Mill) as well as the
majority of the contractarians regard principles and maximes as man-
made, one sided instructions, solely for establishing a compromise or
an equilibrium between both determinants of ethical behavior. Kant's
[26] classical formulation of the criterion is his categorical imperative:
Act so as if your maximes were at the same time general laws (for all)
[26]. The author has shown elsewhere, in more detail, concurring with
Churchman, that this categorical imperative is only an abstract formu-
lation of a stable, but nevertheless dynamic eqUilibrium between man's
egotistic and altruistic poles. It is well known that Kant himself
demonstrated in his famous antinomies that ethics or ethical solutions
can neither be a hedonistic (or Epicureistic) nor a Stoicistic-the latter
fulfils principles out of duty or a 'must'. Therefore Kant regarded the
isolated antagonistic extremes as unsolvable contradictions forming
always an antimony and leading to irreconciliable and alienating

antimonies. But the concrete solution should neither be the identity
between both, rather the hypothetical form of the categorical impera-
tive according to Kant. That means that any balance or equilibrium
between both has to refer to empirical application or to empirical
references (D) and has to belong to the context of an empirical
hypothesis or theory (L) [27].
The utilitarian paradigm proposes, likewise, a dynamic equilibrium
between the individual's and the common welfare and means in its
general form simply to act in such a manner that it will produce the
greatest amount of pleasure and happiness in the world at large or in
Marx' words an alienation free society. In the more socially oriented
form of Bentham and the two Mills [28], it states paradigmatically
that the sum of the individual welfare should be equivalent to the
common welfare or maximization of the individual's preferences or
welfare has to maximize common welfare and vice versa.
The final question to answer would be, which and how many
principles and maximes should be used for solutions of ethical prob-
lems and how many prototypes of solutions do in fact exist? The
answer to the first part of the question is that here, as in all sciences,
there are as many hypotheses as kinds of proposed solutions. They all
deal with specific empirically given ethical conflicts. For example,
Marx' ethical foundation of microeconomics was only a solution for the
interpersonal comparison of labor, whereas Harsanyi's solution offers
only comparison of welfare differences contrary to Rawls' ethical
foundations which offers only level comparability [29], as Sen has
recently shown. There is no all-embracing general method for ethical
conflict solutions, but only specific applications for special empirical
crises, i.e., conflicts. It depends solely on a pragmatical point of view
which ethical conflict is more dangerous and therefore more important
for the society than the others. It is clear that for Marx the ethical
solution of a just distribution of labor time was far more urgent and
dangerous than the distribution problem of income. And maybe today
the ethical problem of a just society is more important than the
neoutilitarian ethical distribution of income and wages. One could
simply say that today, injustice produces far more alienation than any
other ethical conflict and should be solved without delay.
Whereas the number of maximes is limited to two or three: individ-
ual rationality v(i);;:: 0, group rationality v(N1 UNa);;:: v(N1) + v (Na),
as Luce and Raiffa expressed both, and majority voting (MMD) ,

the number of principles is not yet limited. It seems that with new
ethical conflicts, such as pollution or environmental problems or
dwindling resources, new principles will emerge.
There is at last, the problem of relativity of ethical solutions. It is
clear that the eqUilibrium between maximes and principles may shift,
for example, the individuals may sacrifice their lives in case of a war
and on the other hand will not easily give up any increase in their
welfare in affluent societies such as in societies of today. That means
the equilibrium can shift to the left (altruistic side) or to the right
(egotistic side) to maintain conventional contemporary political labels.
Any shift to the right or left then, is simply dependent on the
momentary status of the society, or today, on all societies of the world.
The changes from the equilibrium have to sum up to zero in a long
run, or let us say within three or four generations. The equilibrium is
dynamic in its nature and finally depends on the highest criterion,
namely self -preservation of the whole society or the human race. Thus
the relativity of ethics is only a short time phenomenon, consisting of
deviations from the mean on the difficult way towards a world com-
munity.
University of Nebraska, Department of Philosophy
BIBLIOGRAPHY
[1] Arrow, K., Social Choice and Individual Values, New York, second edition, 1963;
Harsanyi, J. C., Essays on Ethics, Social Behavior, and Scientific Explanation,
Boston, 1976; Sen, A. K., Collective Choice and Social Welfare, London, 1970;
Nash, J. F., 'The Bargaining Problem', Econometrica 18 (1950).
[2] Leinfellner, W., 'Marxian Paradigms versus Microeconomic Structures', forthcom-
ing in R. Cohen and M. Wartofsky (eds.), Proceedings of the Boston ColloqUium for
the Philosophy of Science, Reidel, Boston, 1975-1976.
[3] Smith, A., The Wealth of Nations, The Modern Library, New York, 1937, pp. 28,
33.
[4] Karl Marx is quoted firstly in an English translation in Arabic numbers and secondly
in the German original version (Roman letters), the economic and philosophical
manuscripts of 1844 will be quoted from the edition by Dirk J. Stroik, International
Publishers, New York, Random House 1906. Capital Vol. 1, 2 and 3
will be quoted from the Ch. H. Kerr Company, Chicago, 1925, quoted here as: 1, 2
and 3. The German original edition is the Karl Marx Ausgabe by Hans Joachim
Lieber and Benedikt Kautsky, Cotta Verlag. Stuttgart 1962. I refers to the first
volume of Marx' early writings, IV to the first volume of the Capital and V to the
second and the third volume of the Capital.
[5] Marx, Capital 1 (1,45; 1,7).
[6] Marx, Capital 1 (I, 55; IV, 18).
[7] Becker, W., 'Zur Kritik der Marxschen Wertlehre und ihrer Dialektik', in G. Luhrs,
T. Sarrazin, F. Spreer, and M. Tietzel, (eds.), Kritischer Rationalismus und Sozial-
demokratie, Dietz, Berlin, 1975, pp. 201-213, esp. pp. 209-211.
[8] Marx, Capital 1 (I, 81; IV, 47).
[9] Marx, Capital 1 (I, 75; IV, 41).
[10] Marx, Capital, English edition, pp. 75, 80.
[11] Marx, Capital, English edition, p. 80.
[12] Marx, Capital, English edition, p. 45.
[13] Marx, Capita~ English edition, pp. 52-58, 61-67, 71.
[14] Skinner, B. F., Walden II, Toronto, 21st edition, 1971, pp. 51-66.
[15] See [2] and Gibbins, P., 'Use-Value and Exchange-Value', Theory and Decision 7,
3, 171-180.
[16] See [14], p. 171.
[17] Morishima, M., Marx's Economics, Cambridge, 1973, p. 10.
[18] Sen, A. K., Collective Choice and Social Welfare, San Francisco, 1970; Hanson, B.,
'The Independence Conditions in the Theory of Social Choice', Theory and
Decision 14, I, 24-49.
[19] Rawls, J., A Theory of Justice, Harvard Press, Cambridge, 1971, p.302tf.
[20] Kuhn, T. S., 'Second Thoughts on Paradigms', in F. Suppe (ed.), The Structure of
Scientific Theories, Urbana, 1972, pp. 459-499.
[21] Harsanyi, J. C., Essays on Ethics, Social Behavior, and Scientific Explanation,
Boston, 1976, p. 591.
[22] Hare, R. M., The Language of Morals, Clarendon Press, Oxford, 1952, 2nd edition,
1961, pp. 176-177.
[23] This has been worked out in detail in the following book of the authors Leinfellner,
W., and Leinfellner, E., Ontologie, Systemtheorie und Semantik (in German),
Duncker & Humblot, Berlin, 1977.
[24] Arrow, K., Social Choice and Individual Values, New Haven, 1963, pp. 22-30;
Sen, A. K., Collective Choice and Social Welfare, London, 1970, pp. 41-46.
[25] See [21], p. 711.
[26] Kant, I., Kritik der Praktischen Vemunft, Leipzig 1838, p. 141.
[27] Kant, I., ibidem, p. 2500.
[28] Mill, J. St., Utilitarianism, Warnock and M. Collins (eds.), Fontana, London, p. 33.
[29] Sen, A. K., 'Rawls versus Bentham, An Axiomatic Examination of the Pure
Distribution Problem', Theory and Decision 4, 3/4, 306-308.
MENAHEM E. Y AARI*
ENDOGENOUS CHANGES IN TASTES:

A PHILOSOPHICAL DISCUSSIONt
1. INTRODUCTION
The term 'endogenous changes in tastes' is used by economists to describe

a situation where the act of consumption, in and of itself, induces a change
in the consuming agent's preferences with respect to further consump-
tion. Thus, today's consumption affects tomorrow's tastes which, in turn,
take part in determining tomorrow's consumption. One need not look
very far in order to find instances of this phenomenon. The acquisition of
'a taste for chess' or 'a taste for jazz', situations where a consumer
becomes dependent on a certain commodity, and other manifestations of
habit formation, all these are cases in point. Now, an analogous
phenomenon exists also in the realm of production theory, where it has
been observed that the act of producing sometimes induces, in and of
itself, a change (usually a favorable one) in the subsequent production
technology. As regards production, this phenomenon has received a
considerable amount of attention, mostly under the general title of
'learning by doing'. (See, for example, K. J. Arrow (1962).) In the theory
of the producer, the fact that current actions may affect future production
opportunities raises relatively few methodological or philosophical prob-
lems. On the other hand, in the theory of the consumer, the possibility
that current consumption would affect consumer preferences in the
future gives rise to methodological and philosophical questions, whose
investigation may be of interest in its own right. On the methodological
side, changes in preferences may lead to two kinds of difficulties, both of
them having to do with the fact that consumers' preferences (unlike
producers' technologies) are, in most cases, theoretical constructs not
given to direct empirical observation. The first difficulty lies in the fact
that it is possible to explain almost anything on the hypothesis that
consumers' preferences are subject to change over time. In other words,
the empirical power of discrimination of an economic theory based on a
hypothesis of changing preferences, is likely to be very low. The second
59
60 MEN AHEM E. Y AARI
methodological difficulty which arises as soon as changes in consumers'

preferences are admitted is that, with changing preferences, it may no
longer be possible to explicate the term 'preference' in terms of the
consumer's potential acts of choice, and it may become necessary to rely
instead on an attitudinal or introspective explication. Thus, an economic
theory that sets out to study changes in preferences is immediately in
danger of becoming psychologistic, i.e., of using second-rate psychology
to produce third-rate economics. It should be pointed out that both of
these difficulties arise most acutely when changes in tastes are taken to be
exogenous (that is, when these changes are assumed to come about
without necessarily being attached to past consumption) and less so when
these changes are taken to be endogenous. For certain types of endogen-
ous changes in tastes, an operational definition of the phenomenon can be
provided, which reduces these methodological difficulties to a minimum.
(However, see Section 4 below for a more detailed discussion, especially
of the second difficulty.)
This essay will, for the most part, be concerned with problems of
another variety, arising also in connection with changes in tastes. I have
chosen to refer to these other problems as 'philosophical', in distinction
from the problems described in the previous paragraph, to which I have
assigned the title 'methodological'. In principle, this distinction between
'philosophical' and 'methodological' is of course quite unwarranted. It is
made here only for ease of reference. The word 'methodological' is being
used here as a substitute for the longer phrase 'having to do with the
philosophy of empirical science', whereas the word 'philosophical' is
being used for 'having to do with ethics, social philosophy, and the
philosophical explication of rationality'.
Admitting the possibility, that the act of consumption may induce a
change in the consumer's preferences vis a vis subsequent consumption,
raises two philosophical questions. First, what is the meaning of 'rational
behavior' in such a setting? Second, what measuring-stick can one use, to
evaluate the performance of an economic system, now that consumers'
preferences can no longer be used (because they keep changing) to
construct an unambiguous measure of performance?
The first of these two questions has been studied fairly extensively in
the recent economic literature. (See, for example, Strotz (1956); Pollak
(1968); Peleg and Yaari (1973), and Hammond(1976).) My own reading
ENDOGENOUS CHANGES IN TASTES 61
of this literature has led me to conclude that, in order to resolve the

problem, one must redefine the notion of 'rational behavior' in terms of
some criterion of intertemporal consistency (see Section 5, below) and
then see which inferences can still be obtained, on the basis of this
minimal hypothesis of intertemporal consistency.
The second question posed above has not been discussed systemati-
cally in the literature. However, many authors have used arguments
which appeal to the phenomenon of changes in tastes, in criticizing the
performance of the modern market economy as a framework for social
interaction. The most prevalent argument along these lines is to point to
the widespread use of advertising, and other forms of deliberate manipu-
lation of consumer demand, which are clear instances of induced changes
in consumers' preferences. This observation leads, very forcibly, to the
conclusion that theorems purporting to prove that the market mechanism
provides, in one sense or another, the best feasible way to fulfil consum-
ers' wants, are rather meaningless. What on earth is the merit in establish-
ing a system designed to fulfil consumers' wants, when these wants are
themselves the product of corporate manipulation, through advertising
and other means? Galbraith (1958) and Marcuse (1964) are well known
references on this point. (But see also Koopmans (1957), p. 166.) Now,
changes in tastes brought about by advertising are not endogenous
changes, in the sense of the opening sentence of this essay. Yet, it turns
out that, also in the case of purely endogenous changes in tastes, serious
doubts can be raised as to the merit of a market mechanism, based on free
exchange. Indeed, in this case, the argument is - in my opinion - tighter
and more precise than the arguments usually made in connection with
advertising. Here there is a possibility of developing a positive theory of
behavior, and not just a statement to the effect that some theorem, in
somebody else's theory, is meaningless. From a theory of behavior, one
could hope to deduce specific policy recommendations that would be
designed to correct certain well defined ills. From a statement that a given
theorem, in a given theory, is meaningless or irrelevant, one can only
deduce very general and amorphous recommendations (such as 'scrap
capitalism') which hardly ever provide the policy maker with any guide as
to what to do.
In the coming sections, I shall try to argue that, in situations where
endogenous changes in tastes occur, there exists a prima facie case for
intervention, by society, in the process of trade taking place between

agents, even though participation in this trade process, by all agents, is on
a completely voluntary basis. As in many discussions of intervention by
society in the private affairs of its members, it will be most convenient to
set the stage by means of a certain canonical example (a so-called
paradigm) and to discuss the general problem within the framework
provided by this example. But prior to the presentation of this example, it
seems necessary to digress briefly to consider some of what has been
written recently on the question of intervention by society in processes of
purely voluntary interaction among individuals.
2. COERCION VS. CONSENT: A BRIEF DIGRESSION
Very few contemporary economists - and probably everi fewer contem-

porary philosophers - would be willing to accept Milton Friedman's
(1962) thesis, that a best socio-economic system is one which minimizes
'coercion of man by his fellow man'. Most people would hold that the
absence of coercion is neither a necessary condition nor a sufficient one
for the optimality of a social or an economic organization. The term
'coercion', in this context, is taken to mean the intervention by society, or
by governm~nt, to prevent, restrain, or otherwise modify any actions in
which (in the absence of such intervention) individuals would engage
voluntarily, by exercising their own free will. In other words, a system is
said to involve coercion if it is not based solely upon the voluntary consent
of all participating individuals. Now, there exist many examples of
systems in which consent (i.e., lack of coercion) does not lead to an
optimum of any kind. Most of these examples have to do with external
effects, that is, with situations where the evaluation of the system by an
agent depends not only on the state in which this particulAr agent happens
to be, but also on the states of other agents. Any evaluation of Friedman's
position must, of necessity, come to grips with the question of how
prevalent such external effects might be.
e.
B. Macpherson (1973), in his pointed critique of Friedman's thesis,
contends that consent is not a sufficient test for lack of coercion. On the
other hand, he seems to be willing to grant that, in a simple barter
economy, either with no production at all or with just primitive produc-
tion within the domestic sector, voluntary participation does indeed
imply absence of coercion, leading to an optimal socio-economic organi-

zation. He says (p. 145): "It is indeed clear that in this simple exchange
model, assuming rational maximizing behavior by all hands, every
exchange will benefit both parties, and hence no coercion is involved in
the decision to produce for exchange or in any act of exchange".
Macpherson does not quite go on to say that the absence of such coercion,
in a primitive exchange economy, is proof that laissez-faire is optimal in
such a system. But this concession is implied by the fact that he allows
Friedman to move on, from the simple exchange economy to 'our actual
complex economy' and it is there that his criticism of Friedman is
launched. Well, it seems to me that Macpherson has granted Friedman
too much. It is possible to describe a simple economy of pure exchange,
where everything that takes place is achieved by the purely voluntary
actions of individuals and where, nevertheless, something seems to be
wrong with the outcome of the trade process, and most people would
consider that intervention by someone from outside may in fact be
warranted. If one allows for external effects, then producing examples of
such 'bad' exchange economies is quite straightforward. Indeed, with
external effects, one can easily design a two-person exchange economy
that is equivalent to a generalization of the game known as the prisoners'
dilemma, i.e., an economy in which equilibrium is non-optimal, in the
Pareto sense. But my aim here is to argue that, even in the absence of
external effects between the participating agents, examples of primitive
exchange economies, in which purely voluntary participation leads to a
'bad' outcome, can be given. The essential feature in these examples will
be the phenomenon of endogenous changes in tastes. Section 6, below,
will be devoted to an attempt at exploring the sense in which the outcome
of an exchange process, when agents' tastes are subject to endogenous
change, can be characterized as 'bad'.
Even if I should be successful in demonstrating (in Section 6) that the
outcome of such a voluntary exchange process is liable to be 'bad', it
would still be a long way to a possible conclusion that intervention by
society in this process is warranted. In order to arrive at such a conclusion,
so it seems, one would have to take a position on the many difficult issues
arising in the discourse on the right of society to enforce moral behavior
upon its members. (See, for example, the exchange between Hart (1963)
and Devlin (1965).) Now, the justification of intervention on the grounds
64 MENAHEM E. Y AARI
that external effects exist between individuals may be regarded as the

modern reformulation of John Stuart Mill's libertarian principle. That is,
the term 'external effects' is introduced as a modern explication of Mill's
'harm to others', thereby taking into account the criticism that has been
levelled at Mill, that 'no man is an island'. But, in the voluntary exchange
process (with endogenous changes in tastes) that will be considered in this
essay, all external effects, as usually defined, are ruled out by assumption.
It might appear, therefore, that the only way to argue for intervention in
such an exchange process is to rely on a non-libertarian position,
whether on paternalism! or on an ultimately utilitarian doctrine,
holding moral behavior, in all its aspects, essential for the survival of
society.2 However, the paternalistic and the utilitarian points of view
have in common a serious shortcoming, namely that the bounds which
they impose upon intervention are all too vague. For this reason, an
attempt will be made below, in Section 8, to argue that a case for
intervention in an exchange process, where agents' tastes are subject to
endogenous change, can be made on strictly libertarian grounds. Inter-
vention in such a process is justified, so I shall argue, on the grounds of
what Lord Devlin has termed "protecting the individual from injury,
annoyance, corruption, and exploitation" (see Note 2).
3. TRADERS AND INDIANS; OIL PRODUCERS

AND OIL CONSUMERS
The example, which will provide a framework for the ensuing discussion,
is borrowed from Robert Solow, who likes to use it when discussing free
trade with his students. It goes something like this.
Back in the old days, traders used to go out to the Indians and offer them various goods in
exchange for the furs and other valuables that the Indians had. What the trader would do
was to come to the Indian and offer him cheap whiskey very cheaply. The Indian would
decide how much whiskey he wanted to buy at the proposed terms of trade, and a purely
voluntary transaction would take place. A week later, the trader would once again come to
the Indian and, 10 and behold, the Indian would now be willing to accept more adverse terms
of trade, and to part with more furs in exchange for a unit of additional cheap whiskey. And
so, the process of voluntary exchange would continue, where, in each of the following
weeks, the Indian would be willing to trade his furs for cheap whiskey at a rate of exchange
that was increasingly tilted against him.
We have here a two-person pure exchange economy, in which all
transactions take place on a purely voluntary basis. Yet, we feel that
ENDOGENOUS CHANGES IN TASTES 6S
something is wrong. Somehow, the trader is taking unfair advantage of

the Indian. In order to find out what this element of unfair advantage is,
we must first hasten to emphasize what it is not. First of all, there is the
issue of the trader ruining the Indian's health. For surely, the consump-
tion of cheap whiskey, above a certain minimum, is injurious to health,
and the trade process described above would, no doubt, be accompanied
by a parallel process of disintegration of the Indian's liver. But would the
element of unfair advantage, in our example, disappear if it were the case
that the consumption of cheap whiskey did not affect health in any way? If
that were the case, the example would perhaps appear a little less
infuriating, but the element of unfair advantage would by no means
disappear. Nor would it disappear if we were to neutralize another
element, namely that of the trader causing the India~ to become a loafer
and a bum, and ruining the Indian's 'moral fiber'. Even if it were the case
that drinking whiskey affected neither a person's health nor such things as
his motivation and creativity, even if such were the case, the feeling would
still prevail, that there is something wrong in our trader-Indian exchange
process and that it gives the trader something of an unfair advantage. This
is, of course, a value judgement, which had best be stated most explicitly:
An element of unfair advantage exists in the very use, by the trader, of a
commodity that he possesses, to induce a change in the Indian's prefer-
ences, in a manner designed to tilt the trade process in his favor. In other
words, in an exchange process, between an agent whose tastes are subject
to endogenous change and another agent, whose tastes are stationary,
there will be an opportunity for the agent with stationary tastes to exploit
the changes in the other agent's tastes unfairly, to his own advantage. The
value judgement in th:is last sentence is embodied in the word 'unfairly'.
Note, however, that also without this word, the sentence is far from
meaningless. Its precise meaning will be explored in Section 6, below.
Now, stories about traders and Indians, and about How The West Was
Won, are fine. But such stories do not automatically have the significance
that justifies their use as paradigms in an economic or a philosophical
discussion. I submit, however, that our particular story does have such
significance. The most far reaching contemporary analogy to the trader-
Indian story (some people would say: the most outrageous analogy) is
none other than the world petroleum market, in which oil producers play
the role of the trader and oil consumers play the role of the Indian (and, of
66 MENAHEM E. YAARI
course, oil plays the role of cheap whiskey). Initially, for a certain number
of time periods, it is optimal for the trader to sell whiskey to the Indian at
a ridiculously low price, in order - by the law of demand - to induce the
Indian to buy in large quantities, thereby causing a relatively rapid change
in the Indian's tastes. Then, at a certain point in time, after the Indian has
become sufficiently hooked, it becomes optimal, from the point of view of
the trader, to raise the price of whiskey sky high, and reap the fruits of all
that investment in producing a change in the customer's preferences. The
analogy is, of course, far from complete; but, nevertheless, I find it
reasonably compelling. The explanation which it provides, for the
behavior of oil prices, does not seem to be excessively far-fetched. There
can be no doubt about the change-of-tastes aspect of the availability of
Jarge quantities of oil at very low prices. It was this availability that
permitted the rapid spread of the internal combustion engine and, with it,
the rapid spread of the automobile. The automobile, having become a
popular commodity, then proceeded to produce profound and largely
irreversible changes in habits, in styles of living, and in the structure of
social relationships. The impact, on consumption patterns, of various
petrochemical products (such as plastics) has been nearly as profound as
that of the internal combustion engine. This fact, by an argument to be
presented below, has placed oil producers in a position where they had an
opportunity to exploit the changes in oil consumers' preferences, to their
own advantage. From this, it does not follow, of course, that oil producers
have, in fact, made use of this opportunity (that is, oil producers may not
have acted optimally, given the anticipated reaction of consumers) and,
even if they have in fact done so, it does not necessarily follow that their
practice has been unfair. We cannot deduce an ethical proposition from
the fact that the circumstances exist for it to hold. But the existence of
these circumstances is, in itself, valuable information. It can be used for
explanation in a positive discussion and it can serve as a cue for further
investigation in a normative discussion.
4. ENDOGENOUS CHANGES IN TASTES AND THE CONCEPT OF

RATIONAL BEHAVIOR
Consider, once again, the trader-Indian paradigm of the foregoing Sec-

tion. In what sense is the trader in a position to make use of the changes in
the Indian's preferences to his own advantage? An argument to the effect

that the trader is indeed in a position to do so had better not be based on a
hypothesis of irrationality on the part of the Indian. For it would hardly be
an earthshaki.ng revelation if one were to discover that one agent can
benefit by exploiting the irrational behavior another agent. It would be
more interesting, however, if one could show that, under endogenous
changes in tastes, an element of built-in bias exists in the process, even
when it is postulated that all agents behave rationally. Let us assume that
the Indian is completely aware of all the effects that the consumption of
whiskey will have on his preferences in subsequent periods, and let us
assume, furthermore, that he chooses his transactions with the trader in a
completely rational manner, taking the future fully into account. What I
propose to show is that, under these assumptions, the possibility still
exists that the process of free trade would drive the (perfectly rational)
Indian to a position which would be untenable, by the Indian's own
standards.
It is common in Decision Theory to define rationality (see, for example,
Arrow (1959) and Richter (1971» in the following manner.3 LetA be the
set of all the courses of action open to a decision maker, and let a * be the
course of action actually observed. The set A is often referred to as the
choice set, and a * is then referred to as the chosen element in A 4 The
choice function, call it c, may now be defined by the condition that, for
every choice set A, c(A) is the chosen element a* in A (Obviously, the
function c must satisfy the condition that, for every choice set A,
c(A) E A) The choice function c - or, equivalently, the decision maker-
is said to be rational if there exists a binary relation R, defined on a
universe containing the union of all possible choice sets, such that R is
reflexive, transitive, and connected, and such that, whenever a choice set
A has an R -maximal element, then c (A) is an R -maximal element of A
(Some authors prefer to define rationality without requiring that the
relation R be connected. However, the particular definition given in the
foregoing sentence becomes vacuous when this property is not required.)
According to this definition, a decision making unit is said to be rational if
it always chooses a course of action which is best, relative to some weak
order R. This weak order is then referred to as the unit's preference system
or, more colloquially, as the unit's tastes. Two things should be
emphasized. First, the concept of a preference system is inferred from
68 MENAHEM E. YAARI
observed choices. Second, behavior is defined to be rational if, and only if,
there exists a single (unchanging) preference system such that the unit's
behavior can be characterized as picking a most preferred course of
action, among those available. Thus, according to this definition, the
notion that the unit's preference system changes as the observed course of
action takes place is an instance of irrationality.
We see, then, that in order to build a framework that would account for
changes in tastes and, at the same time, allow behavior to be charac-
terized as rational, we must abandon one of the basic tenets of Decision
Theory. Specifically, we must abandon the stipulation that the concept of
preference is to be inferred from observed choices. It becomes necessary,
instead, to adopt a theory in which preference systems are taken to be
primitive concepts, and to stipulate that observed choices are rational if
they are, in some well defined sense, consistent with these primitive
preference systems. Now, it is quite alright for the term 'preference
system' to be taken as primitive in one's theory. But on the empirical side
- on the side of evidence - if preferences are not inferred from choices,
then there is little that one can do except say that preferences are directly
observable. In other words, the decision analyst is driven to making a
psychological assumption that, in many instances, is simply not borne out
by psychological science. This is precisely where the charge of 'psycho 1-
ogism', which has been mentioned in the Introduction, arises. I do not
have a defense against this charge. That is, I cannot produce for the
reader an empirical history of preferences for any decision making unit,
and it is unlikely, even if I were allowed to interview the Indian (of Section
3) for weeks or months, that I would be able to extract from these
interviews a profile of preference orders that I could then use, in
conjunction with my theory, to predict his purchases of cheap whiskey.
But predicting the Indian's purchases of cheap whiskey or - even more
pretentiously - predicting changes in consumption patterns such as those
brought about by the advent of the internal combustion engine, are not
the object of the present theory. Rather, the object is to show that, even
without direct empirical access to preferences, certain hypotheses on how
these preferences change over time may be helpful both for the under-
standing of the behavior of such variables as oil prices and for the
discussion of such matters as the right of society to intervene in certain
trade processes.
Having made this disclaimer, one can now proceed to propose a

characterization of rational behavior when tastes are changing, in a
framework where 'tastes' (or 'preferences') are introduced as primitives.
5. BEHAVIOR UNDER CHANGING TASTES s
Consider an economic unit ('the Indian') operating in a world where there

are only two commodities, X and Y ('whiskey' and 'furs,).6 The symbols
X, and Y, will be used to denote, respectively, the unit's consumption of X
in period t and the unit's consumption of Y in period t. The unit is
assumed to plan its consumption of both commodities in advance, with a
planning horizon of T periods. Thus, a consumption plan is a 2 T -tuple of
nonnegative real numbers, of the form
We shall assume that the unit's preferences in period t, for t = 1,2, ... , T,
are given by means of a utility function, which will be denoted U,. The
statement that, from the point of view of the unit's tastes in period t, the
consumption plan (XI. YI. ... , Xr, Yr) is preferred to the consumption
plan (x~, Y~, ... ,x~, Y~) is given by the inequality
The changes, which take place over time in the unit's tastes, are sum-
marized by the sequence U I. U2 , ••• ,Ur of utility functions. Our
hypothesis is that these changes in tastes occur as a result of the fact that
the first commodity, X, is what might be called habit forming. That is, at
each moment of time, the greater the quantity of X consumed by the unit
up to the present, the greater is its willingness to give up Y in exchange for
X, in all contracts to be entered into in the present. Thus, in this context,
habit formation means that the unit's subjective rate of e?rchange
between X and Y shifts, in favor of X, as a result of past consumption of
X. None of the other connotations which the term 'habit formation' might
arouse (such as possible injury to health, increasing difficulty in deferring
gratification, etc.) is to be admitted in the present analysis. (This has been
discussed in Section 3.) Because of this, it is possible to characterize the
mechanism that governs changes in tastes in a fairly precise manner.
Assume for convenience, that the utility functions U b ••• , UT are

differentiable. For every pair of integers, rand t, both in the set
n,
{I, ... , define S(r, t} as follows:
S(r, t} =aU,(Xlo Ylo ... ,Xn YT}jaU,(Xb Yb ... ,XT, YT} ,7
ax, ay,
where we assume that the partial derivative appearing in the denominator
is not zero. (In fact, both partial derivatives can be assumed to be
positive.) The quantity S(r, t} is the unit's subjective rate of exchange (the
so-called marginal rate of substitution) for Y in period t in terms of X in
period t, as viewed from the vantage point of the unit's tastes in period r.
In other words, given the consumption plan (Xl, Ylo ... ,XT, YT), the
quantity S(r, t} measures how many furs in period t the Indian would be
willing to give up, in exchange for a unit of whiskey in period t, according
to the system of tastes that prevails in period r. Formally, S(r, t} is defined
n.
for every pair of integers, rand t, in the set {I, ... , It might be argued,
however, thatS(r, t} makes little operational sense when r> t. If r > t,
then, in period r, the opportunity for exchanging X for Y in period t no
longer exists. So, in formulating rules of behavior for an economic unit
whose preferences are described by the utilities Ut. ... , Un it is often
reasonable to impose conditions which make these rules dependent on
S(r, t} only for values of rand t satisfying r ~ t. This can be done, for
example, by a proper choice of utilities (as in Section 6, below).
The hypothesis about the manner in which tastes are changing may now
be written, for example, as follows. For every pair of integers, rand t, in
the set {l, ... ,n, we have
S(r, t} =S(I, t}[1 +I(XI +X2 + ... +X,-l)] ,
where I is a nondecreasing real function satisfyingl(O} =0 (and where, for
r = 1, we define the argument of I in the foregoing formula to be O). The
function I, then, gives the rule by which past consumption of X affects the
present subjective rate of exchange between X and Y. The more of X one
has consumed, cumulatively, in the past, the more willing one is to give up
Y, in exchange for X, in all contracts (for all periods) to be entered into in
the present.
Which courses of action are open to our economic unit? We are
assuming that the unit is fully aware of the preference structure given by
ENDOGENOUS CHANGES IN TASTES 71.
U h ••• , UTand,inparticular, that it is fully awareofthe mannerin which

the consumption of X at any moment of time affects preferences in
subsequent periods. The unit wishes to plan ahead, using all the available
information. So, in period 1, it chooses a consumption plan
(x t y t ... , x}, y}) for all periods. (How this choice is made is yet to be
determined.) In period 2, the consumption that had taken place in period
1, i.e. x ~ and y t is already a matter of record, but the unit is, in principle,
free to deviate from its original plan so far as all other periods are
concerned. In other words, the unit now chooses a new consumption plan
T ,su b'Ject to t he con d'ItIOn
( x 210 Y210 ••• , X 2T, Y2) . that x 21 = X 11 an d Y21 = Y1l' I n
general, for any t in {I, ... , 1}, the unit's action in period t is to pick a
consumption plan (x~, yL ... ,x~, y~), subject to the conditions that
x~= X~-l and y~= y~-1 for all r satisfying r < t. Now, the selected consump-
tion plan, (x~, y~, ... ,x~, y~) , must in the first place be feasible. In order
to define feasibility in the simplest possible way, we shall assume that the
unit is fully informed, both as regards its own endowments and as regards
market conditions (including prices) throughout the future. (Not only
does the Indian know in advance the quantities of furs that he will have in
each period, he also knows in advance what price the trader will charge
for cheap whiskey in each period.) Let Y, be the unit's endowment of the
commodity Y in period t (its endowment of X is assumed to be zero) and
let P, be the market price, in period t, of Y in terms of X (that is, in period
t, one unit of whiskey goes for P, units of furs). From the point of view of
the unit under consideration, both (Yh"" YT) and (Ph' .. ,PT) are
taken as fixed parameters, which, we have assumed, are known in
advance. The particular price sequence (Ph' .. ,PT) that will actually
prevail will be determined by another agent (the trader) who, at this stage,
remains in the background. Given the parameters (Yh"" YT) and
(Ph' .. ,PT), a consumption plan (Xh Yh ... ,XT, YT) is said to be feasible
if we have
(A) y, = Y, - PIX, for t = 1, ... , T.
In each period, the unit's consumption of Y equals its endowment, minus
what it sells on the market, in exchange for X. In order to avoid certain
inessential complications, let us assume that PI > 0 for all t. 8 With this
assumption, and using the equations (A), we can redefine the notion of a
consumption plan as aT-tuple (Xh' .. ,XT) of nonnegative real numbers
and then say that the consumption plan (x 10 ••• ,XT) is feasible if, for t in
n,
the set {1, ... , we have x, :s;; y,/P" Preferences in period t may also be
redefined, in terms of (x 10 ••• , XT) alone, by introducing the utility
functions V10 ••• , VT, as follows.
V,(X1o' .. , XT) = U,(X1o Yl- P1X1o ... , XT, YT- PTXT) ,
t=1, ... ,T,
where U, is the primitive utility for period t, introduced previously. V, is
well defined for every feasible consumption plan (X1o ... ,XT)'
Now let us return to the description of the actions taken by the
economic unit in every period. In period 1, the unit chooses a feasible
consumption plan (xL . .. , x~). In period 2, a new feasible consumption
plan, (xi. ... ,x}) , may be chosen, subject only to the requirement that
xi = x ~. And, in general, in period t (for t = 1, ... , T) a feasible consump-
tion (xi, ... ,x~) may be chosen, subject to the requirement that x~= X~-1
for all integers r satisfying r < t. Note that describing the unit's action in
period t is viewed here as the choice of an entire (feasible) consumption
plan, (xi, ... ,x~), even though x: is the only component of this plan
having an operational significance. For r < t, x ~ is a matter of record,
having been determined and acted upon in period r. And for r > t, x~ the
rate of consumption of X planned today for period r, is open for revision,
by the time period r comes into being. Nevertheless, it seems appropriate
to describe the unit's action in each period as picking an entire consump-
tion plan, in order to emphasize the notion that the unit makes every
attempt to plan ahead and to utilize all the information it has, about past
as well as future, to the fullest extent possible.
It may seem, at first sight, that the unit's choices in the various periods
may be rationalized in the following simple manner: In period t, let
(xi, ... ,x~) be a feasible plan that maximizes the prevailing utility
function, V,(X1o"" XT), subject to the restriction that x~= X~-1 for
r = 1, ... , t-1. But a moment's reflection reveals that this suggestion
must be rejected. Take period 1, for instance. By picking (xL . .. , x~) to
be a feasible plan that maximizes VI> the unit is ignoring vital informa-
tion. In fact, it is ignoring the effect that today's consumption will have on
tomorrow's preferences, an effect of which it is fully aware. Indeed, the
foregoing suggestion amounts, quite simply, to the assertion that, in each
period, the unit will plan its consumption on the assumption that prefer-
ences will not change, only to face, in each period, the unpleasant
discovery that preferences did, in fact, change. Surely, this is not the way
to define rationality in the present context.
Well, then, how will the unit conduct its choices if its behavior is to be
termed rational? Let us begin by looking at the very last period, period T,
where things seem to be quite simple. Indeed, the very suggestion that we
have just discarded for its inadequacy seems to be perfectly reasonable,
so far as period T is concerned. Since the unit is now in its last period,
there is no effect on future preferences to be taken into account. Thus, it is
quite proper to describe the unit's choice in period T as follows. As the
unit enters period T, consumption levels in all previous periods are
already a matter of record. Let these, historically given, consumption
levels be denoted it. i 2 , ••• ,iT-I. Then, the consumption level for the
last period, call it x}, should be selected so as to maximize the quantity
VT(it. i 2, ... ,iT-t. XT), subject only to the feasibility condition, namely
o~ XT ~ YT/ PT. Thus, in period T, the unit is viewed as selecting a best
feasible level of XT, according to the preferences prevailing in that period.
Existence and uniqueness of such a best feasible consumption level, x~,
follow from suitable continuity and convexity assumptions on VT • In
other words, with fairly standard assumptions, one can arrive at an
unambiguous description of the unit's action in period T. Now, x:;' will
depend, of course, on the previously determined consumption levels,
it. ... ,iT-I. For each sequence of preassigned consumption levels
(it. ... ,iT-I), there will be a unique optimal consumption level, x:;', for
period T. This means that optimal behavior in period T is, in fact, given by
some function, call it hT' such that
xj.= hT(it. ... , iT-I) .
This function, hT' will be referred to as the unit's optimal consumption
strategy for period T. Note that the unit is assumed to possess all the
information that is relevant for the computation of h T • The unit is, in fact,
capable of computing hT even before the whole process starts: For any
preassigned values it. ... ,iT-t. it can use its advance knowledge of
(Yt. ... ,YT) and (Pt. ... , PT) to compute Vn and then proceed to
maximize it. To make a long story short, the optimal consumption
strategy, hT' for period T, is part and parcel of the unit's initially available
body of information.
Now let us move to period T -1. For any preassigned levels,

x h ••• ,XT-2, of consumption in the previous periods, the unit can
determine what V T - 1 would be. It must choose a consumption level, XT-h
for the current period, but in making this choice, it must take into account
the effect that XT-l will have upon preferences in period T. In order to do
this the unit makes use of hT' the optimal consumption strategy for period
T, which is a known function. So, in period T -1, the unit will choose XT-l
to maximize the quantity
subject to two requirements. First, XT-l must be feasible, i.e., O.s;; XT-l .s;;
YT-t/PT-l' Second, XT must be consistent with the behavioral pattern
which, as the unit knows, will govern its action in period T. This means
that the second constraint on the maximization is given by XT =
hT(x h ••• , XT-2, XT-l)' All in all, then, the unit's behavior in period T - 1
can be described as choosing, among all values of XT-l satisfying 0 ~
XT-l.s;;YT-t/PT-h a value l~-l so as to maximize the quantity
VT-1(Xh' .. ,XT-2, XT-h hT(Xh ..• ,XT-2, XT-l)) .
Let us assume, once again, that for each set of preassigned values
Xh ... ,XT-2, the maximizing value X~-l exists and is unique. Then, a
function, to be denoted hT-h exists where
X~-l = hT-1(Xh •.. ,XT-2) .
hT - 1 is referred to as the unit's optimal consumption strategy for period

T-1. Note, first of all, that h T - 1 depends upon hT and, secondly, that
h T - 1 is computable from the initial information possessed by the decision
making unit.
It should now be apparent that a procedure of backward recursion is
available, by which the optimal consumption strategies for all periods
may be computed. Specifically, if we assume that the optimal con-
sumption strategies hT' hT-h' •. , hT-k+h for the periods T, T-
1, ... , T-k+1, have already been computed, then the optimal con-
sumption strategy h T - k is defined by the following assertion.
hT-k(Xh' .. ,XT-k-l) = Xt--k if and only if X~-k is that (uni-
que) value of XT-k which maximizes the quantity
VT-k(Xh' .• , XT-k-h XT-k! XT-k+h ... , XT),
under the constraints:

o~ XT-k ~ YT-kl PT-k
XT:"'k+1 = h T- k+ 1(XI.' .. , XT-k-I. XT-k)
XT-k+2 = h T- k+2(XI. ... , XT-k-I. XT-k. XT-k+l)
The first constraint spells feasibility, and the last k constraints make out
the recursive structure of the problem, and they involve the optimal
consumption strategies that have already been computed, in the previous
stages of the recursion. So, the computation of hT - k reduces to the
maximization of a rather complicated function over the single variable,
XT-k. In order for the new optimal strategy, h T- b to be well defined, it is
necessary that, for every pre assignment of XI. ... ,XT-k-I. the maximiz-
ing value of XT-k exist and be unique. For the moment, let us just assume
this to be the case.
Having computed the optimal strategies h2' h3' ... , hy, the decision
making unit is now in a position to determine the optimal consumption
level in the first period, x1, by solving the following maximization
problem.
(B) max Vt(XI. h 2(XI), h 3(XI. h 2(xt)), . .. ).
O""xl""ydpl
This maximization takes place over a single variable, Xl. Assume that the
solution of this maximization problem exists and is unique.
Given the existence and uniqueness assumptions that have been
made,9 we are now in a position to point to a unique consumption path,
(xt, xt ... , x~), which can serve as a description of rational behavior for
a fully knowledgeable economic unit whose tastes are subject to
endogenous change. This path is given by the following recursive rule.
xt = solution of (B)
x~= h2 (xf)
x~ = h 3 (xt, xn
X:}'. = hT(xt, x!, ... , X:}'.-l).
76 MENAHEM E. YAARI
The argument that only this path (x t, ... , X}) - if it exists - can serve as
a characterization of rational behavior in this framework is very compel-
ling indeed. For, given that the unit has, in fact, consumed at the rates
Xt, . .. , X}-l in the first T-l periods, there can be no reason why it
should not consume precisely x} in the last period. Any suggestion for a
different consumption level in period T is a suggestion that the unit
behaves irrationally. Similarly, given that the unit has consumed at the
rates'xt, ... , X}-2 in the first T- 2 periods and that it correctly forecasts
its own rational rule of behavior for period T, there is absolutely no
reason why it should not consume precisely X}-l in period T-l, And so
on. I confess that I find the theoretical criticisms that have been raised,
against using (xt, ... , x}) as the appropriate description of rational
behavior in this context, rather far from persuasive. Of course, if the
assumption. that the decision making unit is fully knowledgeable fails,
then the procedure for computing (xt, ... ,x}) also fails. But an argu-
ment that a theory of behavior under changing tastes cannot assume
possession of full knowledge by the decision making units, such an
argument can only be based on the established principles of confirmation
in empirical science. To the best of my information, such an argument has
not been made to date. To say simply, "look here, that poor Indian
obviously does not know what he is getting into" is not a persuasive
argument. Nor, in my opinion, is the seemingly more forceful argument
that it is absurd to describe an addicted person as planning his own
addiction in a rational manner (since it is well known that addicts are
prone to behave in a fashion that, so often, is considered 'irrational' in
some sense). The present theory, viewed as a conceptual framework in an
empirical science, lies entirely within the realm of economics. It makes
absolutely no claims to contribute in any way to psychology. As an
economic theory, it is designed to be of help in explaining the behavior of
certain economic variables, by taking into account the possibility that
some commodities may, to a greater or to a lesser extent, be habit
forming. In this context, the complete information hypothesis may very
well prove fruitful.
To summarize, then, under the assumption that the economic unit is in
possession of complete information, the consumption plan (xt, ... ,x})
defined above, provides an appealing way for explicating the concept of
rational behavior, in a situation where tastes change over time. We shall
refer to this plan, (xT, ... , x}), as the unit's optimal consumption plan. As
might be expected, in the special case where tastes do not change, that is,
where the utilities V h ••• , VT coincide with one another, the optimal
plan (xT, ... , x}) reduces to that feasible consumption plan which max-
imizes the common utility function. In other words, there is no conflict
between the concept of rationality, as introduced here for situations of
changing tastes, and the concept of rationality used by decision theorists
when they analyse a choice problem in terms of a single preference
system.
The trouble with the optimal consumption plan (xT, . .. ,x}) is its
existence. In order to construct this plan, a whole sequence of assump-
tions must be made on the existence and uniqueness of solutions to
certain maximization problems. If these assumptions fail, the optimal
plan, as defined here, will not exist. The following question, therefore,
arises naturally. Can one suggest a set of behaviorally reasonable condi-
tions that will guarantee the existence of an optimal consumption plan? It
turns out that two sets of conditions having this property can be proposed.
Perhaps the best way to handle the existence problem - and it is a way
which is quite common in economics - is through convexity assumptions.
One begins with a fairly standard assumption, namely that the utility
functions Vh ••• , VTare all strictly concave. (To say thatthis assumption
is 'standard' does not mean that it is weak.) The behavioral content of this
assumption is a matter of common knowledge, so a discussion of this
point seems unnecessary. To this assumption, one now adds the further
stipulation that the optimal consumption strategies, ht(Xh .. ,Xt-l) for
t = 2, ... , T, are concave functions of their arguments. More precisely,
given that VT is (continuous and) strictly concave, the optimal strategy hT
is well defined, so it is possible to postulate that hT is concave. Now, given
that V T - 1 is (continuous and) strictly concave, we find that h T - 1 is well
defined, which makes it possible to go on and assume that hT - 1 is concave.
Similarly, if VT- 2 is strictly concave, while hT- 1 and hT are both concave,
then hT - 2 is well defined, and a concavity condition can be placed on it.
And so on. The concavity assumption for the optimal consumption
strategies h2' h3' ... , hT has a straightforward behavioral interpretation.
Recall that ht(Xh ... ,Xt-l) describes the manner in which the rates of
consumption of the commodity X, in periods prior to period t, affect the
demand for X in period t itself. That is, ht summarizes the tendency of the
economic unit to consume more of X in the present, the more of X it had

consumed in the past. (Indeed, it is easy to show, given the concavity
assumptions on the utility functions and the rule by which they change,
that h, is nondecreasing.) Therefore, the assertion that h, is concave is
merely a statement to the effect that, while consumption of X in the past
tends to stimulate the demand for X in the present, this effect occurs at a
nonincreasing rate. From the behavioral point of view, this seems quite
reasonable. But, from the methodological p....,;nt of view, the concavity
assumption on h, suffers from a deficiency: Ma ~ing assumptions directly
on the theoretical constructs which are ini.roduced as a theory is being
developed ('make assumptions as you go') is not a satisfactory practice.
Rather, one ought to be able to derive the desired properties of theoreti-
cal constructs from axioms, which are stated at the outset, and which refer
to the primitive concepts of the theory. In the present instance, it would
have been desirable that the concavity of the optimal consumption
strategies be deducible from axioms that refer to the utility functions
V h • •• , VT • Unfortunately, I cannot, at this point, offer an appropriately
intuitive axiom on Vh ••• , VT which would lead to the requisite property
of the consumption strategies.
Another way to ensure the existence of an optimal consumption plan
(although in this case such an optimal plan would not necessarily be
unique, which would require a slight change in definition) is to assume
that, in each period, the economic unit must choose from a set consisting
only of finitely many alternatives. For example, in period t, one might
assume that the unit is not allowed to pick the consumption level x, to be
any real number satisfying 0 os; x, os; y,jPh but rather that it must pick, say,
an integer-valued consumption level, satisfying the same inequality.
(Recall that p, > 0.) This amounts to saying that the commodity in
question, X, is indivisible and can be purchased only in multiples of some
standard unit. Under this assumption, an optimal consumption plan
(x f, ... , x~) will always exist although, as mentioned above, its definition
must be modified somewhat, to take account of possible non-uniqueness.
Non-uniqueness gives rise also to a certain conceptual difficulty. If there
exist, say, two optimal plans, then which of them should be adopted as a
description of rational behavior? Of course, the same problem arises in
standard Decision Theory, whenever the possibility of indifference is
admitted. Fortunately, however, it is almost always possible to state the
laws and the predictions of the theory in a manner that does not require a
resolution of this ambiguity.
Finally, what if one is willing to assume neither the concavity of
strategies nor the finiteness of the number of alternatives? Even in this
case, all is not lost. True, an optimal consumption plan, as defined above,
may not exist. But a consumption plan which is distinguished in a
somewhat weaker sense will always exist, and the decision theorist may
be content to use this other kind of consumption plan to characterize
rational behavior under changing tastes. The remainder of this section
will be devoted to a definition and discussion of this new type of
distinguished consumption plan.
A T-tuple of real numbers, (xt, ... ,x}), will be referred to as an
equilibrium consumption plan if the following two conditions hold.
(a) Feasibility. For every t, t = 1, ... , T, we have 0 :OS;x~:os; YrI PI'
(b) Stability. For every t, t = 1, ... , T, let XI be any real number
satisfying 0 :os; XI :os; YrI PI' Then,
v:I (X *1, •.. ,x *1-1. XI> X 1+1, T ~ v:I (X *

* ••• ,x *),.::: 1, ••. ,x *)
T •
The meaning of condition (a) is clear. Condition (b) amounts to the

assertion that in any period, say period t, the economic unit has no
incentive to deviate from the plan (xt, ... ,x}), if it assumes that its
consumption rates in all other periods will, in fact, be according to this
plan, (xt, ... ,x}). Imagine the economic unit as asking itself the follow-
ing question: "Let's assume that consumption will take place according
to the plan (x t, ... , x}). Will this assumption be warranted, from the
point of view of my own interests in period t, for each t?" An affirmative
answer to this question means that condition (b) is satisfied. A consump-
tion plan satisfying (a) and (b) is, clearly, an equilibrium (in the sense of
Nash) of a suitably defined T-person game. 10 Hence the term 'equilib-
rium plan'.
Two things should be noted. First, if an optimal consumption plan
exists, then it is also an equilibrium plan. Second, under the assumptions
that have been made in the early parts of this section, together with a mild
convexity assumption on the utilities V1."" Vr, an equilibrium con-
sumption plan exists. The reader is referred to Peleg and Yaari 0973) for
a further discussion and for proofs.
A brief recapitulation may be in order at this point. Two alternatives

for characterizing rational behavior, when the preferences of the
economic unit under consideration are subject to change over time, have
been suggested. First, the notion of an optimal consumption plan. Under
the (admittedly very strong) assumption that the unit possesses perfect
information, the argument for using this notion to characterize rational
behavior is, in a sense, simply an argument to the effect that, implicit in
rationality is the idea that all available information should in fact be used.
However, in order to ensure the very existence of an optimal consump-
tion plan, certain assumptions are required, which mayor may not be
justified. Therefore, it is sometimes necessary to fall back on a weaker
notion, namely that of an equilibrium consumption plan, for the charac-
terization of rationality. Here the existence problem is not serious, in the
sense that the assumptions needed to guarantee existence are relatively
mild and are of the type of standard assumptions commonly encountered
in Decision Theory.
6. THE DISADVANTAGE OF HAVING ENDOGENOUSLY

CHANGING TASTES
Now let us return to our story about traders and Indians. The Indian is
assumed (in contrast, perhaps, to certain stereotypical descriptions) to be
in possession of complete information and, in particular, to be fully aware
of the effects which the consumption of whiskey will have upon his
preferences in the future. The trader, for his part, cannot pull any fast
tricks on the Indian. All that he can do is quote a sequence of prices, at
which he would be willing to buy furs in exchange for whiskey, and then
sit back and wait for the Indian to respond. Given the price sequence
quoted by the trader, the Indian brings his full information into play and
selects a course of action in the most rational way p'ossible. If an optimal
consumption plan exists, then his response consists of selecting this
optimal plan. If an optimal consumption plan does not exist, then the
Indian settles for an equilibrium consumption plan which, as game theory
assures him, will exist under quite general conditions.
The question of non-uniqueness seems to arise here once again. What
happens if there exist several optimal consumption plans or, in case there
are no optimal plans, if there exist several equilibrium plans? Clearly, if
the existence of a whole family of optimal plans (or of equilibrium plans)

is a sufficiently general phenomenon, then the possibility might arise for a
further tightening of the concept of rational behavior. As will be seen in
the sequel, the points which this essay intends to stress can be brought
forth within the framework of certain simple examples. In the great
majority of these simple examples there exists but a unique equilibrium
plan, so that the term 'rational behavior' is unambiguous. So, for the
purposes of the present discussion, a resolution of the problem raised by
non-uniqueness is not required.
Here, then, is a complete description of a process of free exchange:
Trader announces the price sequence (Pl.' .. ,PT)' Indian responds by
choosing an optimal (or an equilibrium) consumption plan (xt, ... ,x}).
Exchange takes place accordingly, so that, in period t, the Indian buys x~
units of whiskey from the trader, in return for PtX~ units of furs. All
transactions take place voluntarily. Can it be that, in some sense, the
Indian is, nevertheless, at a disadvantage? Before attempting to answer
this question, we turn to a brief discussion of the concept of Pareto-
efficiency.
Let the utilities Vb ... , V T be defined as in the previous section, and
let (Xl. ... ,XT) be a feasible consumption plan for the Indian. The plan
(x 1, ..• , XT) is said to be Pareto -efficient 11 if there exists no other feasible
consumption plan, say (z 1, ••• , Zr), satisfying the inequalities
for t = 1, ... , T with> holding for some t. A plan (Xl. ... ,XT) which is
not Pareto-efficient will be referred to as Pareto-dominated (or simply as
dominated).
It is well known, in the theory of games, that Nash equilibrium is not, in
general, Pareto-optimal. Nor is a so-called perfect Nash equilibrium (in
Selten's sense) Pareto-optimal. The prisoner's dilemma (see, e.g., Luce
and Raiffa (1958)) is the best known example of a game in which the
(unique) Nash equilibrium is not Pareto-optimal. Furthermore, if the two
prisoners are assumed to make their moves in some prescribed order (say
prisoner 1 moves first and prisoner 2 responds) then we get a game with
an equally non-Pareto-optimal perfect equilibrium. The import of all
this, in the context of our exchange process, is clear. Let (x t, ... , x}) be
either an optimal consumption plan or an eqUilibrium consumption plan
82 MENAHEM E. YAARI
for an economic unit whose tastes are changing (the Indian). Then, in
general, the plan (xT, ... ,x}) is Pareto-dominated. More precisely, there
exist some price sequences, (p 1, ••. , PT); that the trader can announce, so
that the Indian's rational response, (xt, ... ,x}), will be Pareto-efficient,
and there exist other price sequences, that the trader can also announce,
such that the Indian's (equally rational) response will be Pareto-
dominated. This point is quite important, so perhaps it might be well to
spell it out in detail:. It is possible for the trader to announce a price
sequence (Ph' .. ,PT) such that the Indian's optimal consumption plan
for these prices is (xT, ... ,x}), but there exists another feasible con-
sumption plan, say (x i> ••• , XT), having the property that, for all t, t =
1, ... , T, and using the same prices (Pi> ... ,PT), we have
Vt(Xh' .. , XT)~ V;(xT, . .. ,x}), with> for some t.
(An example where this is so can be constructed without any difficulty.)
Question: Well, if such a splendid alternative plan (Xl> ... ,XT) exists,
why should not the Indian adopt it, instead of adopting the dominated
plan (xT, ... ,x})? Answer: Because adopting the plan (Xl> ... ,XT) is
irrational. For example, if the Indian were to follow the plan (Xl> ... ,XT)
up to the (T -1)st period, then, in period T, he would find that it would be
best not to consume at the rate XT, but at some other rate. For XT will not
be the solution to the problem of maximizing VT(Xl> ... , XT-l> XT), over
all values of XT satisfying 0 ~ XT ~ YT/ PT' Thus, the plan (Xi>' .. , XT),
splendid though it may be, is inconsistent with itself, and therefore
irrational.
What all this amounts to is the following. It is within the power of the
trader to manoeuvre the Indian into a position where rationality conflicts
with Pareto-efficiency, i.e., into a position where to be efficient is irra-
tional and to be rational is inefficient. It should be emphasized that both
rationality and efficiency are defined inherently, in relation to the Indian's
own values, as represented by his preferences and by the manner in which
these preferences change over time.
So, the disadvantage, for an economic unit, of having endogenously
changing tastes is in that, even with perfect information and perfect
foresight, the unit may find itself forced to follow a course of action which,
by the unit's own standards, is Pareto-dominated. Any other course of
action will be inconsistent with itself.
The foregoing assertion is 'value free'. It is, so to speak, an 'impossibil-

ity theorem': Given our premises on the economic unit's preferences and
opportunities, it is, in general, impossible to find a consumption plan
satisfying, simultaneously, the requirements of feasibility,. rationality,
and Pareto-efficiency. Furthermore, our premises on the economic unit's
opportunities include an assumption concerning market structure (trader
picks prices, Indian responds with quantities), Le., on the rules which
govern the interaction of the unit with other agents. Under these rules, it
is in fact possible for these other agents to behave in such a way as to
provide the unit whose tastes are changing with a response that would be
simultaneously feasible, rational, and efficient. But, in general, there is no
reason why they should.
This last remark points very clearly to the next question which must be
tackled. There is no reason to suppose that these so-called other agents
(Le., the trader) have a specific interest in placing the unit whose tastes are
changing in a position where rational behavior is inefficient. Rather, it
should be assumed that these other agents act in a manner that serves
their own interests best. So, one must investigate the question of how
likely it is that such action, by other agents, will in fact lead the unit whose
tastes are changing to select a dominated consumption plan. In other
words, having seen that the trader is in a position to manoeuvre the Indian
into a situation where rationality conflicts with Pareto-efficiency, we are
now asking whether the trader will in fact choose to do so.
7. TRADER'S BEHAVIOR: SOME RESULTS FROM SIMULATIONS
Section 5 was devoted to an analysis of what might be considered rational

behavior for the Indian, given that the trader has announced an arbitrary
price sequence, (Ph' .. ,Pr). Now, the trader is free to announce any
price sequence, subject only to the requirement that PI> 0 for t =
1, ... , T.12 Which price sequence will he choose? To answer this ques-
tion, one must first specify the trader's objective, his resources in the
various periods of the process, and the information (or knowledge)
available to him. Our assumptions regarding these items will be as
follows. (a) The trader will be assumed to behave so as to maximize the
total quantity of furs that he will get from the Indian throughout the
process;13 (b) the trader will be assumed to possess a fixed amount of
84 MENAHEM E. YAARI
whiskey for use throughout the exchange process, with the cost of
carrying whiskey from period to period assumed to be zero; and (c) the
trader will be assumed to possess complete information, including know-
ledge of the Indian's tastes and of the manner in which these tastes change
over time. Given these assumptions, the trader's choice problem comes
out as follows: Find a sequence of positive prices, (PI. ... , PT), in such a
way that the quantity
P1Xt(Ph ... ,PT) + P2X~(Ph ... ,PT) + ...
+PTX}(Ph'" ,PT)
will be a maximum, subject to the condition that
Xt(Ph'" ,PT)+X~(Ph'" ,PT)+'" +X}(Ph." ,PT)~i,

where X~(Ph ... ,PT) is the t-th component of the Indian's optimal (or
equilibrium) consumption plan when prices are given by (Ph . .. ,PT),
and where i is the total amount of whiskey available to the trader.
One notes immediately that if the Indian's optimal (or equilibrium)
consumption plan is not unique, then the trader's maximization problem
is not well defined. This is another instance of a difficulty that has already
been encountered several times, namely that non-uniqueness is a source
of complication. However, as will be seen presently, all the results that I
am in a position to present have been obtained from the calculation of
some specific examples. In these specific examples, it has turned out that
multiple responses by the Indian have occurred only when the prices were
non-optimal from the point of view of the trader. More precisely, suppose
that, given the prices (Ph' .. ,PT), the Indian has two equilibrium con-
sumption plans, say (xt. . .. , x}) and (xt*, ... , x}*). Then, one can
compute what the trader gets for both of these, i.e., one can compute the
two quantities P1Xt+ .. ,+PTX} and P1Xt*+ .. ,+PTX}*, Now, if there
exists another price sequence, say (p~, ... ,Pr), for which the Indian does
have a unique response, say (x~, ... ,Xr), and if, furthermore, the quan-
tity p~x~ + ... + prxr is greater than both of the previously computed
quantities, then the troublesome price sequence, (Ph" . ,PT), can be
eliminated from consideration, since it is dominated by the price
sequence (p~, ... , pr). Fortunately, in all the examples that I have
calculated, non-uniqueness has only occurred in this inessential way.
The trader's problem, as formulated above, looks very much like a
standard profit maximization problem, for a producer whose variable
production costs are zero. Prices, (Ph' .. ,PT), are the decision variables
and X~(Ph ... ,PT), for t = 1, ... , T, are the demand functions which the
producer faces. In the standard profit maximization problem, if the
customers' preferences are assumed known, then the demand functions
can be derived from utility maximization. On the other hand, in the
present context, the demand functions are derived from the selection of
an optimal consumption plan, or an equilibrium consumption plan, by an
agent whose preferences are subject to endogenous change. Now, cal-
culating an optimal consumption plan involves a very complex recursive
scheme, and calculating an equilibrium plan requires, in most cases,
locating a fixed point for some mapping about which very little is known
explicitly (except for some very general properties, such as continuity). I
mention these difficulties in partial explanation for the fact that I do not
have, at present, any satisfactory theorems on the nature of the trader's
optimal behavior. In particular, a theorem giving conditions under which
it is optimal for the trader to pick a price sequence that would force the
Indian to select a Pareto-dominated consumption plan, such a theorem is
not yet at hand.
In the absence of theorems, simulation seems to be the next best thing.
To simulate, in the context of the present discussion, means to calculate
the theoretically predicted actions of both trader and Indian for several
specific choices of the various functions and parameters involved. From
these calculations, one might hope to be able to extract a rough picture
that would give some information on the frequency of occurrence of
certain behavioral patterns.
Here, then, is a description of the calculations that have been per-
formed, where the notation used is that of Section 5. For t = 1, ... , T, let
the Indian's utility in period t, U" be defined by
T
Ut = L[(1+Xl+'" +Xt-l)U(X.) + v (Ys)],
s=t
where U and v are real functions defined for all nonnegative real
numbers, and where, for t = 1, the factor multiplying u(xs) is defined to be
1. Both U and v are assumed to be increasing and strictly concave. This
specification of U h . •• , UT is in conformity with the changes-in-tastes
hypothesis of Section 5. That is, the Indian's subjective rates of exchange
follow the dynamic rule prescribed in Section 5. The derived utility

functions, Vb"" Vr. are now given by
T
VI(Xh ... ,XT) = L [(1 + Xl + ... + XI-l)U(Xs) + v(Ys - p"xs)],
s=t
for t = 1, ... , T, where, once again, the factor multiplyingu(xs) is defined

to be 1 when t = 1.
Calculations have been carried out under the following specifications.
(a) T= 3.
(b) XI' the Indian's consumption level of X in period t, is only allowed to
take on the values 0, 1, 2, or 3.
(c) y" the Indian's endowment of Y in period t, is fixed at YI = 12.
(d) Ph the price which the trader announces in period t, is only allowed
to take on the values 1, 2, 3, or 4.
In addition to these assumptions, certain convenient forms have been
assigned to the functions U and v. 14 For each assignment of specific forms
to the functions U and v, the following simple algorithm has been carried
out: Pick one of the permissible price configurations (Ph Pz, P3); calculate
the triple (Vb V 2 , V3 ) for each permissible consumption plan,
(Xh Xz, X3); locate all the equilibrium consumption plans; for each
equilibrium consumption plan, (xf, x~, x~), compute the quantity p;xf +
PzX ~ + P3X t to be called the trader's intake at prices (Ph Pz, P3), and
store it; check each equilibrium consumption plan, to see if it is Pareto-
efficient; if it is not Pareto-efficient, locate the Pareto-dominating plans;
repeat the entire procedure for every permissible price configuration;
find the particular price configuration (or configurations) where the
trader's intake is greatest.
In all, seven examples have been calculated. (That is, the procedure
just described has been carried out for seven different choices of specific
forms for the functions u and v.) In each of these examples, there are 64
different price configurations that the trader can announce. So, the
computer looked at 448 (Le., 64 x 7) price configurations, and located the
Indian's equilibrium consumption plans for each one of them. In 103 out
of the 448 cases checked, the Indian's equilibrium plan turned out to be
Pareto-dominated. In other words, the frequency of occurrence of a
Pareto-dominated equilibrium plan was 0.23. Now, for each of the seven
examples, the computer also located the trader's best price.configuration,
i.e., that configuration, among the 64 possible ones, where the trader's
intake was greatest. It turned out that, in four out of these seven, the
associated equilibrium plan for the Indian was Pareto-dominated. So, in
comparison with the frequency of Pareto-dominated equilibria for all
price configurations (which was 0.23), that same frequency, when only
the trader's best price configurations were considered, was 0.57.
A scanning of the computations showed that Pareto-dominated
equilibrium plans tended to be associated with price configurations
having high trader intake. To check on this, a very crude correlation
coefficient, between 'high trader intake' and 'Pareto-dominatedness', has
been computed, in the following manner. A price configuration was
defined to be a high intake configuration if the trader's intake exceeded
one half of the Indian's total endowment (i.e., if it exceeded the number
18). Each price configuration was assigned a value of 1 or 0 according to
whether it was a high intake configuration or not. Then each of these same
price configurations was assigned a value of 1 or 0 according to whether it
gave rise to a Pareto-dominated equilibrium plan, or not. The correlation
coefficient between these two assignment vectors turned out to be 0.62.
These results are, admittedly, very crude indeed. Nevertheless, I think
that it is fair to draw two conclusions from them. First: The phenomenon,
of the trader being in a position to manoeuvre the Indian into a Pareto-
dominated position, cannot be dismissed as negligible. Second:
Furthermore, the possibility, that it is, in fact, in the trader's best interest
to manoeuvre the Indian into such a position, cannot be dismissed as
negligible either.
Now, what about the hypothesis that it would be optimal for the trader
to charge low prices in the initial phase of the process and then to switch to
high prices, in the ensuing phase? Has this hypothesis gained credence as
a result of the simulations that have been performed? Needless to say, I
was hoping that the trader's best price configuration would come out to be
something like (1,1,4), or (1, 4, 4). However, the actual outcomes on the
trader's best price configurations, in the seven examples that have been
calculated, turned out to be as follows: (1, 3,4), (2, 3, 4), (2, 3, 4), (2,4,4),
(3,3,4), (4, 3, 4), and (4, 3, 3). The last two configurations are completely
at variance with the hypothesized pattern, and the first five are, at best,
alright. We see that the behavior of prices over time tends to be rather
sensitive to the specific choice of utility functions for the Indian. Indeed,
88 MENAHEM E. YAARI
this kind of sensitivity exists also in the absence of any changes in tastes.
(Price behavior often depends, for example, on the so-called elasticity of
the marginal utility.) I am hoping to be able to offer a separate investiga-
tion of this issue, sometime in the future.
8. REGULATORY INTERVENTION
The control which an agent has over an economic variable - any

economic variable - puts this agent, automatically, in a position to
exercise an influence on the states of other agents. That is, different
decisions by an agent, with respect to an economic variable under its
control, lead in general to different final states for other agents. This fact
is inherent in any system where agents (or particles) interact. Thus, the
power to influence other agents' positions cannot, in and of itself, be
proposed as sufficient grounds for outside intervention, say through
legislation, in a process of social or economic interaction. Yet, even the
most ardent libertarians agree that intervention is sometimes warranted,
when the actions (or perhaps even the lack of actions) of one agent are
liable to affect another agent adversely. Drawing a line of demarcation, to
separate the cases where intervention is warranted from those where it is
not, is one of the very difficult tasks that social philosophers have taken
upon themselves. In economics, the following partial criterion enjoys
very widespread acceptability: If an inefficiency exists in the economy,
then intervention to cure this inefficiency is warranted. This principle has
been applied in practice time a.nd again, and many items of economic
legislation rest upon it, ultimately. (Perhaps the best known and most
extensively discussed instances of legislation based on this principle are
measures designed to regulate monopolies and monopoly formation - as
in the case of antitrust legislation - and measures designed to promote a
high rate of employment - as in the case of the U.S. Employment Act of
1946.) The justification for this idea, that intervention in order to cure an
inefficiency is warranted, and also a reason for the fact that many
libertarians are willing to accept it, lies in the following argument. If the
economy is inefficient and a (successful) measure is introduced to correct
this inefficiency, then, by a suitable redistribution of wealth among
individuals, a state can be reached where every individual is better off
than he or she would have been, had the measure not been introduced.
This argument, being essentially a restatement of the definition of

inefficiency, need hardly be expounded. It should be noted, however, that
in order to make a case for intervention, based upon this argument, one is
forced to admit also that intervention designed to achieve a redistribution
of wealth is sometimes warranted. Immediately, this raises many ques-
tions for discussion, having to do with how measures designed to correct
inefficiencies might tend to affect liberty and equality. Perhaps the most
prominent example of such a discussion, in the economic literature, is to
be found in the last chapter of J. M. Keynes' General Theory (1936).
In the present essay, we have been investigating an exchange process
(between two agents) in which infficiencies of the type exemplified by
monopoly situations or by Keynesian unemployment mayor may not
arise. Outside intervention in this exchange process, whether or not
followed by a redistribution of wealth, cannot, in general, be guaranteed
to make both agents better off,15 and it is easy to construct examples in
which it definitely cannot. Yet, there exists another type of inefficiency
here, namely the inefficiency to which the agent with changing tastes (the
Indian) is forced to submit, on his own: Given the parameters of his
environment, the Indian is forced, by considerations of rationality, to
select some given course of action, when another course of action exists,
under which he would be better off in every period. It is this element, of
what might be termed inescapable intra-personal inefficiency, which I
propose as an explication for the vague notion that "something is wrong"
in the exchange process taking place between the trader and the Indian.
With the word 'wrong' appearing in the foregoing sentence, it is evident
that the notion which I have been trying to explicate is, at least partially,
an ethical one. If, in an exchange process, an agent is in a position where
behaving inefficiently (i.e., in a Pareto-dominated fashion) is the only
rational thing to do, then this exchange process contains an ethical fault.
This conclusion obviously falls to the ground if nothing is perceived to be
wrong in the trader-Indian exchange process or, alternatively, if the
explication given here, for what is wrong with this process, is considered
inappropriate. Perhaps one might be tempted, at first, to settle this issue
much more simply, by saying that any attempt by man, to manipulate the
preferences of others, is wrong. But, upon reflection, it becomes apparent
that this simplistic point of view cannot be sustained, because it leads
inevitably to totally unacceptable restrictions upon freedom of expres-
90 MENAHEM E. YAARI
sion. A more restricted point of view, namely that any attempt by man to
gain, by manipulating the preferences of others, is wrong, will most likely
be open to similar objections. For example, under this more restricted
point of view, all advertising, even when it is purely informational, would
automatically be deemed unethical, because the successful advertiser
stands to make a gain. Few people would go along with this conclusion.
Thus, it appears inevitable that any attempt to answer the question:
"what, if anything, is wrong in the trader-Indian exchange process?"
would call for the formulation of a fairly subtle ethical principle. The one
proposed in the italicized sentence above is, perhaps, not unreasonable.
Having stated that the trader-Indian exchange process contains an
ethical fault, I now wish to go one step further and propose, as an
additional value judgement, that intervention by society, to correct or
mitigate this fault, is warranted. I shall also argue, however, that extreme
intervention, one that would prevent the process itself from taking place,
is not warranted. My task will be to try and lend support to this value
judgement, by relating it to some of the norms that have been recognized
by social philosophers, with regard to the circumstances under which
intervention by society in the affairs of its members is justified. With this
objective in mind, it seems quite natural to proceed by looking first at
John Stuart Mill's maxim, "that the only purpose for which power can be
rightfully exercised over any member of a civilized community, against
his will, is to prevent harm to others" (Mill (1859), Ch. 1). Is this
libertarian principle sufficient to justify intervention in the trader-Indian
exchange process?
In order to rely upon Mill's principle in the present context, one must
deal with t~o difficulties. The first difficulty has to do with the widening of
meaning of the word 'harm' to include the type of predicament into which
the Indian is being forced, by circumstances that are partially under the
trader's control. From the point of view of the language, such widening of
the meaning of 'harm' does not seem to be seriously objectionable, since
no one would contend that the word 'harm' is already fully explicated. 16
The danger in such a widening of meaning lies principally in its moral
implications, when conjoined with Mill's principle or with some other
moral principle that might be based on the concept of harm. In other
words, is this proposed widening of the meaning of 'harm' likely to lead
(by Mill's principle) to the conclusion that intervention is justified in
certain situations where in fact such intervention is grossly unjustified? It

seems to me, in view of the very narrow explication that has been given
here for what is wrong in the trader-Indian process, that this danger does
not arise.
Perhaps a more troublesome difficulty, hindering the possible applica-
tion of Mill's principle to the trader-Indian exchange process, lies in the
fact that the Indian's participation in this exchange process is, by assump-
tion, completely voluntary. How can it be argued that harm is being
inflicted upon anybody, in a process that takes place by mutual consent?
Why should the agent who is allegedly being harmed ever consent to
participate? Indeed, if the implication 'consent ~ no harm' is valid,17
then, by John Stuart Mill's very principle, intervention in the trader-
Indian process must be ruled unwarranted. Now; it should be noted right
away that, if this last point of view is to be taken seriously, then one must
also rule out any intervention designed to correct inefficiencies in the
economy (such as the regulation of monopoly or the deliberate pursuit of
full employment). Certainly, by the same token, any intervention
designed to bring about a change in the distribution of wealth (such as
through progressive taxation) must also be held unwarranted. An ineffi-
ciency in the economic system does not, in most instances, lead people to
withdraw from voluntary participation in that system, nor does an
unequal distribution of wealth (except in certain extreme cases). So, the
question of how to justify intervention in systems where agents' participa-
tion is completely voluntary is a very broad one, touching as it does upon
virtually all types of social and economic legislation. An attempt at
providing a comprehensive discussion of this question lies both beyond
the scope of the present essay and beyond the competence of the present
author. Let us therefore limit ourselves to one fairly obvious point.
What inference, concerning outside intervention, can legitimately be
drawn from the fact that both agents choose to participate in the
trader-Indian exchange process of their own free will? The fact that both
agents choose to participate means only this: When presented with the
choice of either making the transactions as prescribed by the process or
making no transactions whatsoever, both agents choose the former
alternative. From this, the only conclusion that can be drawn, as regards
intervention, is that a total prohibition of any transactions between
trader and Indian is unwarranted, because such a prohibition would force
both agents to a position which, as is revealed by their choices, is inferior.

There is no inference to be made from voluntary participation to other
kinds of intervention, such as regulation of the terms at which trade takes
place, imposition of a tax, and so forth. (I shall use the term regulatory
intervention when referring to measures of this type.)
Suppose, for example, that a tax were levied upon the trader. In each
period, he would be required to yield to the government a certain fraction
of his revenues, and the government would use the tax proceeds in some
unspecified but neutral manner. Then, as long as the tax rates fall short of
100%, we would find both trader and Indian still willing to engage in the
exchange process. (Recall our simplifying assumption that the trader has
no use for whiskey, except inasmuch as it can be traded for furs.) Thus, if
the initial situation were one in which, say, a 50% tax had already been
levied upon the trader, then, using the implication 'consent ~ no harm'
in conjunction with Mill's principle, we would arrive at the conclusion
that intervention in this modified process is also unwarranted. In' other
words, by this inference, imposing a tax is unwarranted but, once a tax is
imposed, lifting it is also unwarranted. It seems clear, therefore, that a
formalistic appeal to consent as a test for lack of harm, in conjunction
with Mill's libertarian principle, can only be justified when the type of
intervention being contemplated is the most extreme one, namely inter-
vention designed to foreclose the interaction process completely. In the
case of the trader-Indian exchange process, such extreme intervention
(for example through legislation that would make it illegal to sell whiskey
to Indians) is indeed unwarranted. On the other hand, regulatory inter-
vention may well be warranted. In any case, as I have tried to argue, these
moderate forms of regulatory intervention cannot be ruled out on
grounds of consent. It is at this point that the specific definition of harm, in
reference to the trader-Indian exchange process, comes in. The element
of harm has been identified with a set of circumstances in which the Indian
is being manoeuvred into selecting a Pareto-dominated course of action.
If intervention could be instituted in such a way that, while the process
would still be allowed to take place, the Indian would never find himself in
this predicament, then such intervention would be warranted, even on
Mill's principle. Furthermore, in case intervention could not be instituted
so as to eliminate this predicament completely, there might still be a case,
on the same principle, for intervention that would alleviate the predica-
ment, rather than eliminate it. In other words, if a contemplated mode of

regulatory intervention has the property that the Indian's optimall'lan,
when this mode of intervention is in force, Pareto-dominates the optimal
plan that he would pick in the absence of intervention, then this mode of
intervention would be justified. There are some indications that levying a
progressive income tax upon the trader would, in fact, be a mode of
intervention having this alleviatory property. Unfortunately, however, a
detailed exploration of this possibility must await future research.
My attempt in the foregoing paragraphs, to justify regulatory interven-
tion in the trader-Indian exchange process in terms of Mill's libertarian
principle, should not be mistaken for a complete acceptance of this
principle. In Mill's presentation, the phrase "to prevent harm to others"
is proposed both as a necessary and a sufficient condition for justifiable
intervention. That is, if an element of harm exists, then intervention is
justified (sufficiency) and if no such element exists, then intervention is, as
a rule, unjustified (necessity). Here an appeal has been made only to the
sufficiency part. None of Mill's critics, to the best of my knowledge,
disagreed with this part of his proposal, nor am I aware of any system of
social philosophy that would seriously espouse the right of individuals to
caus~ harm to others, unmolested by society and its sanctions. Thus, using
harm as the element justifying regulatory intervention in the trader-
Indian exchange process is an attempt to place such intervention on a
base of acceptability that would be as broad as possible. If this attempt
should prove unsuccessful, then a line of retreat - whether to some
paternalistic position or to a utilitarian position involving some kind of
philosophical cost-benefit analysis - would perhaps be open.
9. CONCLUDING REMARKS
(a) Monopoly
In an oral discussion of the material that has been presented herein, the
following question had come up. Why is the trader-Indian exchange
process not analysable as a special case of monopoly? In particular, why is
intervention in this process not justifiable, very simply, as one more
instance of the regulation of monopoly? In order to see the answer to this
question, one needs to examine the same trader-Indian exchange pro-
cess, while dropping the hypothesis that the Indian's preferences are
94 MENAHEM E. YAARI
subject to change over time. The process now reduces to the familiar
situation of two traders, with fixed preferences, exchanging two -com-
modities (the so-called Edgeworth Box problem). Indeed, with the
trader's preferences being assumed to depend only on whatever furs he
can get from the Indian, the problem becomes quite simple. (The solution
is this: Draw the Indian's offer curve, and find a point on it where the
quantity of furs that he gives up is a maximum. This point gives the
trader's optimal price quotation, as well as the Indian's optimal quantity
response.) Two cases must be distinguished. First, consider the case
where the solution of the exchange problem has the trader transferring
the entire quantity of whiskey at his disposal to the Indian, in exchange
for furs. In this case, the solution is Pareto-optimal and it coincides with
the so-called competitive solution. (A competitive solution is one which is
attained when prices are announced from outside and both agents react to
these prices as though they were environmental parameters.) Therefore,
in this case, monopoly is not an issue. The second case is one where the
solution of the exchange process involves some whiskey left over in the
hands of the trader, even though he has no use for it whatsoever. It is only
here that a situation akin to monopoly arises: The trader restricts his
'output' of whiskey, as compared with what he would 'produce' under
competition, in order to increase his profits. The solution in this case is not
Pareto-optimal, and intervention, on grounds of correcting an ineffi-
ciency, is called for. (In a pure exchange problem, both the monopolist
and his customer are consumers, and outside intervention can make both
of them better off.) But this is not the intervention discussed in Section 8.
Indeed, suppose we did allow for changes in tastes: The solution of the
exchange process may still be non-Pareto-optimal, and intervention may
still be justified, on the grounds that both agents can be made better Off.18
The intention in Section 8 was to argue that intervention in the trader-
Indian exchange process was justified quite apart from the possibility that
both agents can be made better off. The point there was, in fact, that
intervention on behalf of one agent is warranted, on grounds of protect-
ing this agent from the possibly harmful actions of the other agent.
Clearly, such intervention would not cause both agents to become better
off but, rather, it would make one agent better off at the expense of
another agent. Now, some people may well adopt the.value judgement
that such intervention (on behalf of one side as against another) is also
warranted in monopoly situations. But this would not be the usual case
for monopoly regulation, which rests, for its justification, on the correc-
tion of inefficiencies. To summarize, then, the position taken here is that,
under endogenous changes in tastes, intervention in the trader-Indian
exchange process is justified, above and beyond what is indicated by
considerations of monopoly.
(b) Advantageous Gifts
Consider a simple exchange process, with two persons and two com-
modities, without anybody being subject to changes in tastes. It can be
shown that, in such a system, it is sometimes advantageous for one of the
two agents to make an outright gift to the other agent. That is, the
competitive solution that prevails after the gift is made is preferable, from
the point of view of the giver, to the competitive solution that would
prevail if the gift were not made at all. (See, for example, Gale (1974).)
Well, then, why is not the trader-Indian exchange process analysable i!l
terms of this 'advantageous gifts' example? Why spill so much ink on the
issue of endogenous changes in tastes when, even without such changes, it
is sometimes in the interest of one agent to make an outright gift to the
other agent? To see the answer, assume, once again, that the Indian's
tastes do not change over time, and recall that the trader's preferences are
assumed to depend on furs only. Will it ever be in the trader's interest to
transfer a certain quantity of whiskey to the Indian, as a gift? It turns out
that, in order for such a situation to arise, it is necessary that the Indian's
preferences be rather peculiar. Indeed, it can easily be shown that, if the
Indian's preferences satisfy the property that whiskey is a normal good, 19
then it is never in the trader's interest to make a gift to the Indian. So, in
order to analyse the trader-Indian exchange process in terms of the
notion of advantageous gifts, one would need to rely on the assumption
that, for the Indian, whiskey is an inferior good.
(c) Classical Music

I have been asked the following question. What if, instead of cunning
traders selling cheap whiskey to innocent Indians, we were to consider a
classical music club, selling records to subscribers. Each subscriber would
get, say, the first twenty records at an extremely low price, to help him
develop a· taste for classical music, and thereafter he would have to pay
very high prices for any additional records that he might wish to purchase.
(There is no way to obtain classical records, except through the club.)
Would I then pronounce the same judgement on the exchange process,

namely that it contains an ethical fault? My unashamed answer is yes.
Attempting to enhance the appreciation of classical music among the
masses is indeed a noble endeavor. But an economic process which is
judged to contain an ethical fault does not suddenly lose this fault, if the
process can also be shown to have a by-product which is judged to be
noble. On the other hand, one of the considerations guiding the choice of
intervention, if any, in such a process, may well be the preservation of this
by-product.
Cd) Overall Welfare Function
Professor John C. Harsanyi has protested, in an oral discussion, that the
whole problem - about which I have now written so many pages - does
not arise at all, if the Indian's preferences can be aggregated into one
overall welfare function. This comment immediately brings up a vast
literature, on the difficulties associated with the aggregation of prefer-
ences. But, rather than open this Pandora's box, I should like to end this
essay by stressing my complet.e agreement with Professor Harsanyi's
point. If the Indian's preferences can be aggregated into a single welfare
function, then this single welfare function describes the Indian's unchang-
ing tastes. And if tastes do not change, then the problem of changes in
tastes does not arise.
The Hebrew University, Jerusalem
NOTES
* I am indebted to Leonid Hurwicz, Yehuda Melzer, Robert Solow, and Hugo Son-
nenschein for their comments, and to the National Science Foundation for financial support.
An earlier version of this essay was presented at the Reisensburg Symposium on Decision
Theory and Social Ethics, Schloss Reisensburg, June 1976.
t This essay is dedicated to the memory of Yehoshua Bar-Hillel.
1 As defined, for example, by Dworkin (1971): "The interference with a person's liberty of
action justified by reasons referring exclusively to the welfare, good, happiness, needs,
interest, or values of the person being coerced".
2 As, for example, in Devlin (1965), Ch. 1: "The true principle is that the law exists for the
protection of society. It does not discharge its function by protecting the individual from
injury, annoyance, corruption, and exploitation; the law must protect also the institutions
and the community of ideas, political and moral, without which people cannot live
together".
, Several related definitions of rationality exist in. the literature (see Richter (1971». For
the present purpose, however, the choice among these alternative definitions is immaterial.
4 I require the chosen element, a *, to be unique in order to avoid a discussion of the concept
of indifference, which is a methodologically troublesome concept.
S This section contains a certain amount of repetition of material appearing elsewhere in
the literature. (See, e.g., Pollak (1968).)
6 The second commodity, Y, may be thought of as a composite good, made up of all the
non-habit-forming commodities. This aggregation procedure is justified as long as relative
prices between non-habit-forming commodities remain unchanged.
7 It is important to remember that S(r, t) is defined for a specific consumption plan,
(Xlo Ylo •.. ,XT, YT)' Under fairly mild assumptions, the specification of S(r, t), for every
consumption plan (Xlo Ylo ..• , Xn YT) and for all t, gives a complete characterization of the
utility U" provided inter-period substitution rates are also specified.
8 Reade~s who insist that traders be allowed to give out free whiskey to the Indians are
advised to introduce the concept of saturation into the Indians' preference systems.
9 For a discussion of the problems arising in connection with existence and uniqueness in
this kind of framework, see Peleg and Yaari (1973).
10 For the same T-person game, an optimal consumption plan (if one exists) would then
correspond to a so-called perfect equilibrium. See Selten (1965).
11 The term 'Pareto-efficient' is used here, instead of the more common 'Pareto-optimal', in
order to emphasize the fact that the reference is not to social states but to states of a single
agent.
12 See Note 8, above.
13 We are assuming, for simplicity, that the trader has no use whatever for any whiskey left
over after the conclusion of the exchange process.
14 The functional forms used were log (1 +x), x/(1 +x),.rx, and x -kX2.
IS For the agent whose tastes change over time, 'better off' is here taken to mean 'better off
in every period'.
16 For example, Lord Devlin's (1965) explication of 'harm' includes the terms 'injury'.
'annoyance', 'corruption', and 'exploitation'. (See Note 2 above.)
17 The intuitive appeal of the implication 'consent ~ no harm' is not as great as might
appear at first sight. For example, this implication is not considered valid, not even by stanch
libertarians, in the evaluation of actions resulting in bodily injury or in death.
18 See Note IS, above.
19 If the demand for a commodity rises as the consumer's wealth rises (at fixed prices) then
this commodity is referred to as normal. Otherwise, it is said to be inferior. Obviously,
normality or inferiority of a commodity are properties of the consumer's preferences.
REFERENCES
Arrow, K. J.: 1959, 'Rational Choice Functions and Orderings', Economica, XXVI.
Arrow, K. J.: 1962, 'The Economic Implications of Learning by Doing', Review of
Economic Studies, XXIX.
Devlin, P.: 1965, The Enforcement of Morals. London: Oxford University Press.
Dworkin, G.: 1971, 'Paternalism', Morality and the Law (R. A. Wasserstrom, ed.).
Belmont, California: Wadsworth.
Friedman, M.: 1962, Capitalism and Freedom. Chicago: University of Chicago Press.
98 MENAHEM E. YAARI
Galbraith, J. K.: 1958, The Affluent Society. Boston: Houghton Mifflin.

Gale, D.: 1974, 'Exchange Equilibrium and Coalitions: An Example', Journal of
Mathematical Economics, 1.
Hammond, P. J.: 1976, 'Changing Tastes and Coherent Dynamic Choice', Review of
Economic Studies, XLIII.
Hart, H. L. A.: 1963, Law, Liberty and Morality. New York: Random House (Vintage).
Keynes, J. M.: 1936, The General Theory of Employment Interest and Money. London:
Macmillan.
Koopmans, T. c.: 1957, Three Essays on the State of Economic Science. New York:
McGraw-Hill.
Luce, R D. and Raifla, H.: 1958, Games and Decisions. New York: John Wiley & Sons.
Macpherson, C. B.: 1973, Democratic Theory: Essays in Retrieval. Oxford: Clarendon.
Marcuse, H.: 1964, One Dimensional Man. London: Routledge and Kegan Paul.
Mill, J. S.: 1859, On Liberty. London: J. S. Parker & Son.
Peleg B. and Yaari, M. E.: 1973, 'On the Existence of a Consistent Course of Action when
Tastes Are Changing', Review of Economic Studies, XL.
Pollak, R. A.: 1968, 'Consistent Planning', Review of Economic Studies, XXXV.
Richter, M. K.: 1971, 'Rational Choice', Preference, Utility, and Demand (J. S. Chipman et
al., eds.). New York: Harcourt Brace & Jovanovich.
Selten, R: 1965, 'Spieltheoretische Behandlung eines OJigopolmodells mit Nach-
fragetragheit', Zeitschrift fur die gesamte Staatswissenschaft, 121.
Strotz, R H.: 1956, 'Myopia and Inconsistency in Dynamic Utility Maximization', Review
of Economic Studies, XXIII.
PART 2
SOCIAL AND COLLECTIVE

CHOICE THEORY
SALVADOR BARBERA*
NICE DECISION SCHEMES**
1. INTRODUCTION
This paper deals with a particular type of social decision-making

procedures, which I call 'decision schemes'. In general, a social
decision-making procedure is a rule which to each specification of the
preferences of the individuals in a society with regard to the alterna-
tives open to this society assigns a criterion to choose among such
alternatives. Different types of decision-making procedures may arise,
depending on:
(1) the nature of individual preferences over alternatives; and

(2) the kind of choice criterion provided by the procedure.
Decision schemes are defined so that they specify a lottery over the set
of alternatives for each N-tuple of ran kings over alternatives-where a
lottery is a probability measure and a ranking is a complete, transitive
and asymmetric binary relation. They can thus be interpreted as rules
which process the ordinal features of individual preferences and estab-
lish the probability with which each of the alternatives is to be chosen
on the basis of such preferences.
Traditional social choice theory has been generally concerned with
decision-making procedures of a different nature, which I will call
deterministic because they assign a definite choice of alternatives to
each specification of individual preferences. This is the case, for
example, of Arrow's Social Welfare Functions, Sen's Collective Choice
Rules and Fishburn's Social Choice Functions. Actually, even within
these structures there is some room left for chance: whenever more
than one alternative is chosen by the procedure, one can interpret that
the final decision among the chosen alternatives will be left to chance.
On the other hand, some decision schemes may well be deterministic
in a certain sense. Think, for example, of those which always assign
trivial lotteries where an alternative has probability one of being
chosen. Yet, the structure of decision schemes is such that the
101
Hans W. Goningerand Werner Leinfellner (eds.), Decision 1neory and Social Ethics, Issues in Social Choice, 101-117.
Copyright © 1978 by D. Reidel Publishing Company, Dordrecht, Holland. All Rights Res.rued.
102 SALVADOR BARBERA
probability of some alternative being chosen plays an explicit role, while

probabilistic considerations are at most implicit in what I choose to call
deterministic procedures. In this restricted sense the distinction is, I
think, a valid one.
Decision schemes are but one possible type of social decision-
making procedures which explicitly rely on chance. Different proce-
dures can be specified by changing the domain and/or the range over
which they operate. Thus, for example, Zeckhauser [6] has studied the
class of voting schemes, which allow for cardinal preferences of indi-
viduals in their range, and include decision schemes as a particular
case. Intriligator [5] considered probabilistic choice rules defined over
vectors to be interpreted as the preferences of uncertain voters. There
is a growing interest for the study of probabilistic decision-making
procedures in general. In particular, decision schemes seem to be
important because they are compatible with the traditional view in
economics that only the ordinal features of individual preferences are
to count in the process of choice. Decision schemes have been studied
by Gibbard [4], Zeckhauser [6] and Fishburn. They also encompass, as
a particular case, the lottery rules over sets of two alternatives consi-
dered by Fishburn and Gehrlein [3].
The purpose of this paper is threefold: (a) to define some classes of
decision schemes which constitute natural adaptations of well-known
deterministic procedures to the probabilistic setting; (b) to identify a
number of conditions on decision schemes which appear to be attrac-
tive; and (c) to characterize the class of decision schemes which satisfy
these conditions. Objectives (b) and (c) correspond to what Fishburn
[2] has called, respectively, the 'analytic' and the 'synthetic' approaches
in social choice theory. As for the description of specific procedures
(objective (a» it has a long tradition in social choice theory, as it is
from the study of specific proposals that more general questions do
generally arise.
I define two classes of decision schemes. Supporting size schemes
assign a certain weight to the size of the group of individuals which
prefer an alternative x over another alternative y. The probability that
they attach to each alternative is the sum of the weights which
correspond to the alternative on the basis of its supporting sizes in
pairwise comparisons with all others. Point voting schemes assign a
certain weight to each position in an individual ranking. The probabil-
ity that they attach to each alternative is the sum of the weights which
NICE DECISION SCHEMES 103
correspond to the alternative on the basis of its position in the ranking

of each of the individuals.
Supporting size decision schemes can be viewed as an extension of
the system of majority voting. The random character of their outcome
allows for them to encompass simultaneously the spirit of simple and
qualified majority voting. Point voting decision schemes can be viewed
as an extension of deterministic procedures based on scoring, of which
Borda's count is the best known example. While the principles of
scoring and majority voting are in general mutually exclusive as the
basis for deterministic choices, they are partially compatible when
social outcomes are lotteries.
Also, a number of conditions on decision schemes are put forward
which extend notions from the theory of deterministic social choice. A
scheme is called anonymous if permutating the social order of indi-
viduals without changing their preference rankings does not change the
probabilities attached to alternatives. A scheme is neutral if any
permutation of the alternatives in the rankings of all individuals results
in the corresponding permutation of the probabilities attached to each
of the alternatives. A scheme is strategy-proof if no expected utility
maximizer would ever find it to his advantage to misrepresent his
preference ranking of certain prospects.
Finally, the connection between the above conditions and the prop-
osed classes of decision schemes is established by means of the
following theorem:
A decision scheme is anonymous, neutral and strategy-proof

if and only if it is a probability mixture of a point voting and
a supporting size decision scheme.
It has been known for some time that strategy-proofness, a very rare
property for deterministic social decision-making procedures, can be
satisfied when chance is allowed to play a role in selecting the social
outcome. There is some argument as to how bad it is for a procedure
not to be strategy-proof. But those that meet this requirement are
certainly interesting, since they have the property that no individual
will find it advantageous to engage in strategic considerations that
might lead him to misrepresent his preferences. If chance helps in
achieving strategy-proofness, this might constitute an argument in
favour of its playing a role in social decision processes.
However, this argument would be a very weak one indeed if all

strategy-proof decision schemes turned out to be undesirable by the
standards which are generally used in evaluating social decision proce-
dures, such as anonimity, neutrality or efficiency. One might ask the
question, then, whether there exist 'nice' decision schemes which are
strategy-proof. In this context, the theorem presented here could be
interpreted as providing a quite positive answer: not only do there
exist strategy-proof decision schemes which are anonymous and
neutral, but they are, in fact, simple to operate mechanisms, based on
rules that are easy to understand and which constitute natural exten-
sions of the best known deterministic procedures. Therefore, strategy-
proofness does not preclude the equal treatment of individuals and
alternatives, and no overly complicated procedures are needed to
achieve it. Unfortunately, however, the picture is not so satisfactory
from the point of view of efficiency. Very natural efficiency require-
ments are violated by most of the decision schemes characterized
above. But then, finding out about trade-offs of this kind is one of the
main objectives of social choice theory.
The paper is organized as follows. After some preliminary defini-
tions (Section 2), the classes of point voting and supporting size
schemes are defined in Section 3. Section 4 presents a number of
conditions on decision schemes. In Section 5 the theorem characteriz-
ing neutral, anonymous and strategy-proof decision schemes is pro-
vided. Section 6 presents some fundamental results, due to A. Gib-
bard, which are essential along the paper. Section 7, on the basis
of these results, contains the actual proof of the theorem. Section 8
discusses some additional properties of the classes under study. Con-
clusions follow in Section 9.
2. NOTATION AND DEFINITIONS!
Let V be a finite set, called the set of alternatives. Elements of V are

denoted by x, y, z, w, .... M denotes the cardinality of V.
A ranking of V is a binary relation P which, for all x and y, satisfies:
(a) Connectedness: x ~ y ~ (xPy v yPx)
(b) Asymmetry: xPy ~ -yPx, and

(c) Transitivity: (xPy & ypz) ~ xPz.
Let I == {I, 2, ... , N} be an initial segment of the positive integers. I is

called the set of individuals, and N is the number of individuals.
A ranking N-tuple over V is an N-tuple (PI" .. , PN ) of rankings of
V. Ranking N-tuples are denoted by P, P', P*, .... Ranking N-tuples
are interpreted as functions which assign to each individual i E I the
ranking Pi of V.
A measure over V is a function m which assigns a non-negative
number m(x) to each member x of V. The sum LEv m(x) is called the
weight of the measure. A lottery is a measure of weight one. Lotteries
will be denoted by I.
A scheme for (I, V) is a function from the set of ranking N -tuples
over V to the set of measures over V which have a fixed weight a. The
value a is called the weight of the scheme. Schemes will be denoted by
f,!', .. ..
A decision scheme is a scheme of weight one. Decision schemes will
be denoted by d, d', ....
A decision scheme is, thus, a function which determines the proba-
bility with which each of the alternatives in V is to be selected, given
the preferences of individuals expressed by a ranking N-tuple.
3. SOME PROPERTIES OF SCHEMES
Three conditions are now defined on schemes which adapt to the

probabilistic framework the notions of anonimity, neutrality and
strategy-proofness.
A permutation is a one-to-one function from a finite set onto itself.
Given a permutatior. p on the set of alternatives and a preference
ranking P, pP is defined so that, for all x, y E V, xPy ~ p(x)PPp(y).
Given p and an N-tuple of rankings P == (PI, ... , PN), pP is defined
to be the N-tuple (P~, ... , P~).
Given a permutation a on the set of individuals and an N-tuple of
individual rankings P == (PI' ... , PN ), pO" is defined to be the N-tuple of
rankings pO" == (PO"-'(1), ... , PO"-'(N»)'
A scheme f is anonymous iff, given any permutation a on the set of
individuals, f(x, P) == f(x, pO') for all x E V and every N-tuple of rank-
ings P.
A scheme f is neutral iff, given any permutation p on the set of
alternatives, f(x, P) == f(p(x), PP) for all x E V and every N-tuple of
rankings P.
Thus, an anonymous scheme is one which does not discriminate

among individuals, and a neutral scheme is one that does not discrimi-
nate among alternatives.
p and P' agree off k iff (V i)[(i;i: k) ~ Pi =P;]. P hP is the ranking
N -tuple P' such that P~ = P and P' agrees with P off k.
A utility scale U over V is an assignment of real numbers to the
members of V. Where U is a utility scale over V and I is a lottery over
V, the expected utility U(l) of I on scale U is defined by
U(l) = L U(x)l(x).
xeV
Utility scale U fits a ranking P iff, for all x, y E V,
U(x» U(y) ~ xPy.
In the remainder of the section, conditions are defined which apply to

decision schemes only.
A decision scheme d is potentially manipulable by k at P if there is a
utility scale U which fits Pk and a ranking P~ of V such that, where
PI=P/kP~, U(dPI»U(dP).
d is manipulable if there are an individual k and a ranking N-tuple
P such that d is potentially manipulable by k at P. Otherwise, d is
strategy -proof.
If d is potentially manipulable and individual k is endowed with
utility scale U, he has an incentive to find out about the preferences
that other individuals will declare and, eventually, to misrepresent his
preferences when by doing so he is able to change the social ranking
N-tuple from P to PhP~.
If, on the contrary, d is strategy-proof, then no agent can ever find it
advantageous to misrepresent his preferences, and there are no incen-
tives for any single individual to engage in strategic considerations.
4. Two CLASSES OF SCHEMES
Two specific classes of schemes are now defined, which can be viewed
as the probabilistic counterpart of well known types of deterministic
social choice procedures.
The rank of an alternative x for an individual i within a ranking

N-tuple P is defined as r{i, x, P) = 1{Y lYE V & yPjx}1 + 1. Clearly, 1:0::;;
rei, x, P):o::;; M, for all x, i and P.
The supporting size for an alternative x over an alternative y within
a ranking N-tuple P is defined as
sex, y, P) ='I{i liE 1& xps}l.
Clearly, O:o::;;s(x, y, P):o::;; Nand Sex, y, P) + s(y, x, P) = N for all x, y and

P. A scheme { for (1, V) is a point voting scheme iff there exists an
M-dimensional vector of real numbers (a l , ... , aM), to be called a
positional scoring vector, such that:
(1) a l ;;' a2;;" •. ;;. aM;;' 0, and
N
(2) for all P and x, {(x, P) = L
j=l
ar(i.x.p),
It will be said, in this case, that { is representable as a point voting

scheme with positional scoring vector (ai' ... ,aM)' Clearly, if d is a
point voting decision scheme, it must be that
Point voting schemes operate in the following way: each alternative

is given a score aj every time an individual ranks it in ith position. The
total weight assigned to an alternative for a given ranking N-tuple is
the sum of the scores that it has obtained on the basis of the
preferences of each individual. In the case of point voting decision
schemes the positional scoring vector is chosen in such a way that the
weights assigned to the different alternatives be probability distribu-
tions over V.
A scheme { for (1, V) is a supporting size scheme if there exists an
N + I-dimensional vector of real numbers (bN , • •• , bo), to be called the
supporting size scoring vector, such that:
(1) bN ;;. bN - 1 ;;. ••• ;;. bo ;;' 0
(2) 3K such that bj + bN - j = K for all j:O::;; N/2, and
(3) for all P and x {(x, P) = L
ZEV-X
bs(x,z,P)'
108 SALV ADOR BARBERA.
We say then that f is representable as a supporting size scheme with

supporting size scoring vector (bN , ••• , bo). Clearly, if d is a supporting
size decision scheme it must be that, for j,,;; N/2, bj + bN - j =
2/M(M-l).
Supporting size schemes operate on the basis of pairwise compari-
sons among alternatives. If j individuals prefer x to y, then x is
assigned score bj • The total weight assigned to an alternative is the sum
of the scores it has obtained on the basis of pairwise comparisons with
all others. In the case of supporting size decision schemes, the support-
ing size scoring vector is chosen in such a way that the weights assigned
to the different alternatives be probability distributions over V.
Point voting schemes constitute a natural probabilistic counterpart of
a well-known type of deterministic rules for social choice, variously
called scoring functions, representable voting functions, etc.... , and of
which Borda's count is a classical example.
Supporting size schemes, on the other hand, convey the spirit of
majority voting into the probabilistic framework. However, since deci-
sion schemes are more versatile than their deterministic counterparts,
supporting size schemes are able to encompass, simultaneously, the
features of simple and qualified majority voting.
Within a deterministic setting, the principles of majority voting and
positional scoring are incompatible when the number of alternatives is
greater than two. This is not the case within the framework of decision
schemes, since there may exist decision schemes which are representa-
ble both as point voting and supporting size schemes. For example,
where M = 3 and N = 4, the supporting size decision scheme with
supporting size scoring vector (5/18, 4/18, 3/18, 2/18, 1/18) can also
be represented as a point voting scheme with positional scoring vector
(5/36, 3/36, 1/36).
5. NEUTRAL, ANONYMOUS AND STRATEGY-PROOF

DECISION SCHEMES
A scheme f is a probability mixture of schemes fl, ... , fm iff there is a

sequence aI, ... , am, where a i ;3 0 for all i c {1, ... , m} such that, for
every P and x,
f(x, P) = adl(x, P)+ .. . +amfm(x, P).

Where d is such a probability mixture, I will write

m
f= Util + ... + umfm = I
i~l
uJ;.
By definition, [" = f - f' iff f = f' +[".

Clearly, if a decision scheme d is the probability mixture of decision
schemes d1 , . •• , dm , it has to be that L;"~l U j = 1.
The main result of the paper can now be stated.
THEOREM 1. A decision scheme is anonymous, neutral and strategy-

proof iff it is a probability mixture of a point-voting and a supporting
size decision scheme.
The proof of this theorem relies very heavily on the work of Gibbard
in [4]. In this remarkable paper, Gibbard provides a full characteriza-
tion of strategy-proof decision schemes.
The class I characterize is therefore a subset of Gibbard's set. It is
hoped that the characterization provided by Theorem 1 above will
contribute (1) to clarify the specific contents of the class of strategy-
proof decision schemes, (2) to point out, in the language of the theory,
the possibility of locating some attractive features within this class, and
(3) to establish a connection between these procedures and the prob-
abilistic versions of such widely used collective decision-making proce-
dures as those of majority voting and positional scoring. This result
should also shed some light on the meaning of strategy-proofness and
on the basic differences between the deterministic and the probabilistic
setting with regard to this particular feature of collective decision-
making procedures.
6. GIBBARD'S THEOREM ON STRATEGY-PROOF DECISION SCHEMES
Before proceeding to the proof of Theorem 1, some more definitions

and two versions of Gibbard's Theorem need to be stated.
Scheme f is unilateral iff there is a k E I such that, for all P and P', if
Pk=P~, then dP= dP'.
Scheme f is duple iff there are alternatives x and y such that for
every other alternative z and all P, f(z, P) = o.
A subset X s; V heads ranking Pk iff for any pair x, YE V,

[x EX & yeX]~ xPky.
A scheme f is localized iff for every k E I, for every P and p' which
agree off k and for every set X that heads both Pk and P b f(X, P) =
f(X, PI).
A switch is a reversal of two adjacent alternatives in a ranking.
xPk! y will mean that x immediately precedes y in ranking Pk. Where
xPk! y, Pk x is the ranking which switches x and y in Pk and permutes no
other alternatives.
Scheme f is non-perverse iff for every P, k, x and y such that xPk! y,
where P' = P/kPkX, f(y, PI) ~ f(y, P).
Gibbard's Theorem characterizing the set of strategy-proof decision
schemes can now be stated.
THEOREM 2 (Gibbard). A decision scheme d is strategy-proof iff it

is a probability mixture of decision schemes, each of which is localized,
non-perverse and either unilateral or duple.
The necessity part of the theorem can be given a more explicit
formulation, which is going to be of use to prove Theorem 1. Before
this formulation can be provided, some additional notions have to be
introduced.
f xPx is Pk with x moved to the bottom or grounded. Thus,
By definition, fxP= (fxP}, ... ,fxPN).

Scheme f is constant iff for all x E V and all P and P', f(x, P) =
f(x, P').
k's unilateral component of scheme f is the function A such that, for
all x and P, A(x, P) is the minimal value, from among all p' such that
Pk =P b of f(x, PI)- f( ,P'/kfxPk).
The xy duple component of a scheme f is the scheme fxy such that,
for all P, fxy(x, P) = f(x, fxyP), fxy(Y, P) = f(y, fxyP), and for all z other
than x and y, fxy (z, P) = O.
Now we can formulate more precisely the necessity part of Gib-
bard's theorem.
THEOREM 2' (Gibbard). If d is a strategy-proof decision scheme, it

can be expressed as the sum of N + M(M -1)/2 + 1 schemes, in the
form
L h+ L L fxz,
N
d = fo + where
i=1 xeVz"x
zeV
(1) fo is a constant scheme such that, for all Z E V, f(z, P) = d(z, r xP)
for any ranking N-tuple P;
(2) for i E {1, ... ,N}, fi is i's unilateral component of d - fo; and
(3) for all pairs x, z, fxz is the xz duple component of (d - fo)-
L~1fi'
7. PROOF OF THEOREM 1
Sufficiency. It is easily checked that point voting decision schemes,

supporting size decision schemes and their probability mixtures are
anonymous and neutral. To show that they are strategy-proof, let da
be any point voting scheme with positional scoring vector (at> ... , aM)
and db any supporting size decision scheme, with supporting size
scoring vector (bN , ••• , bo), and let
For each i E I, let dai be the decision scheme defined by
dai(x, P) = Nar(i,x,P) for all x E V and all ranking N-tuples P.
Clearly, each dai is unilateral, localized and non-perverse. For each

pair x, y E V, let dbxy be the decision scheme defined by
o if ze{x, y}
dbxy(z, P)~[M(M -1)/2]b s (x,y,P) .if z =x
[M(M -1)/2]b s (y,x,P) If z = y.
Clearly, each dbxy is duple, localized and non-perverse. In addition, it

is easily checked that

N
da = L (l/N)dai
i=l
and that db = (2/M(M -1)) L L dbxy,
XEVy>,X
so that d can be written as
N
d= L (a/N)dai + L L (2(1- a)/M(M -l))dbxy,
i=l XEV y"X
i.e.,
as a probability mixture of localized and non-perverse decision

schemes, each of which is either unilateral or duple. Thus, by Gib-
bard's Theorem, d is strategy proof.
Necessity. Let d be strategy-proof, neutral and anonymous. Since d
is strategy-proof, it can be decomposed as in Theorem 2', in the form
d = fo+ L fi + L L fxz = fo+ t*.

i=l XEVy>'X
ZEV
(a) fo(x, P) = fo(Y, P) for all x, Y and P.

Proof. Suppose not. Then, there would exist two alternatives x and Y
such that, for any ranking N-tuple P, fo(x, P) ~ fo(y, P). Let p be a
permutation on V for which Y= p(x), x = p(y) and z = p(z) for all
ze{x, y}. Let P be a ranking N-tuple under which x is the lowest
alternative and y is the alternative before last in every individual's
ranking. Then, clearly, fxP= P, fyP= Pp.
By definition of fo, we have:
fo(x, P) = d(x, f xP) = d(x, P)
fo(y, P) = d(y, fyP)= d(y, PP).
By hypothesis, fo(x, P) ~ fo(y, P). Thus, d(x, P) ~ d(p(x), PP), con-

tradicting the fact that d is neutral.
Therefore, it must be that fo(x, P) = fo(y, P) for all x, y and P, as
stated. Clearly, this implies that fo is neutral and anonymous.
(b) t* is neutral and anonymous.

Proof. Let, in general, f, f'

and f" be three schemes such that
f = f' +f". From our definitions, the following two statements must
hold:
If f and f' are anonymous, f" is anonymous.

If f and f' are neutral, f" is neutral.
Now, in our case, d = fo+ f*. d is neutral and anonymous by assump-

tion. It has been proven in (a) that to
is also neutral and anonymous.
Thus, f* must be neutral and anonymous.
(c) The unilateral components of d are identical for all individuals. By

this I mean that, if P and pi are any two ranking N-tupJes such that
Pi = Pj for some i, j E I, then fi (x, P) = Mx, Pi) for all x E V.
Proof. By definition, for all x and P, A(x, P) is the minimal value,
from among all p* such that Pk=Pt, of f*(x,P*)-f*(x,P*hfxPk ).
Suppose, contrary to the assertion, that there were two individuals
whose corresponding unilateral components were not identical. That is,
for some pi, P" such that Pj = P~ and some x E V, th (x, P") ~ Mx, Pi).
Suppose, without loss of generality, that fh (x, P") < Mx, Pi), and let P
be the specific ranking N -tuple among those with Ph = P~ for which
f*(x, P) - t*(x, PI hf xP~) = th (x, P").
Let (T be the permutation of individuals that switches hand j,
keeping the positions of all other individuals. Since f* is anonymous
by (b), f*(x, P) = f*(x, pO"), and /*(x, P/hfxP~) = /*(x, [P/hfxP~]O") =
f*(x, PO"ljfxPj).
Thus, for pO" we would have that Pi = Pj, and that
in contradiction with the definition of t

j, which requires it to give the
minimal value of all such differences.
(d) The value of each of the unilateral components of d at any given

profile for any given alternative, depend only on the rank of this
alternative for the corresponding individual at the given profile.
Proof. Suppose not. Then there would be i, P, pi, x such that
r(i, x, P) = r(i, x, Pi) and yet Mx, P) < Mx, Pi).
Let p be a permutation on the set of alternatives such that, for all z,

r(i, z, P) = r(i, p(z), PI), i.e., Pi = P;. Thus, in particular, p(x) = x.
Let P be the specific ranking N-tuple for which Pi=Pi and li(X, P) =
f*(x, P) - f*(x, p/irxPJ.
Since t* is neutral, t*(x, P) = t*(x, PP), and t*(x, P/irxPJ =
t*(x, [P/ir xPi]P) = t*(x, PP)if xpr) , where pr = P;. But then, it would be
that /;(x, P) = t*(x, PP) - t*(x, PP/if xP;) < /;(x, PI), in contradiction with
the definition of Ii.
(e) Let Wo be the weight of 10. Let W(i) be the weight of and t,
WI = Ii: I W(i). Then, d S = (l/Wo+ WI)[fo+ Ii: I t] is a point voting
decision scheme. It is thus neutral, anonymous, localized and non-
perverse.
Proof. By (c) and (d), h(x, P) = t(y, PI) for any i, j, x, y, P and P'
such that r(j, x, P) = r(i, y, PI). Let, for each given h, aft =
/;(x, P)(l/Wo + WI) for any x and P such that r(i, x, P) = h.
Since d is non-perverse and 10 is constant, t* must be non-perverse.
Then, by the definition of Ii> each [; must be non-perverse, and this
implies that ah~ a k whenever h < k.
Let, for each l.;;;h.;;;M, ah =a~+(Wo/NM)(l/Wo+ WI). It is left to
the reader to check that d = (l/Wo+ Wt)[fo+ Ii:t Ii].
S
(f) Let d ss = (l/W2 ) LEv IYEV Ixy, where W(x, y) is the weight of Ixy,
y,<x
and W2 = LEv I YEV W(x, y). Then, d ss is a supporting size decision
scheme. v,<x
Proof. The proof of (f) will only be outlined here. It involves a line
of reasoning similar to that of (b), (c), (d) and (e).
By definition, fo+ If=t t = (ds/Wo+ WI). Thus, d = (d'/Wo+ Wt )+
LEv LEv fxy· Since d S is neutral and anonymous, (ds/Wo+ Wt ) must
X'<v
also be. This, and our hypothesis on d, implies that 1= LEV LEv fxy
must be neutral and anonymous. W'<Y
By a reasoning similar to the one in (c) and (d), and using the fact
that tXY(x, P) = I(x, f XyP), we could show that if P and P' are two
ranking N-tuples such that, for all i E I and any x, y, Z, WE V,
xPiY ~ zP;w, then tXY(x, P) = fzw(z, P'). That is, tXY(x, P) = fzw(z, PI) for
any x, y, Z, W, P and P' such that s(x, y, P) = s(z, w, P'). Let, for each
given k, O~k~M, bk =fxy(x,P)(1/W2) for any x, y and P such that

s(x, y, P) = k.
Since d and fo+ I~l fi are non-perverse, LEv LEv fxy must also be
xr'y
non-perverse, and so must be fxy for any pair x, y E V. Therefore,
bk ~ bh whenever k > h.
It is now left to the reader to check that d ss is indeed a supporting
size decision scheme, with supporting size vector (bN , ••• , bo).
(g) By Gibbard's Theorem, d = fo +I~l fi +LEv LEv fxy. Thus, d =

xr'y
(Wo+Wl)ds+W2dss. where Wo+Wl+W2=1, WO+W1;:?!O, and W2;:?!
O. Therefore, d can be expressed as a probability mixture of a point
voting decision scheme d S and a supporting size decision scheme d ss ,
and this completes the proof of the theorem.
8. SOME ADDITIONAL REQUIREMENTS
What has been said up to now shows that point voting schemes and
supporting size schemes, as well as their probability mixtures, exhibit a
number of desirable properties. Some additional features of such
schemes are now discussed. Proofs of the assertions are left to the
reader.
First of all notice that point voting decision schemes, supporting size
decision schemes and their probability mixtures all satisfy the following
minimal efficiency property:
Weak unanimity: For any P, x and y,
(Vi)xPiy ~ d(x, P);:?! d(y, P).
A different efficiency property can also be imposed upon schemes:

Rejection: For any P and z,
(Vy)[(Vi)yPiZ]~ d(z, P) = O.
Clearly, for a neutral, anonymous and strategy-proof decision scheme

to satisfy the rejection property it has to be decomposable into a point
voting decision scheme which assigns weight zero to the last-ranked
alternative and a supporting size decision scheme for which bo = O.
Finally, consider the following condition, which implies both weak

unanimity and rejection:
Ex-post Pareto Optimality: For any P, x and y,
(\;fi)xPiy~d(y, P) = o.
The only neutral, anonymous and strategy proof decision scheme
which satisfies Ex-post Pareto Optimality is the point voting scheme
with positional scoring vector (1,0,0, ... , 0).2
9. CONCLUSIONS
A class of decision schemes which appears to be 'nice' from several

points of view has been characterized. In particular, the condition of
strategy-proof ness, which is known to be a very rare feature among
deterministic social decision-making procedures, is shown to be com-
patible with several other desirable criteria within the probabilistic
framework. By operating over a larger domain, decision schemes are
able to generate social outcomes which do not leave any room for the
type of bargaining 'within the rules' by means of preference misrep-
resentation to which manipulable procedures are open. The main
causes of dissatisfaction with the subclasses of strategy-proof decision
schemes which are characterized above are to be found (1) on their
poor efficiency properties3 and/or (2) on the possibility that the very
notion of letting chance play an important role might be unacceptable
for certain social decision-making problems. 4
Universidad de Bilbao
NOTES
* The author gratefully acknowledges financial support from the Instituto de Estudios
Fiscales, Ministerio de Hacienda, Spain.
** Presented at the Symposium on Decision Theory and Social Ethics, organized by the
Bavarian Academy of Sciences, held at Schloss Reisensburg, June 24-30, 1976.
1 This terminology is due to A. Gibbard [4]. Gibbard's notation and definitions are used
here whenever possible.
2 This procedure has been called the 'random dictator' system. See [4], Section 5.
3 See Section 8 and Gibbard [4].
4 See [1].
BIBLIOGRAPHY
[1] Barbera, S., The Manipulability of Social Choice Mechanisms That Do Not Leave
Too Much to Chance', Econometrica 45 (1977).
[2] Fishburn, P., The Theory of Social Choice, Princeton University Press, Princeton,
1973.
[3] Fishburn, P., and Gehrlein, W., 'Towards a Theory of Elections with Probabilistic
Preferences', Econometrica 45 (1977).
[4] Gibbard, A., 'Manipulation of Schemes that Mix Voting with Chance', Econometrica
45 (1977).
[5] Intriligator, M., 'A Probabilistic Method of Social Choice', Review of Economic
Studies 40 (1973).
[6] Zeckhauser, R., 'Voting Systems, Honest Preferences and Pareto Optimality',
American Political Science Review (1973).
JOHN A. FEREJOHN
THE DISTRIBUTION OF RIGHTS

IN SOCIETY
I. INTRODUCTION
In the few years since the publication of Sen's paper on 'The Impossi-
bility of a "Paretian Liberal"', (1970) a remarkable outpouring of
notes and papers has been circulated and published on the topic. Two
recent papers, one by Gibbard (1974) and the other by Blau (1975),
have addressed the issue raised by Sen in especially interesting and
provocative ways. I think their proposals are not completely satisfac-
tory in certain respects and so I venture here to propose a somewhat
different way of attacking the problem. The resolutions that I propose
to Sens' 'paradox' have their own deficiencies of course and one is left,
ultimately, to judge which deficiencies are the least incapacitating.
Like Blau and Gibbard I propose to weaken, in a certain sense, the
notion of a right sufficiently to allow society to distribute rights to
many individuals in a way that is consistent with the Pareto principle.
Several such notions of right are found and I argue that our intuitions
about rights in applied situations do not necessarily support the alter-
native notions of Blau and Gibbard.
II. NOTATION
Throughout this paper I will let X denote a set of alternatives and

N(INI = n) a finite set of individuals. For each i E N R j is a binary
relation on X which is complete, reflexive, and transitive. I sometimes
call such a relation a weak order. The set of weak orders on X is
denoted fYt, and the n-fold cartesian product of this set is represented
as Rn. An element 'IT = (R 1 , R z, ... , Rn) E 9A n is simply an n-tuple of
weak orders and is called a preference configuration. The collection of
subsets of X on which society may occasionally be required to make
choices is denoted by 00 £; ~(X).
A social choice function (SCF) is a mapping C, that takes 00 ® fYt n
into ~(X) in such a way that \IS E B, 'IT E fYt n , cf4 C(S, 'IT) £; S. A social
119
Hans W. Gottinger and Werner Leinfellner (eds.), Decision Theory and Social Ethics, Issues in Social Choice, 119-131.
Copyright © 1978 by D. Reidel Publishing Company, Dordrecht, Holland. All Rights Reserved.
120 JOHN A. FEREJOHN
choice function if called rational with respect to 00 if and only if there is

a binary relation Q (which may depend on 'IT) on X such that
C(S,'IT)={yeSI-xQy,VxeS}VSeoo. If 00=~(X) we shall call C
rational.
I can now formulate some of the notions of 'right' that have been
employed in the literature.
R1: C accords a k-right on the ordered pair (x, y) to

individual i E N ++ V'lTE ~n{XPiY -+ [\is E 00, lSI = k, XES-+
y¢ C(S, 'IT)]}.
R2: C accords a right on the ordered pair (x, y) to indi-
vidual i e N ++ C accords a k-right on (x, y) to individual
i e N for each k::s IXI.
Sen's definition of a right (1970) corresponds essentially to our

notion of a 2-right. That is, if an individual has the right in Sen's sense
to decide an 'issue' (x, y), then he can decide that x will be chosen over
y by society on the two element set {x, y} (on this definition he could
not necessarily force y to be chosen over x on the pair {x, y}).
Gibbard's notion of a right, on the other hand, is just the same as ours.
This formulation is intended to allow us to raise questions concern-
ing the content or force of a 'right'. The stories given by Sen and
Gibbard to support their respective definitions do not seem to me to be
unambiguous as to which, if either, of the definitions proposed cap-
tures the idea of an individual having a right to something. In the next
Section, I shall present an alternative story and argue that, taken by
itself, Sen's definition of right is 'too weak', while Gibbard's is 'too
strong', and that we should consider adopting an intermediate defini-
tion of the following kind.
R3: C accords a weak right over (x, y) to i e N ++ [C ac-

cords a 2-right on (x, y) to i E Nand VS E 00, lSI> 2, xPiy,
ye C(S, 'IT), and XES -+ X E C(S, 'IT)].
R4: C accords a weak* -right to x in S to i eN ++ [C
accords 2-rights to i on (x, y) for xeS and each y E C(S, 'IT)
and xPiy Vy e C(S, 'IT) -+ x e C(S, 'IT)].
Finally I give two versions of the Pareto principle.

THE DISTRIBUTION OF RIGHTS IN SOCIETY 121
BP: If xPs Vi E N then {x} = C({x, y}, 7T).
P: If xPiy Vi E N then XES ~ ye C(S, 7T).
Evidently P, the version of the Pareto principle proposed in classical

welfare economics is stronger than the binary Pareto principle. Ulti-
mately, it will turn out that this difference is of some importance.
III. IMPOSSIBILITY THEOREMS
Sen's Theorem (1970) may be stated as follows:
THEOREM 1. If INI;::: 2, IXI;::: 3, then there is no rational social

function that gives 2-rights to two distinct individuals and which
satisfies BP.
To state Gibbard's Impossibility Theorem requires some additional

notation. First assume that X may be regarded as a cartesian product
of m 'issues'. Thus:
X = n
m
i=1
Xi. We say that
XEX is a j-variant of YEX~Xi=Yi' i=1,2, ... ,j-1,

j+1, ... , m.
R5: C accords individual i E N an absolute right on issue
j ~ [x is a j-variant of y ~ i has a right on (x, y)].
Gibbard's Theorem may be stated as follows:
THEOREM 2. There is no social choice function that gives absolute

rights to two distinct individuals.
We give another Theorem similar to Gibbard's though slightly weaker

than his. First we need a definition.
R6: C accords i E N an absolute k-right on issue j ~ [x is a

j-variant of y ~ i has a k-right on (x, y)].
THEOREM 3. There is no rational social choice function that gives

absolute 2-rights to two individuals.
This Theorem can be established either by employing Gibbard's proof
of Theorem 2 or by demonstrating the following lemma and applying
Gibbard's Theorem itself.
LEMMA. If C is rational then i e N has an absolute right on issue
j ++ i e N has an absolute 2-right on issue j.
Proof. We need only establish that if i has an absolute 2-right on
issue j then he has an absolute right on issue j. If not there exist x,
y e X, 7T e R", and S e ~(X) such that x is a j-variant of y, xPiy and
ye C(S, 7T). But note that there is a Q such that:
C(S, 7T) = {z e S l-wQz Vw e S},

and so
-xQy - ye C({x, y}, 7T) so that i e N does not have a 2-

right on issue j.
The statement of Theorem 3 illustrates the difference between Sen

and Gibbard's impossibility results. Gibbard's result shows that as long
as social choice is rational not only is the distribution of two-rights to
more than one individual incompatible with the Pareto principle, but
that the distribution to more than one person of absolute two-rights is
by itself inconsistent with the definition of a social choice function.
One might object that absolute two-rights are not normatively compel-
ling. That is, someone could claim that he was a liberal without
believing that anyone holds any absolute 2-rights. To counter this
objection I will give a theorem that indicates that Gibbard's idea that
certain rights distributions are inconsistent is still valid with a weaker
definition of rights. First I give some additional notation:
DEFINITION. An assignment of rights is a function g: T - N where

TS;X®X.
DEFINITION. S S; T is called connected if and only if for some m

there is a sequence of distinct elements Xl> X2' ••• ,x". contained in X
such that (Xl> x2)e S, (x 2 , x3)e S, ... , (xm-l> xm)e Sand (xm , x1)e S.
DEFINITION. C k-satisfies (satisfies) an assignment of rights g on

T ++ V(x, y)E T, g«x, y») = i ~ i has a k-right (right) on (x, y).
DEFINITION. A choice function C is barely k-liberal (barely liberal)

just in case it k-satisfies (satisfies) g on T and Ig(T)12:: 2.
The following Theorem is easily established.
THEOREM 4. If C is rational and 2-satisfies g on a connected set S,

then g is not barely 2-liberal.
Proof. Assume that Ig(S)12:: 2 and that the individual labeled 1 is
accorded a 2-right on some issue.
Divide S as follows:
K = {z E S I g(z) = 1},
K=S-K,
Pick z = (Xl> Xi+1) E K such that (Xi-I> X;) E K.

Then consider the following preference configuration:
1 2-n
Xi-I Xi
For j=1,2, ... , i-2, i, i+l, ... ,m-l. We have:
Note that by the choice of z = (X;, Xi+I)g«Xi-I> Xi») t= 1 so that {Xi-I} =

C({Xi-I' X;}, 7T • Thus C cannot be rational. Q.E.D.
THEOREM 5. If C satisfies g on a connected set S, the C is

not barely liberal. The method of proof is to show that
C({x 1 , x2, ••• , xm }, 1T) must be empty for the configuration given in the
previous proof.
Theorems 4 and 5 indicate that the possible inconsistency of rights
allocations does not depend on the attribution of absolute rights to
individuals. The distribution of absolute rights is one method for
ensuring that the domain of a rights assignment satisfied by C contains
a connected set. However each of these theorems depend essentially
on the presence of a consistency principle or a very strong notion of
'right' that forces choices on two element sets to be related to choices
on larger sets. In what follows, I weaken the consistency requirements
that Sen and Gibbard have imposed and investigate the possibility of
consistent widespread attributions of rights in this new environment.
IV. RESOLUTIONS OF THE LIBERAL PARADOXES
Gibbard and Blau have each proposed novel methods of restricting the
force of a right sufficiently to avoid the paradoxes discussed above.
Blau's method consists of restricting the subset of preference config-
urations over which the holding of a right by an individual can
determine social choice. He shows in effect that if, in a certain sense,
there are no significant 'externalities' in consumption between indi-
viduals, social choice may be substantially determined by the exercise
of rights of individuals without violating the binary Pareto principle.
Blau proceeds as follows. He says that for an individual xPw is
stronger than ypz ~ xRy, yPz, and zRw and either xPy or zPw. An
individual i is meddlesome in a preference configuration relative to g in
case for some (x, y) E T such that g((x, y» = i he has xPiy and for some
j and (u,v) such that g«u,v»=j and u~v, he has vPiu and vPiu is
stronger than xPiy. An individual is liberal in a preference configura-
tion in case he is not meddlesome. A configuration is liberal if every
individual is liberal in the configuration. His liberalism axiom (WL') is
that, if the configuration 1T is liberal, C 2-satisfies g, g((x, y» = i and
xPiy then {x} = C«x, Y), 1T). Essentially, Blau has built a domain re-
striction into WL'.
I suggest that WL' permits demonstrably illiberal societies to be
regarded as liberal, and so that the demonstration that C may satisfy
WL',BP, and rationality is not of much solace to a liberal. Consider
THE DISTRIBUTION. OF RIGHTS IN SOCIETY 125
the following story (due with some modification to Gibbard):

Jones would like to learn the contents of a certain book as cheaply as possible. He will
read it if he must but would rather let Smith read the book and tell him about it. Smith,
on the other hand, would like to read the book if he could then have an intelligent
conversation about it with Jones. Such a conversation is impossible if Jones hasn't read
the book!
Now suppose we want to accord to both Smith and Jones the absolute
right to read or not to read the book-not an unreasonable attribution
of rights, I would think. Let's represent the social states of interest as
follows.
where a is the list of outcomes on every other issue, by society, R or

NR in the first component indicates that Jones reads or doesn't read the
book, and R or NR in the second components indicates that Smith
reads or doesn't read the book. Formally, say that Mr Jones has the
right to decide between x and y and between z and w. Mr Smith has
the right to decide between wand y and between x and z. The
preference configuration is as follows:
Jones Smith
y x
x z
z w
w y
Note that both Smith and Jones are meddlesome in that Jones' yPw is
stronger than his yPx. Thus, if the two individuals hold rights in Blau's
sense, the social choice function is unrestricted on this preference
configuration. Since Sen has given some persuasive criticisms of this
notion elsewhere (1975) I will not criticize it extensively here. I shall
only say that it seems that an adequate conception of a 'right' should
enable its holder to undertake or prevent some actions in precisely
those cases in which other members of society strongly desire to have
him do something else. Blau's conception provides a right-holder this
ability only in case the preference configuration obeys a certain fairly
restrictive condition. Leaving aside the practical question of how one

determines whether the given configuration is liberal, this conception
of right seems to apply to too narrow a range of situations to be of
much interest to the liberation.
Gibbard takes a different tack. If C satisfies g and BP and if
g«x, y» = i then individual i is said to waive his right on (x, y) on the
set S £;; X just in case there is a sequence Zl, Z2, ..• , Zm E S with y = Zl
and for each k = 1, ... , m -1, either:
or
(2) Zk+lPjZk 'Vj E N,
and
C accords individual i an alienable right on (x, y) on S if and only if C

satisfies g, g«x, y » = i and i does not waive his right on (x, y ». In this
case we say g«x, y), S, 7T) = i. Gibbard's liberalism condition is that:
g«x, y), S, 7T) = i and XPiY~[x E S ~ ye C(S, 7T)].
Superficially this formulation suggests that, like Blau, Gibbard has

made the holding of a right dependent on the preference configuration.
Indeed, he has done that and more. He has made the holding of a right
depend explicitly on the set of feasible alternatives. Nevertheless, the
content of this suggestion is quite distinct from Blau's.
In the previous example Gibbard's liberalism (until Blau's) would
restrict the social choice function on the given configuration. The
following choice function satisfies the rights description of the example
and is liberal in Gibbard's sense:
C({x, y}, 7T) = {y} C({x, y, z}, 7T)={y}

C({x, z}, 7T) = {x} C({x, y, w}, 7T = {x}
C({x, w}, 7T) = {x} C({x, z, w}, 7T) ={x}
C({y, z}, 7T) = {y, z} C({y, z, w}, 7T) ={z}
C({y, w}, 7T)={W} C({x, y, z, w}, 7T) = {x}
C({z, w}, 7T) = {z}
Note that this choice function is not rational since the willingness to
exercise rights, which is unconditional in two element sets, depends on
preferences over other elements in the larger feasible sets. Note also
that while this choice function is not the only one that would satisfy
Gibbard's liberalism condition, no choice function that satisfies this
condition is rational.
Not only is Gibbard's proposal mathematically distinct from Blau's,
it also rests on a distinct method of resolving conflicts between holders
of rights. Gibbard shows that no conflicts will arise if only each
individual behaves in an apparently reasonable manner. The individual
should not try to exercise his right on a pair (x, y) in any case where
assuming the other right holders exercise their rights, he would be at
least as well off by foregoing his rights claim. Thus the attractiveness of
this proposal rests on the likelihood that other individuals will be
'reasonable' in Gibbard's sense. This is ultimately an empirical ques-
tion. Thus if evidence is produced showing that people do not satisfy
Gibbard's criterion of reasonableness, we are left again with the
original Sen and Gibbard paradoxes.
V. A NEW CONCEPT OF RIGHT
The contributions of Blau and Gibbard are less than completely

satisfying in that they provide a hypothetical constitution-writer with
information that is useful only in a restricted set of environments. Blau
indicates that rights may be distributed widely as long as we are willing
to limit their application to preference configurations of a certain sort.
Gibbard says a wide distribution of rights is consistent as long as
everyone acts in a restricted way. I wiII give here a concept of right
with the property that rights of this sort can be distributed widely, need
not be abrogated on various preference configurations, and do not
require us to restrict the behavior of individuals. As suggested above
the new rights notions proposed here are located between 2-rights and
rights.
First we note that if an individual has a weak-right on (x, y) the he
has a weak* -right to x in S, for any S £ X such that XES. The
converse implication does not hold. We will give results of two sorts:
one in which we employ the concepts of weak-rights or weak*-rights;
the other in which we use the concept of 2-rights together with an
explicit consistency condition. Finally we provide a connection between

the two formulations.
DEFINITION. If g is an admissible assignment of rights then C

weak-satisfies g ~ 'r/(x, Y)E T, [g«x, y») = i ~ i has a weak-right on
(x, y)J.
DEFINITION. If g is an admissible assignment of rights then C

weak*-satisfies g~'r/S, 'r/XES [g«x,y»)=i'r/YEC(S,1T)~i has a
weak*-right to x in S].
The following Theorem is given without proof:
THEOREM 6. If g is an admissible assignment of rights, then there

exists a C that satisfies BP and which weak-satisfies g.
I introduce a consistency principle put forward in an earlier paper by

Ferejohn and Grether (1977).
In that paper it was argued that *IP is, at the same time, an
attractive consistency condition for social choice, and sufficiently weak
that a variety of procedures exist that satisfy it. In the present context
the following result can be establisbed.
THEOREM 7. If g is an admissible assignment of rights then there is

a C that satisfies BP, *IP and 2-satisfies g.
Proof. Note that BP and 2-satisfaction of an admissible rights dis-
tribution determine social choice only on two element sets. For larger
sets let C(S, 1T) = S. Q.E.D.
We proved a somewhat stronger version of the following lemma in
an earlier paper (1974). This lemma turns out to provide a connnection
between the two formulations introduced here.
LEMMA. If C satisfies * IP and 2-satisfies g then for any i E N, if i has

a 2-right on (x, y) 'r/y E C(S, 1T) then i has a weak*-right to x in S.
Proof. Suppose i does not have a weak*-right to x in S, then

3'7TE ~n such that xPiy, VyEC(S, '7T), XES and xe C(S, '7T). Note that
C( U C({x,y},'7T)UC(S-C(S,'7T))~C(S,'7T)\
yeC(S, 'IT) ')
= C[{x}U C(S- C(S, '7T)]~ C(S, '7T);i 0. Q.E.D.
Thus it is seen that weak or weak* -rights may be distributed to many

individuals without violating the binary Pareto principle. The cost of
this reconciliation is that a weak-right does not empower its holder to
do very much. At best the holder of a weak-right can force a desired
alternative into the choice set for society. He cannot, however, prevent
society from choosing alternatives that are abhorrent to him.
VI. SOME NEW IMPOSSIBILITY THEOREMS
Like Blau and Gibbard, I have suggested a way of weakening the force
of a right. The weaker rights conceptions given here turn out to be
consistent with the definition of a social choice function even if rights
are distributed widely, as well as consistent with the binary Pareto
principle. While these properties are obtained at some cost, they at
least indicate the existence of general social choice processes that
operate by empowering individuals to make certain choices on behalf
of society (decentralized processes). Such processes may operate in a
very wide class of societies, but they may not be permitted to be very
decisive on large sets if the distribution of rights is extensive. In certain
preference configurations each of many individuals may be able to add
elements to the choice set.
In this Section, I shall show that decentralized processes of the sorts
described above do not generally restrict their choices to the Pareto
undominated elements of the feasible sets.
THEOREM 8. There is no C which weak satisfies g, an admissible

assignment of rights, with Ig(T)I;;:: 2, and P.
Proof. Employing the same configuration as in Theorem 4, note that
C({Xl' X2, ••• , xm }, '7T) must contain Pareto dominated elements.
Q.E.D.
THEOREM 9. There is no C which 2-satisfies g, an admissible

assignment of rights with Ig(T)I;:::: 2 and *IP and P.
Proof. Choose the same configuration as in Theorem 4 and note
that:
{Xj} = C({Xj, Xj+l}, 7T) = 1, 2, ... , m -1,

{x m }= C({Xm , Xl}, 7T),
*IP implies (see Ferejohn and Grether (1977)) that {Xl' X z, .. ·, xm}s;
C({Xl' Xz, ••• , xm }, 7T). Q.E.D.
Theorem 8 indicates that if weak-rights are distributed widely

enough in society, the resulting decision procedure must sometimes
choose inefficiently. Theorem 9 shows that if we weaken the definition
of rights to require only that the rights holder be empowered to choose
on two element sets, and require that the social decision procedure
satisfy a weak consistency axiom, the same result holds.
Unfortunately we have no theory describing limitations on the
distribution of weak* -rights. It seems clear that if the social choice sets
are always 'large enough' we can require that the choice function
weak* -satisfy equitable rights distributions without requiring society to
be inefficient. We shall leave further investigation of this concept for
the future.
VII. CONCLUSION
The results reported here are intended to clarify somewhat the pos-
sibilities for organizing social choice through the use of decentralized
decision making procedures. We have explored here the consequences
of giving different amounts of power to the individual units in decen-
tralized system, and have found that systems that give large amounts of
power to individual decision making units will sometimes be forced to
choose inefficiently.
California Institute of Technology

BIBLIOGRAPHY
Blau, J. H., 'Liberal Values and Independence', Res., 1975.

Ferejohn, J. A. and Grether, D. M., 'Weak Path Independence', JET (Forthcoming),
1977.
Ferejohn, J. A. and Grether, D. M., 'Regular Choice and Power Structure', Mimeo,
CaITech., 1974.
Gibbard, A., 'A Pareto Consistent Libertarian Claim', JET 7 (1974); 388-410.
Sen, A. K., 'The Impossibility of a Paretian Liberal', JPE 78 (1970), 152-157.
Sen, A. K., 'Liberty, Unanimity and Rights', Mimeo, 1975.
PETER C. FISHBURN
ACCEPTABLE SOCIAL CHOICE LOTTERIES*
1. INTRODUCTION
Lotteries have been used at least since biblical times to make certain
types of social decisions. Thanks in part to the paper by Zeckhauser
[29], which notes that "Social decision procedures usually do not allow
lotteries on alternatives to compete as potential social choices", inter-
est in the analysis of social choice lotteries has increased in the past
few years. As far as I am aware there has not however been an attempt
to identify the characteristics of situations in which a social choice
lottery can be acceptable by current standards. The first main purpose
of this paper will therefore be to suggest a set of characteristics for a
social choice process that delineates minimal standards of acceptability
for the use of a social choice lottery. At the same time I shall identify
reasons why such lotteries are not used more often at the present time.
The second half of the paper then examines aspects of acceptable
situations for social choice lotteries from a mathematical viewpoint.
We shall look at these situations from the perspective of the prefer-
ences of the agents who have a direct stake in them. Our two main
concerns will be the existence of a Condorcet alternative-one that is
preferred by a majority of non-indifferent agents to every other
alternative-and the nature of Pareto lotteries, which are lotteries that
are not unanimously less preferred than other lotteries. In addition, the
role of a compromise alternative will be considered.
Further introduction is provided in the next section which explains
the basic formulation for social choice lotteries and briefly reviews the
literature on the topic of social choice lotteries.
2. SOCIAL CHOICE LOTTERIES
Let X be a nonempty set of mutually exclusive decision alternatives

that are viewed as the basic objects of choice in a group decision
process. A lottery on X is a simple probability distribution on X so that
if p is a lottery on X then p(x) = 0 for all but a finite number of x E X
133
Hans W. Garringer and Werner Leinfellner (eds.), Decision Theory and Social Ethics, Issues in Social Choice, 133-152.
Copyright © 1978 bv D. Reidel Publi&hinR Com""nv. Dordrecht. Holland. All Rights Reseroed.
134 PETER C. FISHBURN
and L p(x) = 1 for those x that have p(x) > O. Lotteries can be-and
sometimes are-used to select a basic alternative as the social choice in
a group decision process, and in this capacity we refer to them as social
choice lotteries. If lottery p is used to make the social choice, then a
random device that assigns probability p(x) to each x for which
p(x»O is actuated to determine a 'winner'. Random devices used for
this purpose range from coins and dice to somewhat more elaborate
mechanisms used, for example, in draft lotteries and state or national
lotteries.
Although elements in X may present aspects of risk or uncertainty
to the individuals in the group, as when each x E X is a risky invest-
ment opportunity [10] or a political candidate whose positions on
salient issues are ambiguous [22], the probabilities used in the social
choice lotteries need not refer directly to these risks or uncertainties.
For example, a political candidate may find it advantageous to be
vague about his views on the issues (as in the 1976 election for
President of the United States?), thus in effect creating a lottery over
issue positions in the mind of the public. However, a social choice
lottery to select a winning candidate in this case does not refer directly
to lotteries over issue posiJions although the latter may affect the vote
which, in turn, may affect the social choice lottery that is used. We
know of course that social choice lotteries are seldom if ever used to
choose winners of public elections and will give reasons for this in the
next section.
On the other hand, there is a sense in which choice by lottery may
be relevant in a direct majority-winner vote between candidates. In
particular, if issue positions are interpreted as the basic alternatives, if
each candidate in effect presents a lottery over issue positions to the
electorate, and if the winner's actual positions and resultant policies
are viewed as being selected according to his or her issue-position
lottery, then the vote between the candidates can be taken to be a vote
between social choice lotteries on issue positions. I shall not however
focus on this type of interpretation in what follows since the social
choice lotteries that will be considered are lotteries that are explicitly
carried out by some random device as described earlier.
In discussing social choice lotteries I shall follow the precedent of
virtually all the literature on the subject by concentrating on a generic
subset A of X which may be thought of as the set of available
alternatives or the admissible agenda that obtains in the situation at
hand. The question of how available versus unavailable or infeasible
ACCEPTABLE SOCIAL CHOICE LOTTERIES 135
alternatives are determined will not be addressed explicitly. With A

the feasible set of alternatives, the social choice must be made from A;
hence a social choice lottery will be admissible in the A context only if
p(x) = 0 for each x~ A. Only admissible lotteries will be used in what
follows. To the extent that the social choice from A is to be based on
the attitudes, beliefs, values and perhaps votes of individuals, we
presume in the spirit of Arrow's independence condition [1, 9, 25] that
the only information from individuals about alternatives that will be
used in the choice process is information about the feasible alternatives
in A. This information may involve ballots and/or aspects of individu-
als' preferences on the single elements in A or on subsets of A or on
lotteries on A.
An example will clarify several aspects of this formulation. We
suppose that a panel or jury of n judges (i = 1, ... , n) is to award a
'prize' to one of m contestants (j = 1, ... , m) who have qualified for a
certain competition such as a beauty contest, primary election, jury
trial, or sports tournament. We shall let aj denote the decision to
award the 'prize' to contestant j. Hence the feasible set is A =
{at. ... ,am}' There is of course a huge number of balloting-scoring
processes that are or could be used to make the choice in this type of
setting. I shall mention several of these that involve social choice
lotteries.
One procedure, discussed by Intriligator [19] and others [11, 24],
would have each judge submit a ballot that amounts to a lottery on A.
The probability pi(aj ) that judge i assigns to aj might be interpreted as
judge i's subjective probability that contestant j is the best contestant
or the one who most deserves the prize. Social choice lotteries can be
formed from the n lotteries (pI, ... ,pn) of the judges in a number of
ways. One of these is Intriligator's average rule that defines p(aj ) for
the social choice lottery p by p(aj)=[pl(aj)+ ... +pn(aj)]/n. In this
case p(aj ) > 0 so long as pi(a j ) > 0 for some i. A different procedure
sets p(aj ) = liN for each of the N values of j that maximizes Ii pi(aj }
and sets p(aj } = 0 for the others. This procedure will often result in a
degenerate social choice lottery (p(a j ) = 1 for some j) and involves only
even-chance social choice lotteries on subsets of A.
Another approach to balloting asks each judge to vote for one con-
testant. With nj the number of votes obtained by j and n 1 + n2 + ... +
nm = n, the social choice proportional lottery rule takes p(aj ) =
n/n for each j. This rule has been discussed by Coleman [4] and
Fishburn and Gehrlein [13, 14] in the m = 2 setting. An alternative is
to set p(aj ) = liN for each of the N values of j that maximizes nj and
to set p(aj ) = 0 for the others. When m = 2, the latter rule is the simple
majority rule with a tie (nl = n2) broken by the flip of a fair coin [13,
14]. Obvious modifications of these procedures arise when each judge
is allowed to vote for as many contestants as he pleases.
Other balloting methods ask the judges to rank some or all of the
contestants from most preferred to least preferred, or to assign scores
to each contestant, or to vote between contestants or social choice
lotteries on contestants two at a time. Several authors [7, 8, 26, 27, 29]
investigate the existence of a Pareto optimal social choice lottery and
the existence of a simple majority equilibrium lottery when voters are
presumed to have preference orders over lotteries. Others [2, 17, 20,
30] consider aspects of strategic (manipulative) voting when even-
chance lotteries or more general types of lotteries compete for the
social choice. An approximate conclusion of most of this work indi-
cates that the potential use of social choice lotteries does little to
alleviate, and indeed may aggravate, the problems that can arise in
social choice theories where lotteries are not permitted. Nevertheless,
there are situations in which lotteries seem quite natural and are used
as a matter of course in arriving at social choices. One class of such
situations will be developed in the next section and examined more
closely in the final section.
3. ACCEPTABLE LOTTERIES
One of the striking features of many social choice procedures is the

lengths to which they will go to avoid the use of a nondegenerate social
choice lottery in helping to determine the outcome of the process. In
those instances in which balloting is used and the balloting-scoring
procedure may yield a tie among two or more alternatives in A, a
sequence of ballots, some of which may involve new sets of judges, is
often used until a single winner is obtained. Selection of party candi-
dates by national conventions to nominate presidential contenders in
the United States provides one example. And if our Electoral College
cannot reach a conclusion on who should be the next President, the
matter goes to the U.S. House of Representatives for resolution. In a
very elaborate and to the best of my knowledge unused election system
involving multiple candidates [18, pp. 496-505], fourteen main steps
for determining a winner are followed by ten additional steps for
ACCEPT ABLE SOCIAL CHOICE LOTTERIES 137
resolving ties, the last of which says that [po 500]

if all pairs of remaining undefeated candidates have been compared and found to be tied,
declare that undefeated candidate elected who received most first choices. If two or more
of them received the same highest number of first choices, declare elected that one of the
candidates tied with most first choices who received on all the ballots most second
choices. If there is a further tie, decide it by referring to third choices, and so on. If two
or more candidates remain tied after the examination of all choices, declare one of them
elected by lot.
In this system an even-chance lottery among a subset of candidates is

to be used only as a last resort.
In addition to multiple ballots and special voting rules, odd numbers
of judges or committee members and tie-breaking chairmen are often
used to avoid deadlocks. In most jury trials which end in a hung jury
a mistrial is declared when the issue might have been decided by some
type of lottery. The aversion to justice by chance is well illustrated by a
June 20, 1976 article in the New York Times (p. 11) which reported
that the Louisiana Judiciary Commission recommended disciplinary
action against a Baton Rouge city judge who gave the appearance of
deciding cases by tossing coins.
Modern attitudes towards social choice lotteries have been shaped in
large measure by Enlightenment thought that led to the doctrine of the
freedom and moral responsibility of men to shape and control their
destiny coupled with the doctrine of egalitarianism or the belief in
human equality in social, political and economic spheres. Together,
these principles led to the overthrow of theocracies and the divine right
of kings and ushered in modern forms of participatory democracies.
According to the freedom-responsibility doctrine, the use of a lot-
tery to make a social decision subverts man's control over his own
affairs, denies his proper role as a moral agent responsible for the
health and improvement of the social organism, and otherwise consti-
tutes a step backwards into the dark ages by relegating the decision to
blind chance. An historically interesting contrast to this viewpoint is
provided by two verses from the book of Proverbs (Revised Standard
Version): The lot puts an end to disputes and decides between power-
ful contenders (18:18); The lot is cast into the lap, but the decision is
wholly from the Lord (16:33). Thus the outcome of the die cast by
man to settle an issue reveals God's will.
Although the will of God has given way to the will of the people or
the will of the majority in many societies, as the hand of God in
matters of chance has been replaced by lady luck, certain social choice
lotteries are sanctioned today. The coin flip before the kickoff at an
American football game has become a secular ritual. The Irish sweep-
stakes, English football pools, and state lotteries are officially con-
doned money-raising activities. Lotteries are commonly used to select
people for potential jury duty. The order of names on ballots is often
determined by chance. And several years ago the United States
instituted a draft lottery to correct inequities in its previous conscrip-
tion system although the lottery has since been replaced by a volunteer
system.
An examination of these situations reveals a number of common
characteristics. First, there is a set of two or more qualifying agents,
such as teams, ticket holders, or citizens or residents of a certain
jurisdiction who meet prescribed criteria. Second, there is a 'prize' or a
set of similar prizes (kickoff option, money, invitations to jury duty,
positions on the ballot) to be awarded to the qualifying agents. Third,
all agents have more or less uniform attitudes towards the desirability
of each prize: both teams would like the kickoff option, everyone
would like to win the sweepstakes or have his name first on the ballot,
and most potential draftees would probably prefer not to be drafted.
Fourth, each agent would acknowledge that all agents have a more or
less equal claim on or right to each prize. And fifth, the agents do not
actively compete to convince other agents or interested parties that
they are more deserving of or better qualified to be awarded the
prize(s). Since I know of no situation in which prizes are awarded by a
sanctioned social choice lottery that does not have these characteris-
tics, it is tempting to presume that they represent current minimal
standards for acceptability of the use of a social choice lottery.
The fourth stipulation in the description of an acceptable situation,
to the effect that each potential awardee feels that he has no more
right to receive or avoid receiving a prize, than does his fellows, is
essential. Thus a situation in which each claimant to a certain property
believes that he has sole right to the property may be settled by a
judge, or by a panel of judges or jurors, or perhaps by open warfare,
but resolution by lottery is most improbable. Even if each member of a
jury believed that the contestants had equal claims to the property, the
jury is forbidden from reaching a verdict by lottery.
The fifth stipulation, regarding active competition, also affects court-
case situations. There are other situations that satisfy the first four
characteristics and fail on the fifth, thus eliminating them from the
acceptable class. Suppose, for example, that a two-candidate political

election situation satisfies our first four characteristics, with each
candidate recognizing the claim of the other on the office at stake.
Because the candidates actively try to convince the electorate of their
qualifications, this situation does not satisfy the fifth characteristic. On
the other hand, the sanctioned examples given earlier do satisfy this
characteristic for the most part. In the jury selection and draft lottery
cases, it is frequently held that all people who meet certain basic
conditions have a duty to serve on a jury or to bear arms and,
moreover, that each eligible person is able to do the required job.
Hence there is no provision in the underlying philosophy of these
situations for agents to compete actively for the positions although
people sometimes do things (which others may find morally reprehen-
sible) to disqualify themselves from consideration. Acts of this sort do
of course challenge the passivity feature of the fifth characteristic to a
degree.
We must be careful, however, in interpreting the fifth characteristic
as a prerequisite for a social choice lottery since the use of a lottery
may promote passivity which might not otherwise obtain. Thus if a
present election-by-vote situation were changed to a social choice by
lottery, active campaigning would probably cease. Despite this caution
on the fifth characteristic, the situations given in our earlier examples
appear, under prevailing social philosophy, to be the types in which
active competition would not seem especially appropriate even if
lotteries were not used.
The principle of equality is heavily involved with our earlier
examples and characterization, especially with regard to the similar
attitudes aspect of the third characteristic and the equal claim aspect
of the fourth. When one prize is desired by all qualifying agents, when
all recognize an equal claim to it, and when the award is not to be
based on merit or superior qualifications, what fairer and more equita-
ble way is there of awarding it than to use an even-chance lottery? The
even-chance feature of the lotteries used in the examples also relates
to people's ability to comprehend this type of lottery and to abide by
its outcome in certain situations. On the other hand, people often have
great difficulty understanding the probabilistic aspects of lotteries with
unequal chances and may be quite averse to their use.
It is also of interest to note the interplay between the freedom-
responsibility doctrine and the egalitarian doctrine in the types of
situations under discussion. In the draft lottery and jury selection
cases, the philosophical position noted above weakens the freedom-

responsibility proscription against blind chance and leaves the way
open for the egalitarian principle to sanction an even-chance lottery.
On the other hand, consider the two-candidate political situation. A
simple coin flip to determine a winner without any vote is ruled out not
only by the freedom-responsibility rule but also by the egalitarian
principle as it applies to potential voters. In this context the propor-
tional lottery rule could be implemented by placing all marked ballots
in a drum, drawing one ballot at random, and declaring the winner to
be the candidate whose name is marked on the drawn ballot. (This
rule is also pejoratively referred to as the 'random dictator' rule
although it is similar to many of the even-chance lotteries in our
sanctioned examples.) The proportional lottery rule is an even-chan(;e
lottery for voters since each voter has the same chance of naming the
winner, and it clearly satisfies the egalitarian principle with regard to
voters. There might however be some question of its fairness wit~
respect to candidates. But regardless of this, the proportional lottery
rule clearly clashes with the freedom-responsibility principle, which
takes precedence in this situation and prescribes a nonrandom selec-
tion procedure. The egalitarian principle then enters the picture secon-
darily by prescribing a simple majority election in which each vote
counts equally in a nonprobabilistic sense.
Despite various fairness arguments for the proportional lottery rule,
both with respect to voters and minority candidates, I believe that its
absence in election-type situations stems directly from the freedom-
responsibility doctrine. Nevertheless, it may be remarked that a
candidate's position on the ballot can affect the number of votes he
gets, so that blind chance can affect the outcome in majority or
plurality elections when ballot positions are determined randomly.
More sophisticated ballots (as discussed in the next section) could
correct this threat to the freedom-responsibility principle although
these may be uneconomical in some cases and might be disliked by the
candidates who might then be unable to advertise their positions on
the ballot.
4. MATHEMATICAL ASPECTS
The rest of this paper considers mathematical aspects of situations

described by the characteristics for acceptable lotteries in the preced-
ing section. Our purpose will be to examine these situations from the
perspective of the preferences of the qualified agents. The following

definitions will be useful.
An alternative x in the set A of basic feasible alternatives will be
referred to as the Condorcet alternative [3, 5, 9, 12] if and only if more
agents prefer x to y than prefer y to x for each y -:j:. x in A. The
Condorcet principle, whose congruence with the freedom-responsibility
and egalitarian principles is often taken to be self-evident, says that the
Condorcet alternative should be the social choice whenever there is
such an alternative.
Alternative x is a Pareto alternative [1, 9] if and only if there is no y
in A that every agent prefers to x. The Pareto principle, which is
consistent with our other principles, says that the social choice should
be a Pareto alternative.
The Condorcet and Pareto notions generalize in an obvious way to
social choice lotteries on A. Thus lottery p is the Condorcet lottery if
and only if more agents prefer p to q than prefer q to p for each
lottery q -:j:. p. And p is a Pareto lottery if and only if there is no lottery q
that every agent prefers to p. Since the even-chance lottery on A will
receive special consideration we shall refer to it as p*.
Under reasonable assumptions about agents' preferences we shall
observe that A frequently has no Condorcet alternative and hence no
Condorcet lottery [8]. In some cases all lotteries will be Pareto lotteries
while in others very few lotteries will be Pareto lotteries. Compromise
alternatives will also be considered. It will be noted that a compromise
alternative that is a Condorcet alternative may fail to be a (degenerate)
Pareto lottery.
4.1. The Simple Paradox of Voting Example
To set the stage for further discussion we shall begin with the situation
in which three agents vie for a single prize. Let A = {at. a2 , a3 } be the
set of basic feasible alternatives with ai the decision to award the prize
to agent i. It will be assumed for the present that
Agent 1 prefers a 1 to a2 to a 3
Agent 2 prefers a 2 to a 3 to al
Agent 3 prefers a3 to a 1 to a2 •
Thus first-place preferences indicate that the prize is desired by each

agent, and second and third-place preferences indicate that an agent
still cares about who gets the prize if he does not. The preferences
have of course been arranged to yield a majority cycle with no
Condorcet alternative, since al beats a2 by a 2-to-l majority, a2 beats
a 3, and a 3 beats al'
It will be assumed that each agent compares lotteries on A by the
expected utility criterion. For convenience let 0 and 1 be each agent's
utility for his least and most desired alternatives, respectively, and let
Ui E (0, 1) be the von Neumann-Morgenstern utility [28] of agent i for
his intermediate alternative. With Pi = p(ai ), the expected utilities of
the three agents for lottery pare
Pl + P2 U l for Agent 1
P2 + P3 U2 for Agent 2
P3 + Pl U3 for Agent 3.
Shepsle [26] notes that there is a lottery P that has a simple majority
over each of the three basic alternatives if and only if its expected
utility for each agent exceeds the agent's Ui value. However, when such
a lottery exists there must be another lottery that has a simple majority
over the first [8, 27]. Hence there can be no Condorcet lottery in this
case. On the other hand, a simple argument shows that every lottery is
a Pareto lottery. For with di = Pi - qi and d 1 + d 2 + d 3 = 0 for lotteries p
and q, all agents will prefer P to q if and only if
d 1 +d2 u 1 >0
d 2 +d3 u2 >0
d 3 +d 1 u3 >0.
If dj = 0 for some i then, since dj + dk = 0 for the other two, one of the
three inequalities must fail; and if d j ¥- 0 for all i then the inequalities
and L d j = 0 require d j > 0 for exactly two of the three d j , say d 1 and d 2
with d 3 = -(d 1 + d 2 ), and in this case the third inequality is violated
since -(d 1 + d 2 ) + d 1 U 3 < O. Since neither the Condorcet principle nor
the Pareto principle (applied either to basic alternatives or to lotteries)
helps in any way to discriminate among lotteries, an even-chance
lottery on A seems natural in this situation especially in view of the
symmetry aspect of the basic preferences.
A further point of interest can be made in this context with regard to
the possibility of a compromise prize. Suppose that the single prize
could be split into three equal parts. Let c be the decision to award the
compromise prize. The preceding preferences may then be sup-
plemented as follows:
Agent 1. al c a2 a3
Agent 2. a2 c a3 al
Agent 3. a3 cal a2 ,
so that each agent prefers something to nothing. There are three nice
features about c here: first, it is the Condorcet alternative in the
context of {ai' a2 , a3 , c}; second, the award of c seems reasonable and
equitable; and third, the presence of c may ease our minds about the
possibility of making the award by blind chance.
However, a closer look may reveal a disquieting possibility. In
particular, every agent might prefer the even-chance lottery p* on
{aI' a2' a3} to the compromise alternative c. In other words, each
would rather take his chances on getting the whole thing than to go for
the three-way split. (People do not buy sweepstake tickets in the hope
that their money will be refunded: they want a chance at the grand
prize.) When this possibility obtains, the award of the Condorcet
alternative c would not only thwart the will of the majority, it would
go against the unanimous will of the group. Except perhaps for the
aspect of chance, the choice of the even-chance lottery seems wholly
consistent with the freedom-responsibility and egalitarian principles.
On the other hand, one might argue that the Condorcet alternative c is
the better choice since more agents will prefer c to the lottery outcome
after the fact. If the latter position is taken, and if it is believed to be
most in line with the two basic principles, then it seems necessary to
demonstrate why the presumably morally responsible and rational
agents would be ill-advised to implement an option that they uniformly
prefer to the Condorcet alternative even though each knows that the
risky option is more likely than not to leave him in a less preferred
position.
4.2. Ballot Positions
We now turn to a multiple-prize situation to illustrate several aspects

of formulation and analysis for this case. It will be assumed that three
candidates, C I , C2 and C3 , compete in an election, the decision at the
moment being the order of their names on the ballot. Let CiCjCk
denote the ballot on which Ci's name is first, Cj's name is second, and
Ck's name is last. The six ballot-position arrangements will be denoted
as a l through a6 where
a l = C I C2 C3
a2 = C I C3 C2
a3 = C2 C I C3
a4 = C2 C3 C I
as = C3 C I C2
a6= C3 C2 C I •
Assuming that each candidate's preferences are governed solely by his

position on the ballot, the following preference orders can be ex-
pected:
CI . (aIa2)(a3aS)(a4a6)
C2· (a 3a4)(a l a6)(a2aS)
C3·- (aSa6)(a2a4)(al a 3)·
Parentheses around alternatives indicate individual indifference be-

tween the alternatives; otherwise, preference decreases from left to
right. There are two three-alternative simple majority cycles: a l beats
as beats a4 beats aI, and a2 beats .£l3 beats a6 beats a2. Other pairs of
alternatives are tied. Hence, as in the preceding example, there is no
Condorcet alternative.
With Pi = p(G-t), the expected utilities of the candidates for lottery P
on A ={a l , ... , a6} are
(PI + P2) + (P3 + Ps) UI for C I

(P3 +P4) + (PI + P6)U 2 for C2
(PS+P6)+(P2+P4)U 3 for C3
where, as before, least and most preferred alternatives are assigned

utilities of 0 and 1, and Ui E (0,1) for each i. Unlike the preceding
example, lotteries may fail to be Pareto lotteries in the present case.
We consider first the even-chance lottery p* on A that has pi = 1/6 for
each i.
THEOREM. Lottery p* is a Pareto lottery if and only if U1 = U2 = U3.

Proof. Lottery p* is a Pareto lottery if and only if there does not
exist a lottery P = (PI' ... , P6) on A for which
(PI + P2) + (P3 + ps)u I >~+ u l /3

(P3 + P4) + (PI + P6)U Z > ~+ U2/ 3
(Ps + Pc,) + (P2 + P4)U 3 >~+ u3/3.
If U1 = U2 = U3 then addition of these three inequalities gives 1 + UI +

U2 + u3> 1 + U1 + U2 + U3, which is impossible. On the other hand, sup-
pose the Ui are not all equal and for definiteness assume that Uj > U2 •
Then it is easily verified that P with
PI =0
P2 = ~- (u 1 + 3u 2 )/12
P3 = t+ u2/(6u l )
P4 =t- u z/(6u I )+(u I + 3u z)/12
Ps=1
is a lottery that satisfies the three preceding inequalities since substitu-

tion and reduction yields u 1 > Uz in each inequality. This completes the
proof of the theorem.
Since it would be unusual at the very least to attempt to determine the

U i in an actual ballot situation, and since the egalitarian principle might
be interpreted as allowing only p* as a potentially acceptable lottery,
the preceding theorem might be taken to be little more than a
technical curiosity. Nevertheless, it does suggest that in cases where
more general lotteries might be considered, the 'obviously equitable'
even-chance lottery may be unanimously less preferred than some
other lottery.
When the equality condition on the Ui does not hold, many other
lotteries will fail to be Pareto lotteries. In general, with d i = Pi - qi'
every candidate will prefer lottery P to lottery q if and only if

(d l + d 2 ) + (d 3 + dS)u l > 0
(d 3 + d 4 )+(dl +d6 )U2 >O
(d s + d6 ) + (d 2 + d4 )U3 > O.
As in the foregoing proof, suppose for definiteness that u l > U 2 • Then,

with ao, a l and a2 positive and
d2 =-al-dl
d3 =-a o-d l
d 4 =aO+a l +d l
ds = a o+ a2 + d l
d 6 = -aO-a2- dl>
so that I d; = 0, substitution in the preceding three inequalities shows

that they all hold if and only if
Since U l > U2, it is always possible to select positive values of the a j

that satisfy this double inequality; moreover, if every qi is positive,
sufficiently small values of Idll, ao, al and a2 can be chosen to
guarantee that Pi ~ 0 for each i. Hence lottery q cannot be a Pareto
lottery if qi > 0 for all i and the Ui are not all equal. In addition, if
Ul> U2' then by taking d] = -ao - a2 or d l = -a o- al> it can be seen
that q is not Pareto if either ql> 0 and q4> 0 or ql > 0 and q6> O. On
the other hand, if ql + q2 = 1, or ql + q3 = 1, or qs + q6 = 1, then q will
be a Pareto lottery.
The following theorem summarizes part of the preceding discussion.
It omits situations in which some of the Pi equal zero.
THEOREM. If Pi> 0 for i = 1,2, ... ,6, then lottery P is a Pareto

lottery if and only if u] = U 2 = U3 •
Hence the vast majority of lotteries will not be Pareto lotteries when
the candidates do not have essentially similar risk attitudes towards
their intermediate alternatives. If the Ui were actually estimated in such

a case, then a reasonable lottery to use would be a maximin lottery.
Such a lottery maximizes the minimum of the three agents' expected
utilities and must be a Pareto lottery.
In the case at hand there is a natural compromise alternative c which
directs that each of the six ai orders appears on about one-sixth of the
ballots. If every candidate prefers c to his intermediate alternatives,
such as (aIa2)c(a3aS)(a4a6) for C I , then c will be the Condorcet
alternative. But, as before, it could also be true that every candidate
prefers p* on {aI' ... , a 6} to c. However, p* in this case will itself be
unanimously less preferred than some other lottery if the U i are not all
equal.
4.3. One Indivisible Prize
It will be assumed henceforth that one indivisible and uniformly

desired prize is to be awarded to one of n agents, with ai the decision
to award the prize to i. We consider first the situation in which each
agent doesn't care who gets the prize if he doesn't get it. Using
parentheses again to denote indifference, the preferences will be as
follows:
Agent 1. a l (a 2a 3 ... an)

Agent 2. a 2(a I a 3 ••• an)
All alternatives are tied under binary comparisons since if i:j:. j then i
prefers a i to ai' j prefers ai to ai' and the others are indifferent.
Moreover, all lotteries on A = {aI' ... ,an} are Pareto lotteries even
though for every lottery there is another lottery that is preferred to the
first by n -1 of the n voters: by reducing one Pi> 0 and increasing
every Pi for i:j:. j, we obtain a new lottery that everyone except j prefers
to p.
The egalitarian principle supports the even-chance lottery p*, but
other arguments for p* are also available. For example, p* is the
maximin lottery since it uniquely maximizes the minimum, over agents,
of the ratio of the utility of the lottery minus the utility of the worst
alternative to the utility of the best minus the utility of the worst. In
addition, a little calculus shows that the proportion of the lottery space
{(Ph' .. , Pn): Pi ~ 0 for all i and L Pi = 1} in which lottery P would be
beaten by an n -1 to 1 vote is (for n ~ 3)
PIn-l+ P2n-l+ : .. + Pnn-l .
This proportion equals 1 if one of the Pi = 1, and it is minimized with

value n-n+2 when PI = P2 = ... = Pn = 1/n. Hence the unique lottery
that is least likely to be defeated n -1 to 1 by another lottery chosen at
random by the uniform distribution over the lottery space is p*.
We now extend our analysis by assuming that each agent cares who
gets the prize if he does not. To be more precise, let Case K denote
the generic situation in which each agent ranks K «n) of the ai by
decreasing preference with the one that awards him the prize in first
place and in which the agent is indifferent among the remaining n - K
alternatives, which are least preferred. The two preceding paragraphs
have examined K = 1. With n = 5, the preference orders ala4(a2a3aS)
and alaSa2(a3a4) would be K = 2 and K = 3 orders respectively for
agent 1. When K~2, some lotteries, including p*, can fail to be Pareto
lotteries. I leave it to the reader to give an example of this when
(K, n) = (2,3).
A Case K profile consists of one preference order for each agent in
the Case K format. Since each agent can select and order the K - 1
alternatives that immediately follow his most preferred alternative in
(n-l)(n-2) ... (n-K+l)=(n-l)!/(n-K)! ways, there are [(n-
l)!/(n - K)!]n different Case K profiles for a given n > K. If K> 1 and
n ~ 3 then some of these profiles will have Condorcet alternatives. For
example, of the eight profiles for (K, n) = (2, 3), six have Condorcet
alternatives and two do not. One of the two that have no Condorcet
alternative was displayed in the first example of this section.
Because each Case K profile has each alternative in first place in
exactly one order, it seems likely that the proportion of Case K
profiles that have no Condorcet alternative will exceed the proportion
of profiles that have no Condorcet alternative when the first-place
restriction is removed and each agent can have any alternative
in first place. A profile of the latter type, in which each agent
ranks K of the alternatives in decreasing preference with the other
n - K less preferred than the preceding K and indifferent to each
other, will be called a Case K* profile. There are [n !/(n - K)!]n
different Case K* profiles for n > K. Of the 216 Case K* profiles for
(K, n) = (2, 3), 204 have Condorcet alternatives and 12 do not. Hence
for (K, n) = (2, 3), the proportion of Case K profiles with no Condorcet
alternative is 2/8 = 0.25000 and the proportion of Case K* profiles
with no Condorcet alternative is 12/216 = 0.05555 ....
Table I compares the proportions of profiles that have no Condorcet
alternative for the two cases for each relevant (K, n) pair up to n = 5.
The table shows that the Case K proportion exceeds the Case K*
proportion in every instance. Hence the following conjecture seems
appropriate.
CONJECTURE. For every pair of integers (K, n) with n>K~1, the

proportion of Case K profiles that have no Condorcet alternative exceeds
the proportion of Case K* profiles that have no Condorcet alternative.
This conjecture is obviously true for K = 1 but I have been unable to

establish its status for any larger value of K. One way to approach it
begins with the observation that the number of Case K* profiles equals
n n times the number of Case K profiles. Hence if for each Case K
profile in which aj is the Condorcet alternative it is possible to identify
at least nn Case K* profiles that have aj as the Condorcet alternative
in such a way that these do not overlap the n n or more Case K*
profiles with aj the Condorcet alternative identified for any other Case
K profile in which a is the Condorcet alternative, then the conjecture
j
is essentially true.
Readers who are familiar with other attempts to compute the
likelihood of no Condorcet alternative [6, 15, 16, 21, 23] will readily
recognize a connection between the foregoing conjecture and other
work. In particular, if the conjecture is true for all (K, n) with K =
n -1, then it says that the likelihood of there being a Condorcet
alternative when all voters independently select a linear preference
order with equal probability (lin!) from the set of n! linear orders on
A (the 'impartial culture' case with the same number of voters as
alternatives) will exceed the likelihood of there being a Condorcet
alternative when voter i always has aj in first place and selects the
remainder of his linear preference order with equal probability (1/(n-
1)!) from the set of (n -1)! linear orders on {aI' ... , aj-I, a + l , ... , ~}.
j
Table I and the associated conjecture suggest that the likelihood of

no Condorcet alternative will be fairly significant in the type of
TABLE I
Proportions of Case K Profiles and Case K* Profiles that have no Condorcet Alternative
(no alternative that has a strict simple majority over every other alternative).
K=1 K=2 K=3 K=4

CaseK Case K* CaseK Case K* CaseK Case K* CaseK Case K*
n=2 1.00 0.50000

n=3 1.00 0.22222 0.25000 0.05556
n=4 1.00 0.23438 0.85185 0.59549 0.85185 0.65799
n=5 1.00 0.32640 0.62891 0.43609 0.46470 0.29300 0.35185 0.19952
situation examined here. Hence if an attempt is made to resolve the

situation by Condorcet's principle without the use of a social choice
lottery, the attempt can easily fail. In as much as other reasons that
require no explicit vote can sanction the use of an even-chance social
choice lottery in the present context, it would probably be stretching
the point to claim that the likely absence of a Condorcet alternative is
a primary reason for the use of a lottery. Nevertheless it can hardly
diminish the support for such usage.
The Pennsylvania State University
NOTE
* This paper was prepared for the International Symposium on Decision Theory and
Social Ethics, June 24-30, 1976, sponsored by the Bavarian Academy of Science. The
author wishes to thank Richard Zeckhauser for his comments on an earlier version of
this paper.
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152 PETERC. FISHBURN
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ALLAN GIBBARD
SOCIAL DECISION, STRATEGIC BEHAVIOR,

AND BEST OUTCOMES
1. INTRODUCTION
What ought to happen depends at least in part on what the people

involved prefer. I shall take that as a truism, though it may need
qualifications: perhaps what ought to happen depends not on what
people actually prefer, but on what they would prefer if they were fully
informed and clearheaded, and perhaps it depends not on what people
prefer on the whole, but on what each person prefers as regards himself.
Accepting these qualifications, though, would only make the problem I
raise in this paper more difficult. I shall assume here that what ought to
happen depends at least partly on the preferences the people involved
actually have. If the reader thinks that only informed preferences
matter, he can think of the paper as addressing the special case where
actual preferences are fully informed, and if he thinks that only
self-regarding preferences matter, he can think of the paper as tackling
the special case where everyone's preferences are self-regarding.
My question is how, at least in these special cases, to design a system
that will ensure that what ought to happen always does. The systems I
consider may be constitutions, or they may be ways for a well-meaning
government to base its decisions on plebiscites or public opinion polls,
or they may be systems of economic incentives. I shall talk at times as
if I were discussing only one of these cases, but what I say should apply
to all systems through which individuals interact to produce an out-
come.
2. STRATEGIC BEHAVIOR
Suppose a well-meaning government tries to base its decisions on the

preferences of the people involved. It may well not be able to learn
what those preferences are. If it asks people their preferences-
through plebiscites or public opinion polls-people who understand
the system by which decisions are made may have an incentive to
misreport their preferences.
153
Hans W. Gallinger and Werner Leinfellner (eds.), Decision Theory and Social Ethics, us""s in Social Choice, 153-168.
Copyright © 1978 by D. Reidel Publishing Company, Dordrecht, Holland. All Rights Reseroed.
154 ALLAN GIBBARD
Suppose, for instance, the government selects a policy on the basis of

a Borda rule, as follows. Each person lists the alternative policies on
his ballot in order of preference. Then, where there are m alternatives,
each person's first choice gets m -1 points, his second choice gets
m - 2 points, and in general, his t th choice gets m - t points (so that his
last choice gets zero). The points each alternative gets are added up,
and the alternative with the most points wins; ties are broken by
chance. Now suppose three people vote among alternatives w, x, y, and
z: person i votes ordering xyzw, person j votes wxyz, and the true
preference ordering of person k is wxyz. Simple arithmetic shows that
if k votes his true preferences, the score is w6, x7, yS, and z1, so that
x wins. k, though, can scuttle x by voting the ordering wyzx; in that
case the score is w6, xS, yS, and z2, so that k's first choice wins. k
thus gains by misreporting his preferences.
People who act so as to secure the result they like best will be said to
behave strategically. This characterization of strategic behavior needs
some refinement: a strategic agent will ordinarily not know for sure
how others will act, and so he acts in a way that in some sense holds
out the best prospect, on the basis of his limited information, of
advancing his interests. Exactly how he does this will not matter for
what I have to say in this paper. In particular, a person who votes
not in order honestly to reveal his preferences, but in order most
effectively to advance his interests, will be said to vote strategically. To
say this is not to say that he misreports his preferences, but that
however he votes, truthfully or otherwise, he does so because no
other way of voting holds out a better prospect of advancing his
interests.
Strategic voting is not inevitable. It might be that each voter
wants the system to work properly to produce a result that is best
from a moral point of view. If he trusts the others to vote honestly,
he may himself vote honestly because otherwise, he reasons, he
would subvert the way the system works to produce a morally best
result.
In many communities, though, strategic behavior will be impossible
or costly to prevent. This paper takes up a problem for such com-
munities: whether a satisfactory system of group decision-making can
be designed for them-whether, that is, a system can be designed that
will give the results it ought to give, even when everyone behaves
strategically.
SOCIAL DECISION AND BEST OUTCOMES 155
3. STRATEGY-PROOFNESS
One way to approach the question I have asked is to inquire whether

there are reasonable systems of group decision-making which, by the
very way they are designed, are guaranteed never to reward an
individual's misreporting his preferences. Such a system will be called
strategy-proof. If a government uses a strategy-proof system to make
its decisions and people do not misreport their preferences when they
have no incentive to do so, then the government will indeed base its
decisions on peoples' genuine preferences. The remaining question is
whether it will base its decisions on their preferences in a reasonable
way.
The answer to this remaining question seems to be negative: all
strategy-proof systems are defective as ways to make a social choice
depend on individual preferences. Take first a strategy-proof system
which picks the alternative to be put into effect without resort to any
element of chance. Any such system, it turns out, will either be
dictatorial or be duple, in the sense that the outcome is confined,
independently of the way people vote, to a fixed pair of alternatives.
(See Gibbard, 1973, and Satterthwaite, 1975.) Take next a strategy-
proof system in which chance does play some role in determining the
final outcome. It turns out that any such system, for almost all
combinations of individual preferences, is a fixed probability mixture
of systems, each of which is either duple or unilateral, in the sense that
it denies everyone but a single fixed voter any influence whatsoever on
the outcome. If in addition, such a system guarantees that the alterna-
tive to be put into effect will be Pareto-optimal, then in the absence of
individual indifference between alternatives, the system is a random
dictatorship-a fixed probability mixture of dictatorial systems. (See
Gibbard, 1977, 1978.) In brief, then, only a narrow class of unappeal-
ing systems can preclude advantageous individual misreporting of
preferences.
I have implied that a random dictatorship is 'unappealing', and I
should say something about what is wrong with it. I shall assume
without argument that a dictatorial system is unsatisfactory, and talk
about random dictatorships that are not fully dictatorial-that are, I
shall say, non-degenerately random. One defect of a non-degenerately
random dictatorship is that the lotteries it produces may not be
Pareto-optimal ex ante: there may be an alternative lottery which
156 ALLAN GIBBARD
everyone prefers. (This problem is discussed by Zeckhauser, 1973,

p. 939.) Another defect is more pertinent to the concerns of this paper:
a non-degenerately random dictatorship may result in one alternative's
being put into effect when another feasible alternative is better.
The assumptions behind this claim are crucial to the argument of the
entire remainder of this paper. Some alternatives are feasible and some
are infeasible, and for any set M of alternatives, we can ask what ought
to be done in the case where M is the set of feasible alternatives. I
shall assume, here and in the rest of the paper, that what ought to be
done is this: put into effect one of the best of the feasible alternatives,
where a best feasible alternative is a feasible alternative such that no
other feasible alternative is better than it. I shall assume three things
about the relation is better than: first, that it is a weak ordering (that is,
an ordering that allows ties); second, that if everyone prefers an
alternative x to an alternative y, then x is better than y; and third, that
what is better than what does not depend on which alternatives are
feasible.
It follows from these assumptions that under some possible cir-
cumstances, a non-degenerately random dictatorship may have an
outcome which is not a best feasible alternative. For suppose the
contrary. Consider a society of two people, i and j, with three alterna-
tives, x, y, and z, where i ranks the alternatives in order xyz and j
ranks them zxy. Suppose first that all three alternatives are feasible. A
lottery between x and z results, and so either x or z may be put into
effect. x and z are therefore both best feasible alternatives, and
therefore equally good. Everyone prefers x to y, and hence x is better
than y. Since z and x are equally good and x is better than y, it follows
that z is better than y. Now suppose only y and z are feasible. The
non-degenerately random dictatorship yields a lottery between y and
z, and so even though z is better than y, either may be put into effect.
That contradicts the supposition that a non-degenerately random dic-
tatorship will always put into effect a best feasible alternative.
4. AN ALTERNATIVE APPROACH
On the basis of three assumptions about the relation is better than and
a theorem which characterizes strategy-proof systems, I have shown
that no strategy-proof system can ensure that the alternative put into
effect will always be a best feasible alternative. That leaves open the
question of whether there could be a system which was not strategy-
proof, but under which the effects of strategic manipulation were
always benign. 1 Strategic misreporting might be benign in that it
switched the outcome from one best alternative to another, or from a
non-best feasible alternative to a best one. The question I now want to
ask, then, is this: could there be a system of voting that ensures that
whatever peoples' preferences are, the outcome of their strategic
voting is always a best feasible alternative?
The question can be broadened to include systems that are not sys-
tems of voting. By a system of voting, I have meant a system in which
people somehow report their preferences, and a decision is based in
some way on their reported preferences. Now think of systems in
which people do not necessarily report their preferences, but do take
actions of some kind, and thereby interact to produce an outcome.
Economic systems are prime examples of systems of interaction which
do not consist of voting. What we can now ask is this: Is there any
possible system of human interaction that will ensure that whatever
peoples' preferences are, if they understand the system and act ration-
ally through it to advance their interests, the outcome will always be a
best feasible alternative?2
5. SYSTEMS OF INTERACTION
One way to represent a system through which people interact is by

what I shall call a 'game form with variable feasibility', or 'GFWVF'.
Let there be n players, a non-empty set L of alternatives, and for each
player i, a finite non-empty set Si of pure strategies for i. A GFWVF g
for alternative set L and pure strategy sets S1"'" Sn is defined as
follows. A pure strategy profile s for g is an n-tuple (S1' ... , sn) where
S1 E S1, ... , Sn E Sn. g is a function whose domain consists of all pairs
(M, s) of a finite non-empty subset M of L (called the feasible set) and
a pure strategy profile s, and whose value g(M, s), for any such M and
S, is a lottery over members of M (that is, an assignment to the
members of M of non-negative real numbers adding up to one). The
lottery is to be interpreted as giving the probability each alternative
has of being put into effect when the set of feasible alternatives is M
and players play the pure strategies given by s.
158 ALLAN GIBBARD
The theory of non-cooperative games can be thought of as the

theory of what happens when rational agents interact strategically
through a GFWVF. For each set M of feasible alternatives, a GFWVF
g determines a game form-a function whose arguments are all pure
strategy profiles and whose values are lotteries over a fixed set of
feasible alternatives. (See Gibbard, 1973, 1978.) A combination of a
game form and a utility scale for each player is a game, in the sense of
standard game theory. Where g is a GFWVF, M a feasible set,
U1 , ••• , Un are utility scales, and U = (U1 , ••• , Un), we can designate
the resulting game as (g, M, U). For any such game, non-cooperative
game theory tells us (or aspires to tell us) what the players might do,
and hence which of the alternatives might be put into effect as a result
of the play of the game.
Given a GFWVF, then, which alternatives might be put into effect
depends on the set of feasible alternatives and the utility scales of the
players. I shall call the function that expresses this dependence a 'social
choice function' or 'SCF. Given a GFWVF g, we can informally
characterize the consequent SCF as the function c such that, for any
U = (U1 , ••• , Un) and finite non-empty set M of alternatives, c(M, U)
is the set of feasible alternatives which might be put into effect as a
result of the game (g, M, U).
In the rest of this paper, I shall talk not about GFWVFs, but about
the corresponding SCFs. A social choice function is defined as follows.
Let there be n people and a set L of alternatives. A utility scale ~ over
L is a function that assigns a real number to each alternative in L, and
an n-person utility profile over L is an n-tuple of utility scales over L.
An n-person social choice function (or SCF) over L is a function c
whose domain consists of all pairs (M, U) consisting of a finite non-
empty subset M of L and an n-person utility profile U over L, where
for each such M and U, c(M, U) is a non-empty subset of M. The set
c(M, U) is called the choice set of c for M and U.
Note the difference between the way a GFWVF is used to represent
a system of interaction and the way a SCF is used to represent it. A
GFWVF is to be interpreted as giving a lottery as a function of what
people actually do. A SCF will be interpreted here as giving possible
outcomes as a function of peoples' true utility scales; it expresses the
end result when players who are guided by their true utilities interact
strategically. As an illustration of the difference, take a system which
consists of each person's writing down a utility (from one to a hundred)
for each alternative, with the reported utilities being aggregated in

some way to determine a social decision or lottery. The GFWVF that
represents this system will show how the outcome depends on what
people report. Now if the system rewards strategic misreporting of
utilities, what people report may well not be their true utilities. The
SCF that represents the system will tell which alternatives might be put
into effect as a function not of utilities as reported, but of peoples' true
utilities.
The choice sets of an SCF may contain more than one alternative.
There are a number of reasons for this. In the first place, the GFWVF
that underlies the SCF may yield non-degenerate lotteries. In that
case, the choice set of the resulting SCF will consist of all alternatives
that get non-zero probability in a given situation. In the second place,
even if a GFWVF always yields a single alternative with probability
one for any pure strategy profile and feasible set, players may adopt
mixed strategies, so that again, more than one alternative has a
non-zero probability of being adopted. Finally, a GFWVF may yield
games with multiple equilibria. For any feasible set M and utility
profile U that give multiple equilibria, the choice set c(M, U) will
contain the outcomes of all equilibria.
An SCF can be used to depict the results of strategic interactions
even when there is no guarantee that players fully know each other's
preferences. 3 In such cases, the statement x E c(M, U) is to be inter-
preted as follows. Let a belief profile B be an assignment of a set of
beliefs B; to each player i. What might happen, then, depends not only
on which alternatives are feasible and on what each person's utilities
are, but on what each person believes about the situation. A person's
beliefs may be partly determined by what is true; thus it may be that
not all possible beliefs about a situation are compatible with a given
utility profile's obtaining in fact. We can talk, then, of a belief profile B
as compatible or incompatible with utility profile U. B will be incom-
patible with U whenever the system of belief formation we are
considering does not allow the beliefs ascribed by B to form when the
truth about preferences is given by U. To say x E c(M, U), then, is to
say this: There is a belief profile B compatible with U such that if B
gave everyone's beliefs, U gave everyone's utilities, and M were the
set of feasible alternatives, then x might be the outcome of their
strategic interaction.
Because SCFs will be used here to represent the results of strategic
160 ALLAN GIBBARD
interactions, we can draw on game theory to place conditions on the

SCF's we consider. In game theory, cardinal utility scales are signifi-
cant only up to positive affine transformations. If for fixed a > 0 and b,
U'(x) == aU(x)+ b for every alternative x, then,.which of the scales U or
U' is ascribed to a player makes no difference to the behavior to be
expected of him. We shall consider, then, only SCFs that satisfy the
following condition.
Scale Invariance. Let at> . .. ,an be positive real numbers,

and let b1 , ••• ,bn be any real numbers. Suppose U and U
are such that for every person i and every alternative x E L,
Uj(x) == ajUj(x) + bj. Then for any M, c(M, U') == c(M, U).
In the second place, I shall assume here that which alternatives are
feasible is common knowledge, in the sense that everyone knows it,
everyone knows that everyone knows, and so forth. (Cf. Lewis, 1969,
p. 56) The utilities players ascribe to non-feasible alternatives, then,
will have no bearing on their behavior. Even if the system permits
voters to express preferences involving non-feasible alternatives, they
will decide what preferences to express not on the basis of how much
they like the various non-feasible alternatives, but on the basis of how
much they like the various feasible alternatives and how they expect
their expressions of preferences which involve non-feasible alternatives
to affect the social choice among feasible alternatives. 4 The SCF's we
consider, then, should satisfy this condition.
Independence of Preferences Involving Non-Feasible Alter-

natives (IPINFA). Let M be a feasible set, and suppose U
and U agree on M, in the sense that for every person i and
every x E M, U;(x) == Uj(x). Then c(M, U') == c(M, U).
This is Arrow's Independence of Irrelevant Alternatives in something

close to its original form. (Arrow, 1963, p.27.)
Scale Invariance and IPINFA together have a special significance for
choice from pairs of alternatives: they entail the following condition.
Determination of Pairwise Choice by Pairwise Preferences

(DPCPP). Let U, U, x, and y be such that for all people i,
U:(x»U:(y) iff Uj(x»Uj(y), and U;(x)<U;(y) iff
Uj(x) < Uj(y). Then c({x, y}, U') == c({x, y}, U).
LEMMA 1. Suppose SCF c satisfies Scale Invariance and IPINFA.

Then c satisfies DPCPP.
Proof. Suppose that for all i, U:(x) > U:(y) iff Ui(x» Ui(y) and
U:(x)< U:(y) iff Ui(x)< Ui(y). For each i, transform scale Ui linearly
to scale V; so that if Ui(X»Ui(y) then Vi(x)=1 and V;(y)=O; if
Ui(x) = Ui(y), then V;(x)= V;(y)=O; and if Ui(x)< Ui(y), then
Vi (x) = 0 and Vi(y) = 1. Transform scales Uf to V: in the same
manner. Then for all i, V:(x) = V; (x) and Vf(y) = V; (y), and so by
IPINFA, c({x, y}, V') = c({x, y}, V). By Scale Invariance, c({x, y}, V) =
c({x, y}, U) and c({x, y}, V/)= c({x, y}, U/). Therefore c({x, y}, U /)=
c({x, y}, U), and the Lemma is proved. 5
DPCPP says that in the case of a pairwise social choice, not only are
the utilities of the feasible alternatives all that matter, but that strength
of preference does not matter: all that matters is who prefers the one
and who prefers the other. This is the only condition on SCF's that will
be exploited in what follows. The condition might have been justified
directly on the basis of what a strategic player will do to influence a
social choice between a pair of alternatives x and y. If he prefers x to
y, no matter how weakly, he will do whatever holds out the best
prospect of securing x as opposed to y. The same holds, mutatis
mutandis, if he prefers y to x. In no case will his strength of preference
make any difference to what he does.
6. BEST OUTCOMES
Return now to the main question of this paper: whether there is any
possible system of human interaction which will ensure that rational
agents, acting strategically through the system, will always produce a
best feasible outcome. I have argued that if it is common knowledge
which alternatives are feasible and that all agents involved are rational,
then strategic interaction through a system can be represented by an
SCF which satisfies Scale Invariance and IPINFA, and thus satisfies
DPCPP. For these conditions of common knowledge, then, the ques-
tion of this paper can be put as a question about SCF's. Is there, we
can ask, an SCF satisfying Scale Invariance and IPINFA, such that for
any feasible set M and utility profile U, the choice set c(M, U) consists
only of best feasible alternatives?
A modification of the Arrow theorem shows that the answer is
162 ALLAN GIBBARD
negative. On the basis of a few weak assumptions about the relation is

better than (all but one of which have already been made), I shall show
that if there are at least four alternatives, then there is no SCF
satisfying Scale Invariance and IPINFA which always confines the
choice set to best feasible alternatives.
Consider again the relation: is better than. Whether one alternative is
better than another depends at least in part, I have supposed, on the
preferences of the people involved. I shall represent this dependance
by a social welfare function f, where for any utility profile U, f(U) is a
binary relation between alternatives. To say that (x, Y) E f(U) is to say
that if peoples' preferences were as given by utility profile U, then x
would be better than y.
Here I do not mean to suppose that what is better than what
depends exclusively on peoples' utilities. Other factors may be relev-
ant. If they are, assume them to be fixed in some way and f will then
represent the way what is better than what depends on individual
utilities when those other factors are held fixed in that way.
A variety of positions on the significance of individual utility scales
will be compatible with what I shall be saying. For all I shall say, levels
of utility may be interpersonally comparable or not, strength of prefer-
ence may be interpersonally comparable or not, and the strengths of
different preferences of the same person may be comparable or not.
Thus the ethical significance of a utility scale may differ from its
behavioral significance. Interpersonal comparisons of utilities will not,
I supposed earlier, bear on the choices people make, but they may, for
all I am supposing, have a bearing on such ethical questions as which
of two alternatives is better.
The formal definition of a social welfare function is this. As with a
SCF, we begin with a number n of people and a non-empty set L of
alternatives. An n-person utility profile over L is defined as before. An
n-person social welfare function (or SWF) over L is a function f whose
domain consists of all n-person utility profiles U over L, and whose
value f(U) for any such U is a two-place relation on L.
On a SWF f, we can impose conditions that we take to characterize
the dependence of the relation is better than on individual utilities. One
such condition is built into the mechanism of a SWF: that whether one
alternative is better than another does not depend on which alterna-
tives are feasible. Two other conditions were discussed earlier, and
need now only be formulated.
Ordering. For any U, where P = f(U), we have

(V x, y) - [xPy & yPx] (full asymmetry)
(Vx, y, z)[(-xPy & -yPZ)-+ -xPz] (negative transitivity).
Unanimity. For any U, x, and y, if for all people i, Uj(x»
Uj(y), then where P= f(U), we have xPy.
The final condition to be imposed is that no person is so much more

significant than everyone else that the social ordering could never go
against his preferences.
No Weak Dictator. For every person i, there are a U, x, and
y such that where P= f(U), we have both Uj(X) > Uj(y) and
yPx.
It remains only to impose a condition on the relation between a SCF
and a SWF. The condition should say that the choice sets of the SCF
consist only of best feasible alternatives, where what makes one
alternative better tnan another is indicated by the SWF.6
Optimality. For arty feasible set M and utility profile U,
c(M,U)£{xlxeM & -(3yeM)(y,x}ef(U)}.
Note that this condition requires more than Pareto optimality: it
requires that the alternatives that might be put into effect be fully best,
where what is better than what is told by f.
The conditions imposed here bear a close resemblance to the Arrow
conditions. Indeed, if we take the conditions needed for a cardinal
version of the Arrow theorem (Sen, 1970, p. 129), there are only two
differences. One is that Arrow's non-dictatorship condition is weaker
than the condition of No Weak Dictator given here. The other, more
crucial difference is that Arrow has a strengthened version of the
condition of Optimality. Optimality here requires that all members of
the choice set of the SCF be best feasible alternatives; Arrow requires
in addition that all best feasible alternatives be included in the choice
set. In other words, Arrow strengthens the Optimality condition by
requiring equality rather than subsethood.
What distinguishes the approach here from the Arrow approach is
this: constraints on a theory of what feasible alternatives are best are
distinguished from constraints, either ethical or practical, on a system
of group decision. 7 The relation is better than, it seems to me, should
164 ALLAN GIBBARD
be a weak ordering which is determined at least in part by individual

utilities, and which is independent of considerations of feasibility. I can
see no reason, though, for requiring the way it is determined to satisfy
both Scale Invariance and IPINFA. These latter constraints, on the
other hand, apply inevitably to most systems of human interaction. I
can see no reason, though, for requiring the results of group choices
between pairs of alternatives to yield an ordering. I agree that group
decision ought to be constrained by considerations of which feasible
alternatives are best, and that which feasible alternatives are best is
determined by an ordering, but I see no reason for group decisions to
be fully determined by the ethical consideration of which feasible
alternatives are best. Hence I accept that all chosen alternatives should
be optimal, but not that all optimal alternatives should stand a chance
of being chosen.
7. THE IMPOSSIBILITY THEOREM
If there are at least four alternatives, it will now be shown, the

conditions I have stated cannot be jointly met. I take the force of this
theorem to be as follows: If it is common knowledge that people are
rational, know which alternatives are feasible, and are disposed to act
strategically, and if any utility scale whatsoever is possible for each of
them, then no system of group decision-making (or interaction of any
kind) will be ethically perfect by the standards I have proposed.
THEOREM. Let a set L of alternatives have at least four members,

let f be an n-person SWF over L, and let c be an n-person SCF over
L. Then not all of the following hold: f satisfies Ordering, Unanimity,
and No Weak Dictator, c satisfies IPINFA and Scale Invariance, and f
and c are related by the condition of Optimality.
Proof. 8 Let a set I of people be weakly decisive for x over y iff
(3U)[«Vi E 1) If;(x) > Ui(y» & «Vj¢ I) Uj(y)
> U;(x» & x E c({x, y}, U)].
This will be written XDIY. I is strongly decisive for x over Yiff x ~ y and
(VU)[«Vi E I)Ui(x) > U;(y» ~ x = c({x, y}, U)].

This will be written XDIY.
LEMMA 2. If for some x and y, xD{i}Y, then for all x and y, xi5{i}Y.
Proof. Suppose xD{i}y. Then by DPCPP, for any V such that
~(x»~(y) and (Vj~i)~(x)<Ui(Y)' we have XEC({X,y}, V). Let
z¢{x, y}, and let V be such that i orders alternatives x, y, and z in
order xyz, and everyone else prefers y to both z and x. Then
x E c({x, y}, V). Let P = f(V), and let R be the corresponding loose
preference relation (c. l.p. r.): the relation such that for all v and w,
vRw iff - wPv. By Optimality, we then have xRy. Everyone prefers y
to z, and so by Unanimity, yPz. Therefore by RP-transitivity, xPz.
Hence by Optimality, x = c({x, z}, V). Since the only assumption about
the ordering of x with respect to z was that Ui(x» Ui(z), by DPCPP,
x = c({x, z}, V) whenever i prefers x to z: in other words, xi5{i}z.
Now let w~ z. If w = x, then wD{i}z. If w~ x, let V be such that i
ranks wxz in that order, and everyone else prefers w to x. Let
P = f(V) and R be the c.l.p.r. Then since Xi5{i}Z, we have x =
c({x, z}, V); by Optimality, xRz; bu Unanimity, wPx; by PR-
transitivity, wPz; by Optimality, w = c({w, z}, V); and hence by
DPCPP, wi5{i}z. This holds, then, for all z¢{x, y} and w~ z.
The first argument now shows that for any v¢{w, z}, wi5{i}v. Since
Wi5{i}Z, we have wi5{i}v for all v ~ w. Here w is any alternative such
that for some z, w ~ z¢ {x, y}, and since there are at least four
alternatives, this is no restriction at all. That proves the Lemma.
Proof of Theorem. Let I be the minimal set such that for some x
and y, xDrY. Let w, x, y, and z be distinct, let i E I, and let V be such
that i has the ranking xyzw, I -{i} all have the ranking zwxy, and
everyone else has the ranking yzwx. Let P = f(V), and let R be the
c.l.p.r. Everyone in I prefers x to y, and so since xDry, by DPCPP,
x E c({x, y}, V). Hence by Optimality, xRy. Only those in 1- i prefer z
to y, and so if z E c({y, z}, V), then 1- {i} would be weakly decisive on
a pair, contradicting the original characterization of 1. Therefore
y = c({y, z}, V), and by Optimality, yRz. Everyone prefers z to w, and
so by Unanimity, zPw. Hence by RRP-transitivity, xPw. Since only i
prefers x to w, we have XD{i}W. Therefore by Lemma 2, xi5{i}Y for all x
and y.
It follows that i is a weak dictator for f. For for any V, x, and y, if
Ui(x» U;(y), then x = c({x, y}, V), and so by Optimality, xRy. That
proves the Theorem.
166 ALLAN GIBBARD
8. THREE ALTERNATIVES
In this Section it will be shown that if there are no more than three
alternatives and there are at least three people, then all the conditions
imposed in this paper can be jointly satisfied. The conditions of
Unanimity and No Weak Dictator can even be strengthened to the
following.
Strong Unanimity. [(Vi)Ui(x)-== Ui(y) & (3i)U;(x» U;(y)]
~ (x, Y)E[(V).
Non-Dictatorship. -(3i)(VV, x, y)[Ui(x» Ui(y)
~ (x, Y)E[(V)].
The conditions in this paper, then, differ from the Arrow conditions in that
they are jointly satisfiable in a world of three alternatives, whereas the
Arrow conditions are not.
The three-alternative SCF and SWF that satisfy all the conditions
can be constructed as follows. Let the relation xR*y hold iff either (1)
x has a strict majority over y, or (2) neither x nor y has a strict
majority over the other, and either everyone is indifferent between x
and y, or the least i who is not indifferent between them prefers x to y.
R*, then, is a relation of majority rule, with persons 1, 2, 3, and so
forth used as successive tie-breakers. For two-alternative sets M, let
c(M, V) be the set of R*-maximal elements of M, that is, {XE
M I(Vy E M)xR*y}. Now let relation R be the transitive closure of R*,
and define [ by saying that (x, y ) E [(V) iff xRy & - yRx. Where L is
the set of all three alternatives, let c(L, V) be the set of all R-maximal
elements of L.
We can check that if there are at least three voters, then c satisfies
IPINFA and Scale Invariance, fis a SWF satisfying Ordering, Strong
Unanimity, and Non-Dictatorship, and c and [ jointly satisfy Optimal-
ity. It is clear, in the first place, that c satisfies scale-invariance, since
only the ordinal properties of individual utility scales are used in
defining it. c satisfies IPINFA, since its choice from a two-element
feasible set {x, y} is determined by the relation R* between x and y,
which is defined solely in terms of individual preferences between x
and y, c and [ jointly satisfy Optimality. For given the definition of [ in
terms of R, Optimality becomes
c(M, V)~{xEMI (Vy EM)xRy},
the condition that c(M, U) is a subset of the R -maximal feasible

alternatives. When M consists of all three alternatives, these two sets
are equal. When M has two members, c(M, U) is the set of R*-
maximal feasible alternatives, and since whenever R* holds between
two alternatives, R holds between them, any R*-maximal x is R-
maximal.
Turn now to f, which is defined in terms of R. Since R is the
transitive closure of R*, R is transitive. R is fully connected in the
sense that (\Ix, y)[xRy v yRx], since R* itself is fully connected. Thus
f(U) satisfies Ordering. Since if there are at least three people, anyone
can be outvoted, f satisfies Non-Dictatorship. It remains only to show
that f satisfies Strong Unanimity.
Suppose (Vi)U;(x)~ U;(y) and (3i)Ui(x» Ui(y), but (x, y)if(U);
that is, yRx. Since x has a strict majority over y, we do not have yR*x;
therefore yRx can hold only if yR*z and zR*y both hold. Let 'Y/yz be
the number of people who strictly prefer y to z, and define 'Y/ with
other subscripts in a like way. Since (\Ii)Ui(x)~ Ui(y), anyone who
strictly prefers y to z strictly prefers x to z; hence 'Y/xz ~ 'Y/yz. For a
similar reason, 'Y/zy ~ 'Y/zx. Since yR*z, we have 'Y/yz ~ 'Y/zy, and since
zR*x, we have 'Y/zx ~ 'Y/xz. Therefore by transitivity of ~, 'Y/xz = 'Y/zx and
'Y/yz = 'Y/zy. Let k be the least person who is not uniformly indifferent
among the three alternatives. Then either Uk(z) ~ Uk(x) or
Uk(z) ~ Uk(y). In the first case, since zR*x and all i < k are indifferent
between z and x, we must have Udz» Uk(x). Thus since Uk(X)~
Uk(y), we have Uk(z» Uk(y). Hence k is the first person not indiffer-
ent between z and y, and it follows that - yR*z. By a like argument in
the second case, we can show that - zR*x. The supposition that f
violates Strong Unanimity has led to a contradiction.
What has been shown is that if there are exactly three alternatives
and at least three people, there exist an SCF c and an SWF f such that
c satisfies Scale Invariance and IPINFA, f satisfies Ordering, Strong
Unanimity, and Non-Dictatorship, and c and f jointly satisfy Optimal-
ity. A fortiori, f satisfies Unanimity and No Weak Dictator. The
conditions that were earlier shown not to be jointly satisfiable when
there are four or more alternatives turn out to be jointly satisfiable
when there are at least three people and the number of alternatives is
exactly three. 9
University of Pittsburgh, Dept. of Philosophy

168 ALLAN GIBBARD
NOTES
1 This question has been suggested to me by Elaine Bennett, Mark Satterthwaite, and
Amartya Sen.
2 The fundamental approach of this paper-studying whether strategic behavior might
be benign by distinguishing a function that represents a system of group decision from a

function that represents an ethical theory-was suggested to me independently by Elaine
Bennett and Amartya Sen. It is the approach taken by Campbell (1976).
3 This point was drawn to my attention by Wolfgang Spohn. Reinhard Selten's discus-
sion of the matter was helpful.
4 This argument is given by Campbell (1976, p.264), and has been given by Charles
Plott on a number of occasions.

5 Essentially the same argument is given by Sen (1970, pp. 129-30).
6 This condition is essentially Campbell's condition A3 (1976, p.264).
7 Campbell (1976, pp. 259, 264) makes this distinction.
S The method of proof here follows, with appropriate modifications, that of the Arrow
theorem (in Arrow, 1963, pp. 97-100).
9 I have been greatly helped in writing this paper by discussions with Elaine Bennett,
Mark Satterthwaite, and Hugo Sonnenschein.
BIBLIOGRAPHY
Arrow, Kenneth, Social Choice and Individual Values (Second Edition), 1963.
Campbell, Donald E., 'Democratic Preference Functions', Journal of Economic Theory
12 (1976), 259-72.
Gibbard, Allan, 'Manipulation of Voting Schemes: A General Result', Econometrica 41
(1973), 587-60l.
Gibbard, Allan, 'Manipulation of Schemes That Mix Voting with Chance', Econometrica
4S (1977), 665-68l.
Gibbard, Allan, 'Straightforwardness of Game Forms with Lotteries as Outcomes',
Econometrica 46 (1978).
Lewis, David K., Convention: A Philosophical Study, 1969.
Satterthwaite, Mark A., 'Strategy-proofness and Arrow's Conditions: Existence and
Correspondence Theorems for Voting Procedures and Social Welfare Functions',
Journal of Economic Theory 10 (1975), 187-217.
Sen, Amartya K., Collective Choice and Social Welfare, 1970.
Zeckhauser, Richard, 'Voting Systems, Honest Preferences, and Pareto Optimality',
American Political Science Review 67 (1973), 934-46.
WULF GAERTNER' AND ACHIM HEINECKE"
CYCLICALLY MIXED PREFERENCES-A

NECESSARY AND SUFFICIENT CONDITION
FOR TRANSITIVITY OF THE SOCIAL
PREFERENCE RELA TIONt
1. INTRODUCTION
In a series of papers several authors have given both sufficient and

necessary and sufficient conditions for transitivity of the social prefer-
ence relation under the simple majority decision rule. The aim of this
paper is not only to introduce a new necessary and sufficient condition
for transitivity of the social relation, but also to establish the connec-
tion between this condition of 'cyclically mixed preferences' and the
well known conditions of 'extremal restriction', 'value restriction',
'limited agreement', and 'dichotomous preferences'. While the latter
conditions rule out the joint occurrence of certain individual prefer-
ence orderings our condition excludes no individual ranking.
Starting from the preference structure S of a given society G several
operations are introduced that transform the original preference profile
into a 'reduced structure' S* comprising only a reduced set of indi-
vidual orderings. In order to decide whether the collective preference
relation is transitive only the reduced set of individual orderings has to
be considered. This set of orderings is said to have reached its standard
form if all possible reductions are performed, and it is shown that there
are no more than twelve essentially different standard forms (Theorem
1). It is then demonstrated that these twelve standard forms can be
partitioned into three different groups (Theorem 2).
The main result of this paper is that if and only if the preference
structure of the original society G is cyclically mixed over every triple
of alternatives, an Arrowian social welfare function exists (Theorem 3).
In the concluding remarks the logical relationship between this result
and those of Inada, Sen and Pattanaik, and Saposnik is made clear.
2. NOTATION AND DEFINITIONS
Let there be a finite number of individuals forming a society G and let

A be a finite set of social alternatives. Ri is individual i's preference
169
Hans W. Gotlinger and Werner Leinfellner (eds.), Decision Theory and Social Ethic~, Issues in Social Choice, 169-185.
Copyright © 1978 by D. Reidel Publishing Company, Dordrecht, Flolland. All RIghts Reseroed.
170 WULF GAERTNER AND ACHIM HEINECKE
ordering on the set of alternatives, that is, a binary relation on A being

reflexive, complete, and transitive. Strict preference Pi and indifference
Ii are derived from R; in the customary way. In this paper the set of
preference orderings of the individuals who form society G is some-
times called the preference structure of G, at other times we denote it
as the preference profile of G. A collective choice rule is a mapping f
from a set of individual preference orderings (Rt> ... , Rn) on A into a
set of collective preference relations R on A. R is a binary relation,
reflexive and complete. A social welfare function is a collective choice
rule f with the property that every R in the range of f is transitive, that
is, R is a collective preference ordering. From R strict collective
preference P and collective indifference I can be defined in the same
way as for individual relations.
From the outset it will be assumed that all the individuals forming
society G are concerned for every triple of alternatives. I Clearly all
those individuals who are indifferent between every pair of alternatives
in the given set have no influence on the formation of the collective
preference ordering if the mapping f chosen is the method of majority
decision. Furthermore we want to begin our investigations by consider-
ing only a set of three social alternatives x, y, z.
Let N( aPb) denote the number of individuals for whom aPib where a,
bE{X, y, z}. The vector (N(xPy)-N(yPx), N(xPz)-N(zPx), N(yPz)-
N(zPy» will be called 'majority-vector' or 'majority-pattern' of the
underlying society. Under the method of majority decision the major-
ity vector determines the collective preference relation. For all a,
b E{X, y, z} we obtain aRb if and only if N(aPb)- N(bPa);;::'O.
Clearly two preference structures characterized by the same majority-
vector have the same social preference relation.
For our subsequent analysis it has proved to be useful to separate all
logically possible strict and weak individual orderings into the follow-
ing disjoint cycles:
UI ={x PyPz, yPzPx, zPxPy},

U2 = {zPyPx, xPzPy, yPxPz},
and
VI = {xPylz, yPzlx, zPxly},
V 2 = {zIyPx, xIzPy, ylxPz}.
CYCLICALLY MIXED PREFERENCES 171
It is immediately verified that the preference orderings within each

cycle are generated by cyclical permutation of all three alternatives x,
y, z.
Consider a preference profile consisting of only two individual
orderings. We wish to say that these two orderings are inversely
related if the majority-vector of this profile is (0,0,0). Clearly two
inversely related preference orderings never originate from the same
cycle.
Two preference orderings are said to be jointly compatible if they
contain no 'antagonistic' strict preference relation. The following ex-
ample should help to clarify the point: According to our definition the
orderings xPypz and xPylz are jointly compatible while this is not true
for the orderings xPyPz and yPxlz. Obviously, a weak preference
ordering is always compatible with two strict orderings which belong to
different U-cycles and are not inversely related. On the other hand,
two strict orderings with these properties are compatible with one and
only one weak preference ordering. We denote these strict orderings as
the 'components' of the weak ordering. For example, xPypz and
xPzPy are the components of the weak ordering xPylz. Later on in our
analysis we will make use of the fact that two strict orderings having
the property of being the components of a weak ordering are rep-
resented by the same majority-vector as this weak ordering if the latter
is counted twice.
Hitherto, the set of strict and weak individual preference orderings
was divided into two different types of cycles, denoted by Ui and V;
respectively (i E {1, 2}). Later on we will use the common classification
in
Z1 = {xRyRz, yRzRx, zRxRy},
Z2={zRyRx, xRzRy, yRxRz}.
Clearly the assignment of the strict preference orderings to these

cycles is unique. The strict ordering xPyPz, for example, is assigned to
the element xRyRz of Z1; a different assignment is logically impossi-
ble. All those preference orderings with one indifference, however, can
be assigned both to cycle Z1 and to Z2. Within cycle Zi' i E{1, 2}, each
weak ordering is assigned to the same preference relation to which one
of its components is assigned. As an example, xPylz is assigned to
xRyRz in Z1 or xRzRy in Z2. This possibility of choosing within the
assignment procedure is fundamental for our notion of cyclically mixed

preference profiles. Before introducing this concept, however, we need
another notion, the concept of reducing the preference structure of a
given society G.
3. REDUCTIONS AND STANDARD FORMS
As already noted the collective preference relation with respect to a

given triple (x, y, z) of alternatives is determined by the underlying
majority-pattern. Therefore, if the problem is to find out whether for a
given set of individual preferences an Arrowian welfare function exists
it seems reasonable to 'simplify' the underlying set of preferences. As
will be immediately seen this process of simplification which we will
call reduction procedure (or simply reduction) is performed by
eliminating and/or combining certain sub-structures of the original
preference profile in such a way that the majority-vector is left
unchanged. By means of this reduction procedure originally given
preference profiles can be transformed into simplified structures satis-
fying certain conditions for transitivity of the social relation R that the
preference profiles did not fulfil in their original form. The following
types of reductions will be distinguished:
PI: elimination of all pairs of strict (resp. weak) individual

preference orderings which are inversely related;
P2: elimination of all complete cycles of weak individual order-
ings (Vi-cycles, i E {t, 2});
P3: transformation of two non-identical weak individual order-
ings of cycle V I (V2 ) into that weak ordering of cycle V2 (VI )
which has the property of not being inversely related to
either of the two. As an example yPzlx and zPxly, both
belonging to Vt. can be transformed into the weak ordering
zIyPx being an element of V 2 ;
P4: replacement of two strict preference orderings which are the
components of a weak ordering by the latter ordering which
has to be counted twice.
We want to postulate that all four reductions are always performed

in the given order. As for PI' P2, and P3 the procedure is uniquely
CYCLICALL Y MIXED PREFERENCES 173
determined. As for P4, the possibility cannot be excluded that different

pairs of components can be combined. For reasons which will become
clear later on the following procedure will be required: If possible
those pairs of strict individual orderings are combined which generate
weak orderings that are inversely related to weak orderings still
occurring in the set of individual preferences. Reduction PI will then
be applied once more. Other situations are conceivable where reduc-
tion P3 will be applied anew.
We say that a preference structure S of society G has reached its
standard form S* if and only if all reductions have been performed,
i.e., if
Pi(S*) = S*, i E {1, 2, 3, 4}.
As our problem is the existence of a transitive social relation R, it

can easily be shown that we need not distinguish between those
standard forms which have the property of being identical up to a
permutation of alternatives. Also, the numerical distribution of indi-
vidual preferences can be disregarded. As an example, consider the
following two standard forms (the numbers in front of the individual
orderings indicate the number of people having this particular prefer-
ence relation):
~: XPiZ~Y and 1: xPjZPS

1: yPjxPjz.
We do not distinguish between these reduced profiles, since both

standard forms are identical up to a permutation of alternatives y and
z. With this convention in mind we arrive at our first important result:
THEOREM 1. There are exactly 12 different standard forms.

In the following these standard forms will be denoted by
Stl (k E {a, 1,2, 3}; 1E {a, 1, 2}), where k (resp. 1)
gives the number of distinct strict (resp. weak) preference orderings

occurring in Stl.
Proof. Let the preference structure of society G be in standard form,

i.e., Pi(S*) = S* for i E {1, 2, 3, 4}. We have to show that the preference
profile S occurs in one of the forms st,.
(a) Pl(S*) = S* means that from each pair of inversely related
strict (resp. weak) individual preference orderings at most
one ordering can occur, with no restriction placed on the
number of times this ordering occurs. It is possible, for
example, that all orderings of cycle U 1 or all preference
relations of V2 occur in S*.
(b) PI (S*) = P2( S*) = S* means that in addition to assertion (a)
no complete cycles of weak individual preferences exist.
This implies that in one of the V -cycles at most two distinct
weak orderings can occur. Clearly in that case the only
element of the second V-cycle, if at all, will be the one that
is inversely related to the not occurring third ordering of the
first V-cycle.
(c) Pl(S*) = P2(S*) = P3(S*) = S* implies that in addition to (a)
and (b) each V-cycle contains at most one weak pref-
erence ordering.
(d) PI (S*) = P2(S*) = P3(S*) = P4(S*) = S*. In addition to (a),
(b), and (c) all strict individual orderings that still occur
belong to the same U-cycle.
Summarizing assertions (a) to (d), S* is seen to comprise exactly 0,

1, 2 or 3 strict individual preference orderings all belonging to the
same U-cycle, and 0, 1 or 2 weak individual orderings belonging to
different V-cycles. This, however, means that profile S* occurs in one
of the forms st,.
Thus the proof given above has shown that if a
standard form comprises at least two distinct strict orderings these
orderings always belong to the same U -cycle, while in case that two
distinct weak preference relations occur, these weak orderings always
belong to different V-cycles.
4. CYCLICALLY MIXED PREFERENCE PROFILES
We now wish to define what we call a cyclically mixed preference

structure. The definition of this concept makes it necessary to return to
the classification of strict and weak individual orderings into Zj-cycles,

as given in Section 2.
The Condition of Cyclically Mixed Preferences (CM). The prefer-
ence profile S of a given society G is said to be cyclically mixed, if this
profile can be reduced such that
(a) the reduced set of orderings S* is the empty set,
or
(b) all elements of the reduced set S* are identical,
or
(c) the reduced set of preference orderings S* can be assigned

to the two Zj -cycles in such a way that orderings from both
Zj-cycles occur, with the qualification, however, that from
each pair of relations aRbRc and cRbRa, a, b, c E {x, y, z},
at most one relation occurs.
In this definition cases (a) and (b) describe situations which can be
called trivial, while case (c) essentially formulates the condition of
cyclically mixed preference structures. Condition CM postulates the
existence of a sequence of reductions PI, P2, P3, P4 such that the
reduced set of orderings fulfils one of the properties (a), (b), (c) in the
definition. Unfortunately, this result is not secured by every conceiva-
ble sequence PI to P4' The reason for this is the ambiguity within
reduction P4' The procedure postulated in Section 3 above, however, is
such that the reduced set of preferences always satisfies one of the
properties (a) to (c) in condition CM provided that this is possible at
all. Some examples are in order now.
1. Consider the following preference structure S:
2: XPSPiz
2: yPizPjx
2: ZPjXPjy.
This original preference profile has already attained its standard form
S~o; the preference structure of society G is not cyclically mixed.
2. 1: xFiyFiz
1: yFiZFiX
1: zFixFiy
1: zFiyFix
1: zFiylix.
This original preference profile is easily seen to be reduced to standard
form Sf1:
1: yFiZFiX
1: zFixFiy
1: zFiylix.
The original preference structure is cyclically mixed, for the two strict
orderings are assigned to Zl, whereas ordering zFiylix can be assigned
to relation zRyRx within Z2, and one easily checks that xRyRz does
not occur.
3. Let the original preference structure only comprise weak individual

orderings. Then the original profile can be reduced to either sto, or
Stb or St2 which again means that the preference profile of G is
cyclically mixed in all cases. If the reduction procedure leads to st2> for
example, the original profile is cyclically mixed, for the two remaining
preference orderings belong to different V-cycles.
4. Let the original preference profile of society G be
1: xFSFiZ
1: xFizFiy
1: zFixFiy
2: yFixliz.
Applying reduction P4 to xFSFiZ and xFizFiy, one arnves at the

following intermediate profile:
2: xPiyliz
1: ZFiXFiY
2: yFix1iz.
Applying reduction P3, one finally obtains
2: xljyPjz
1: ZPjXPjy,
and this reduced structure is easily seen to satisfy none of properties

(a) to (c) in condition CM.
If, however, P4 is applied to XPjZPjy and ZPjXPjy, one obtains
1: xP;yPjz
2: xljzP;y
2: yPjzljx
and by means of reduction PI one finally arrives at
which clearly satisfies condition CM. The latter reduction procedure is

the one that was postulated in Section 3 above.
It should be clear by now that in order to solve the problem of

existence of a transitive social relation only the composition of the
reduced preference profile has to be investigated. A reduced structure,
however, always assumes one of the twelve standard forms.
Our next step is to give a classification of all possible standard forms.
These can be partitioned into three groups and we arrive at:
THEOREM 2.
(a) If one of the standard forms S~o, S~l' S~2' sto
is derived, the
corresponding original preference profile is always cyclically
mixed;
(b) if one of the standard forms S!o, S~o, S~l' S~2 is derived, the
corresponding original profile never is cyclically mixed;
(c) if one of the standard forms Sth S!2' S!h S!2 is derived, the
corresponding original structure is cyclically mixed if and
only if at least one of the weak preference orderings has as
its components two strict orderings with the following prop-
erty: one of these orderings is inversely related to one of the
(one or two) not-occurring strict preference relations of the

Ui -cycle to which the k strict orderings of Sri belong.
Case (c) is readily understood if one remembers the following result
pointed out before: if a standard form comprises more than one strict
preference relation these orderings always belong to the same Ui -
cycle.
Proof. Assertions (a) and (b) should be immediately clear from the
definition of condition CM. Assertion (c) will be made clear by means
of the following example.
Let xPyPz be the only strict ordering in a standard form sfl or sf2'
Then the original preference profile is cyclically mixed if and only if
(a) neither of the two weak preference orderings zPylx and zIyPx
occurs or (f3) at most one of these two weak orderings occurs,
combined, however, with a second admissible weak ordering. As an
example consider the following two standard forms:
n1 : XPiyPiZ nl : XPiyPiZ
nz: zPixliy n2: zPixIS
n3: xli zPiY
While the first standard form satisfies the property required in case
(c) of condition CM, the second does not. The two weak orderings
zPylx and zIyPx are easily seen to be those which have the inverse
ordering of xPypz as their component. They do not, however, have a
strict ordering as one of their components that is inversely related to
one of the not -occurring strict orderings of that Ui-cycle to which xPypz
belongs.
The same reasoning applies to the case of two strict orderings. Let
these two preference relations be xPypz and ypzPx. Obviously in this
situation at least one of the two weak orderings yPxIz and ylxPz has
to occur in order to secure that the standard form in question satisfies
condition CM while both zPxly and zIxPy must not occur.
5. A POSSIBILITY THEOREM
We now state and prove our theorem on cyclically mixed preferences.
THEOREM 3. Under the majority decision rule the social preference

relation is transitive if and only if the preference profile of the
underlying society G is cyclically mixed over every triple of alterna-

tives.
It should be briefly mentioned that necessity is used here in the
sense of Sen ([6], p. 183): Every violation of the condition yields a list
of individual preference relations such that some assignment of these
orderings over some number of individuals will lead to intransitivity of
the social preference relation.
Proof. What has to be done in the following is to analyze the three
groups of standard forms (a), (b), and (c) from Theorem 2.
(a) Necessity.
The proof of necessity is trivial since all standard forms belonging to
this group always satisfy condition CM.
Sufficiency.
For the standard forms S~I (l E {a, 1, 2}) the assertion of our theorem
coincides with that of Inada in his theorem on dichotomous prefer-
ences ([2], p. 526, and [3], p. 492).
For sfo the assertion is trivial. The social relation coincides with the
only remaining individual preference ordering.
(b) Sufficiency.
The proof of sufficiency is trivial since all standard forms belonging to
this group never fulfill condition CM.
Necessity.
We confine ourselves to an investigation of S!o.
Consider a situation where nl individuals have the ordering xPjyPjz
and the same number of individuals holds yPjzPjx. Under the simple
majority decision rule the social relation is zIx & xly & yPz which is
clearly intransitive.
In case (b) transitivity is only given in special cases. As an example
consider the following S!c profile:
nl : xPjyPjz
11z: yPjzPjX, where nl j; n2 •
Here transitivity holds if and only if ttl j; n 2 • Clearly this last require-
ment is trivially fulfilled if (nl + n2) is an odd number.
(c) The proof for this group of standard forms is more interesting. For
obvious reasons we can confine ourselves to proving the transitivity of

the social relation for St2 and S~2 which may occur in the following
form:
St2: xPjyPjz S~2: xPjyPjz
yPjzljx yPjzpjX
zlSPjX yPjzljx
zljYPjx.
Sufficiency.
(a) Standard form St2. Let the number of individuals having the three
orderings of Sf2 be nl> n2, and n3 and let us assume that nl > 0, n2> 0,
and n3:2': O. Clearly the assumption n3:2': 0 enables us to integrate the
case of standard form Sfl into our proof.
It is easily seen that Sf2 as given above fulfills condition CM. The
following assignment to the two Zj -cycles proves this statement:
xPypz --+ xRyRz E Zl

yPzlx --+ yRxRz E Z2
zlyPx --+ yRzRx E Zl
It should be emphasized that the occurrence of yPzlx is indispensable

in order to have an assignment that satisfies property (c) in condition
CM (though yPzlx is not unique; ylxPz would also be admissible
here), while zIyPx is not essential. The majority-vector reads (n 1 -
("2 + n3), n 1- n3, n 1+ n2)· Due to our assumptions n 1+ n2> 0 so that
we immediately obtain ypz under the majority rule. If in addition yPx
and xpz hold the transitivity of the social relation is obvious. There-
fore, the only cases which have to be investigated are
1. xRy under the majority decision rule, and

2. zRx under the majority decision rule.
We have to demonstrate
1. xRy --+ xpz and 2. zRx --+ yPx.
1. xRy means that nl - (n2 + n3):2': O. Due to the assumption

n2> 0 it follows that n1 - n3 > 0 so that xpz holds.
CYCLICALL Y MIXED PREFERENCES 181
2. zRx is equivalent to nl - n3:5 O. Then it is also true that

nl-(n2+n 3)<0. This again means that yPx and the proof
is complete.
({3) Standard form S~2. The proof is analogous to the one given above
and is presented only for the sake of completeness.
The assignment to the two Zi-cycles is found to be
xPypz ~ xRyRz E ZI
ypzPx ~ yRzRx E ZI
yPxlz ~ yRxRz E Z2
zIyPx ~ yRzRx E ZI.
Let the number of individuals having the four orderings be m 1, m2, m3,
and m4, where we assume that ml, m2' m3 > 0, and m42: O. As in case
(a), the last assumption enables us to include standard form S~1 with
m4 = 0 in our proof. Clearly, the majority-vector is (m 1 -
(m2 + m3 + m4), m 1- (m 2+ m4), m 1+ m2+ m3). We again obtain yPz
under the majority decision rule. What has to be shown is to prove the
following two implications:
1. xRy ~ xPz and 2. zRx ~ yPx.
1. xRy is equivalent to m1 - (m2 + m3 + m4) 2: o. This clearly

implies ml - (m2 + m4) > 0 so that we obtain xPz.
2. zRx means that m1 - (m 2 + m4):5 O. Due to the assumption
m3> 0 we obtain ml - (m2 + m3 + m4) < 0 so that yPx.
The proof of sufficiency is now complete. It may seem to the reader

that the proofs given assumed rather special forms for the standard
forms S!l and S~l' I E {I, 2}. 'But one can easily verify that the assump-
tions made do not imply any loss of generality.
Necessity.
In order to prove that condition eM is necessary for the existence of a
social preference ordering we only have to give a profile for each of the
standard forms S!l' S!z, S~l' and S~2. such that the condition is
violated. Let these preference profiles be
sfI: S;"2:
1: xPiyPjz 1: xPiyPjz
1: zIiyPix 1: zIiyPix
1: zPixliy
sfI: S!2:
1: xPjyPjz 3: xPjyPjz
1: yPjzPjX 1: yPjzPjX
1: zPjyljx 1: zPjxljy
2: zIjyPjx.
In all four cases the social relation is seen to violate the transitivity
property. This completes the proof of our Theorem 3 for the case of
three social alternatives x, y, z. Clearly, the social relation R can be
found to be transitive over every triple of alternatives; from this it
follows immediately that R is transitive over any number of alterna-
tives.
In this paper a new condition on individual preferences was introduced

that proved to be both necessary and sufficient for transitivity of the
social preference relation. We think that it is legitimate to ask the
question why we have added a new condition to the numerous condi-
tions for transitivity which already exist. It appears to us that condition
CM is the hitherto missing link between all these conditions, providing
the key to the problem of social transitivity. Before trying to give
arguments in support of this statement all those conditions to which we
will refer subsequently should be briefly discussed.
The first three definitions are from Sen and Pattanaik [7].
DEFINITION 1. Extremal Restriction (ER). If for an ordered triple

(x, y, z) there is someone who prefers x to y and y to z, then anyone
who prefers z to x also prefers z to y and y to x, i.e.
DEFINITION 2. Value Restriction (VR). In a triple (x, y, z) there is

some alternative, say x, such that all the individuals agree that it is not
worst, or agree that it is not best, or agree that it is not medium, i.e.,
[V i: xPs or xPiz] or [Vi: yPix or zPix], or

[Vi: (xPiy and xPiz) or (yPix and zPix)].
DEFINITION 3. Limited Agreement (LA). In a triple there is an

ordered pair (x, y) of distinct alternatives such that everyone regards x
to be at least as good as y, Le., [Vi: xRiy].
Sen [6] has proved that VR, ER, and LA are completely indepen-
dent of each other.
The following condition is due to Inada [2], [3].
DEFINITION 4. Dichotomous Preferences (DP). Each individual

classifies all alternatives into two groups so that he is indifferent among
alternatives in each group.
It should be noted that the classification of alternatives may differ

from individual to individual.
The final condition was formulated by Saposnik and uses the concept
of 'clockwise and counterclockwise cycle' of individual orderings [4].
These correspond to our Ui-cycles.
DEFINITION 5. Cyclical Balance (CB). The preferences of a given

society are cyclically balanced if there is the same number of individual
preference orderings constituting the clockwise cycle and the coun-
terclockwise cycle.
Saposnik has shown that condition CB is independent of properties

VR, ER, and LA.
First of all, it should be noted that conditions 1-5 above, though
defined for the original preference profile of a given society G, only
have to be satisfied by the standard form S* so that their range of
application can be enlarged considerably.
Condition ER as applied to any preference profile requires that from
each Ui-cycle there be at most one strict ordering. This, however,
°
implies that ER is only applicable to standard forms Stl with k E {O, I}
and IE {O, 1, 2}. While for k = transitivity of the social relation is
guaranteed in all cases (ER is fulfilled trivially in this case),2 for k = 1 it
is required that the strict and weak individual preference orderings
'harmonize' in a certain way. If xPyPz, for example, occurs, the weak
orderings zPylx and zIyPx are not admissible. Under condition CM
one of the latter orderings may occur in combination with xPyPz if
another weak ordering is added being such as to guarantee a cyclically
mixed assignment to the Z;-cycles. This observation indicates what can
be proved formally: condition ER implies condition CM while the
reverse statement does not hold [1]. Clearly condition ER is not at all
applicable to standard forms Stb k;::: 2 and IE {O, 1, 2}.
The requirements that conditions VR and LA make also are quite
similar to those of condition CM. To demand that there is some
alternative, say x, such that all individuals agree that x is not worst, or
agree that x is not best means that the reduced set of preferences S*
satisfies one of the properties (b), (c) in condition CM, provided that
all strict orderings admissible under the restriction actually occur.3 It is
interesting to note that this assertion is not true for the case where it is
required that some alternative, say x, is not medium in the opinion of
all individuals. In this situation the reduction procedure can, for
example, generate a reduced set S* with only two strict orderings both
belonging to the same Z;-cycle.
In order to avoid the possibility of intransitivity in this case condition
VR has to be supplemented by an additional requirement; one has to
demand that the number of concerned individuals for every triple of
alternatives be odd [5, 6].
As for condition LA, things are very much the same. Condition CM
is satisfied if all strict individual preference orderings that are admissi-
ble under the restriction occur. 4 On the other hand, condition CM
implies both value-restriction and limited agreement within the
corresponding standard forms S*.
Our final point is a comparison between the two theorems by Inada
and Saposnik. 5 It can be demonstrated that all preference profiles that
fulfil Saposnik's condition CB can be reduced to one of the standard
forms St,. On the other hand, Inada's result only applies to preference
structures where the strict individual ordering aPbPc for a, b, C E
{x, y, z} is not allowed to occur. This then shows that both theorems
basically say the same. In our terminology Saposnik and Inada assert
that for a given preference structure S a transitive social relation exists

if by means of the reduction procedure all strict preference orderings
can be eliminated. A different, though equivalent formulation would
be to say that a given preference profile, all strict individual orderings
of which can be eliminated, is cyclically mixed. This clearly shows that
the conditions of Inada and Saposnik are just special cases of the
condition of cyclically mixed preferences.
Universitiit Bielefeld and Universitiit Munster
NOTES
* Fakultiit fUr Wirtschaftswissenschaften. Universitiit Bielefeld, D-4800 Bielefeld 1, W.

Germany.
** Institut fUr Medizinische Informatik und Biomathematik, Universitiit Munster,
D-4400 Miinster, W. Germany.
t Paper presented at the International Symposium 'Decision Theory and Social Ethics',
SchloG Reisensburg, June 24-30, 1976. Final version.
1 A concerned individual for a set of alternatives is one who is not indifferent between every
pair of alternatives in the set.
2 Of course, this is the case to which Inada's theorem on dichotomous preferences directly
applies.
3 This is a sufficient, not a necessary condition.
4 See the remark in footnote 3 above which also applies to condition LA.
S Saposnik's theorem giving a sufficient condition for transitivity of the social preference
relation can be found in [4].
BIBLIOGRAPHY
[1] Gaertner, W., 'Zum Problem der Existenz von Sozialen Wohlfahrtsfunktionen im Sinne
von Arrow', Zeitschrift fur die gesamte Staatswissenschaft 133 (1977), 61-74.
[2] Inada, K., 'A Note on the Simple Majority Decision Rule', Econometrica 32 (1964),
525-531.
[3] Inada,K., 'The Simple Majority Decision Rule' ,Econometrica 37 (1969),490-506.
[4] Saposnik, R., 'On Transitivity of the Social Preference Relation Under Simple Majority
Rule'l. Econ. Theory 10 (1975), 1-7.
[5] Sen, A. K., 'A Possibility Theorem on Majority Decisions', Econometrica 34 (1966),
491-499.
[6] Sen, A. K, Collective Choice and Social Welfare, Holden-Day, San Francisco, Calif., and
Oliver and Boyd, Edinburgh, 1970.
[7] Sen, A. K and Pattanaik, P. K, 'Necessary and Sufficient Conditions for Rational Choice
Under Majority Decision', 1. Eeon. Theory 1 (1969), 178-202.
LUCIAN KERN
COMPARATIVE DISTRIBUTIVE ETHICS
An Extension of Sen's Examination of the Pure

Distribution Problem
O. INTRODUCTION
In recent years several different conceptions of distributive justice have

been proposed: in addition to the utilitarian conception Rawls' differ-
ence principle, Sen's Weak Equity Axiom and the theory of fairness.
These conceptions have not been systematically compared, rather
there was a tendency to concentrate on the conflicting features. But the
points where these conceptions are compatible with one another are at
least as interesting as the points where they do contrast, and a
systematic comparison which can reveal both might therefore be of
interest.
Such a comparison seems to be possible within the framework of the
pure distribution problem which has been used already by Sen to
compare the Rawlsian and the utilitarian conceptions [1]. This com-
parison can be extended to include also the other conceptions by
introducing additional rules of choice and axioms, representing the
different conceptions.
The result of the extended comparison is interesting on two ac-
counts: First, there is no total conflict between any of the conceptions,
rather they can be interpreted as a continuum, running from a purely
egalitarian conception to a conservative one where the conceptions are
overlapping to some extent-and even the two extremes have some-
thing in common: they both reject the Strong Equity Axiom which is
introduced in the next section.
Second, there seems to be another conflict between what might be
called income-egalitarianism, i.e. the distributive conception of the
theory of fairness, and welfare-egalitarianism which is equivalent to
Kolm's notion of 'fundamental justice'. Kolm has already pointed out
that welfare-egalitarianism can be inefficient in the Pareto sense or
impossible to attain [2]. But, as is shown in this comparison, there is
another feature of welfare-egalitarianism: it can be in conflict with
income-egalitarianism.
187
Hans W. Garringer and \Verner Leinfellner (eds.), Decision Theory and Social EthiCS, Issues ht Social Choice, 187-200.
188 LUCIAN KERN
If we imagine a society which gives an equal income to all its

members, such a society is not necessarily free of conflict since a case
can be made by some against others on the ground that, due to their
uniformly lower welfare functions, they are worse off than the others
getting the same income. And conversely: in a society which realizes
welfare-egalitarianism, such that everyone has the same level of wel-
fare, it cannot be excluded that some are envious vis-a-vis others
because of the necessary differences in income.
The comparison is arranged in three sections. The first one intro-
duces the rules of choice and axioms. The second section presents the
results of the comparison and the proofs. The third section concludes
with a short discussion of the results.
I. PRESENTATION OF RULES OF CHOICE AND AXIOMS
The framework of the comparison is given by what is known as the

pure distribution problem, i.e. the exercise of justly dividing a fixed
and homogeneous income (cake) among n people, where the problem
is to rank all possible distributions of this income according to some
rule of choice.
More formally: if the share of income of person i is Yi' for i =
1, ... ,n then the problem is to rank all vectors y, i.e. (Ylo ... , Yn),
subject to
n
L Yi = Y>O and Vi: Yi ~O.
i=1
The welfare Wi of person i is assumed to be a monotonically

increasing, strictly concave and twice differentiable function of his
income Yi:
Wi=WlyJ, with Wf>O and W"<O.1
There are many rules of choice according to which the distributions

of the cake can be ranked. In this comparison only four are taken into
account: the Utilitarian Rule (UR), the Rawlsian Maximin Rule (MR;
including its lexicographic extension, LMR) , the Conservative Maxi-
max Rule (CR), and the Egalitarian Rule (ER).
COMPARATIVE DISTRIBUTIVE ETHICS 189
The Utilitarian Rule (UR) is to maximize the sum of individual

welfares, i.e. to rank the distributions according to the sum of indi-
vidual welfares. Hence UR states that
iRy ~ I W;(xJ ~ I W;(Yi)'

i i
The simple Maximin Rule (MR) is to maximize the welfare of the

worst-off person, i.e. to rank the distributions according to the welfare
level of the worst-off person. Hence MR states that:
iRy ~ min W;(xJ ~ min W;(yJ.

i i
Rawls himself has proposed a lexicographic extension of this rule to

cover all cases in which the worst-off persons are equally well off in
two or more different distributions. The Lexicographic Maximin Rule
(LMR) then prescribes to maximize the welfare of the second worst-off
person, i.e. to rank the distributions according to his welfare level-
and if the second worst-off persons are also equally well off, then to
maximize the welfare level of the third worst-off person, and so on. So,
if xl is the worst-off person in distribution i and xi the ith worst-off
person, and similarly, yi is the ith worst-off person in distribution y,
then LMR states that:
iRy ~[(Wxl > Wy1}V{Wx1 = W y1 & Wx2 > W y2 } v ...

v{Vi: i;;;n-2: Wxi=Wyi & Wx(n-1) > Wy(n-l)}
v{Vi: i;;;n-l:Wxi=Wyi & Wxn>WyJ].
Instead of maximizing the minimum as in the Maximin Rule, an

alternative rule would be to maximize the maximum. The Maximax
Rule which can be deduced from the well-known Hurwicz-Rule by
setting the optimism parameter ,\ to one is extremely optimistic as a
decision rule. But as a social choice rule it assumes a very conservative
character since it maximizes the welfare of the best-off persons, i.e. the
distributions are ranked according to the welfare level of the best-off
persons. Hence the Conservative Maximax Rule (CR) states that
iRy ~ max W;(xJ ~ max W;(yJ.

i i
190 LUCIAN KERN
Another rule of choice can be deduced from the theory of fairness.

The concept of fairness is based on the idea of an envy-free society
which is said to be one in which no person will prefer another's bundle
of goods to his own. Assuming that there is only one good, real income,
the only distribution free of envy is the equal income distribution.
Since individual welfare is assumed to be a function of income, the
corresponding rule minimizes the sum of the differences of welfare
levels which results from a comparison by all persons of the level of
welfare they get from their own income with the level of welfare they
would get from the income of other persons, and ranks the distribu-
tions accordingly. Hence the Egalitarian Rule (ER) states that
iRy ++ L L [\V;(x
i j
j )- Wlx;)]~ L L [\V;(y) -
i j
\V;(y;)P
Though the rule is formulated in terms of welfare levels, it is easily

seen that it is the differences of income which really matter, such that
the optimum is reached if all persons have an equal income. This
conception has therefore been interpreted as income-egalitarianism, an
interpretation which is supported by several theorems in the theory of
fairness [3].
Now, the above-mentioned choice rules may be expected to follow
some axioms which are themselves representative of certain notions of
distributive justice. The first axiom stands in favor of a reduction of
inequality, if the persons have identical 'needs'. It simply says that
assuming identical welfare functions, any transfer of income from a
richer man to a poorer man is always preferable. Hence the Symmetry
Preference Axiom (SPA) states that
[{\fi,j, y: Wi(y) = Wj(Y)}&{Yi<Xi~Xj<Yj}

& {Xi - Yi = Yj - Xj} & {Vk;t: i, j: Xk = ydJ ~ iPy.
But how can we adjust differences in 'needs' if it is assumed that the

persons do not have identical welfare functions? One possibility is
Sen's Weak Equity Axiom (WEA) which demands that persons who
are worse off, i.e. who have a lower welfare function, should not be
made to receive less income as well. WEA therefore states that
persons more deprived in non-income aspects should be given at least
as much income as others
[{V y: W;(y) < ~(y)} & Ny: iRy}] ~ Xi ~ Xj'
Another possibility is to strengthen the Weak Equity Axiom such

that the worse-off persons will not only receive at least as much income
as those better off, but that much more income to make their level of
welfare equal with that of the other persons. Thus, the Strong Equity
Axiom (SEA) states that:
Behind this axiom lies a conception of distributive justice, which

may be called welfare-egalitarianism and which has its roots in the idea
of a distribution according to needs as opposed to a distribution
according to desert. This principle was enunciated by Marx in his
Critique of the Gotha Program, but it should be made clear that Marx
confined it to the higher stage of communism, that is he deemed it
realizable only after society has passed through the stage of socialism
[5].
An alternative principle emerges if the direction of the income
transfer as prescribed by WEA and SEA is reversed. Hence, what may
be called the Non-Equity-Axiom (NEA) states that:
[Ny: W;(y) < ~(y)} & {Vy: iPy}] ~ Xi < Xi'
NEA can be interpreted as the axiomatic counterpart of the above

mentioned Conservative Maximax Rule (CR) since it invariably will
give more income to persons who are already better off due to their
higher welfare functions. But there are also cases in which the
utilitarian principle of the maximization of the sum of individual
welfares will require to give more income to persons with a higher
welfare function.
II. RESULTS AND PROOFS
With the rules of choice and axioms stated as above it is possible to

examine which of these axioms are satisfied (or violated) by the
192 LUCIAN KERN
Egalitarian, the Maximin, the Utilitarian and the Conservative Rule

respectively. This examination yields the following results:
(1) The Utilitarian Rule violates (a) the Weak Equity Axiom and (b)
the strong Equity Axiom for some set of permissible individual welfare
functions.
(2) The Utilitarian Rule always satisfies (a) the Symmetry Prefer-
ence Axiom and can satisfy (b) the Non-Equity Axiom for some set of
permissible individual welfare functions.
(3) The Maximin Rule and its lexicographic extension violate (a)
the Non-Equity Axiom, but can satisfy (b) the Weak Equity Axiom
and satisfies (c) the Strong Equity Axiom; only the Lexicographic
Maximin Rule satisfies (d) the Symmetry Preference Axiom for some
set of permissible individual welfare functions.
(4) The Egalitarian Rule violates (a) the Non-Equity Axiom and (b)
the Strong Equity Axiom, but satisfies (c) the Weak Equity Axiom and
(d) the Symmetry Preference Axiom for some set of permissible
individual welfare functions.
(5) The Conservative Rule violates (a) the Symmetry Preference
Axiom, (b) the Weak Equity Axiom, (c) the Strong Equity Axiom, and
satisfies only (d) the Non-Equity Axiom for some set of permissible
individual welfare functions.
The results of the comparison are summarized in the following table
and proved below; proofs preceded by * are taken over from Sen [1].
ER MR/LMR UR CR
Violates NEA, SEA" NEA WEA,SEA SPA, WEA, SEA
Satisfies SPA, WEA SPAb, WEAa, SEA SPA, NEA" NEA
Proofs (4a-d) (3a-d) (la-b, 2a-b) (5a-d)
a Only within a certain range.

b Applies only to LMR.
Proofs
*(1a) We assume that ~ differs from W; by the factor m such
that W;(') = m ~( . ), with 0 < m < 1 and W;(·) always posi-
tive. If Vy: .fRy then under UR:
L W;(x;) = mflX LW;(Y;)·

i Y i
Given the strict concavity and twice differentiability of each

W;, this implies that:
Since m < 1, and W!' < 0 it must be the case that Xi < Xj' Thus
UR violates WEA.
(lb) Follows directly from the proof of (1a) and from the fact
that SEA implies Xi > Xj'
(2a) Given the assumption of identical individual welfare func-
tions, the antecedent in the statement of SPA implies that
In addition we have: Xi - Yi = Yj - Xj'

In view of the strict concavity of the individual welfare
functions it follows that the welfare gain of i will be larger
than the welfare loss of j, i.e.
Hence
and iPy according to UR which satisfies SPA.

(2b) Follows directly from the proof of (la), given the fact that
NEA prescribes Xi < Xi'
But note that if Xi« Xi there may be a case in which
which implies that
and iPi according to UR which would violate NEA.

Hence UR can satisfy NEA only if W;(xi ) ~ W[(x;).
194 LUCIAN KERN
(3a) Follows from the proof of (3b) below, given the fact that
Xi < Xj in the consequent of NEA. The same reasoning
holds for LMR.
(3b) We assume that W;(·) = m~('), with 0< m < 1.
If 'r/y: iRy, then under MR
Given the assumption of a fixed sum to be distributed, i.e.
under MR it must be the case that Xi ~ Xj which satisfies

WEA. The same reasoning holds for LMR. But note that if
Xi »xj there may be a case in which we have W;(x) > W;(yJ
and Wi(X i ) > ~(Xj)' but at the same time W;(Yi) > ~(Xj)'
In this case evidently mini W;(.x;) < mini W;(yJ and yPi
according to MR which violates WEA.
(3c) From the statement of SEA it directly follows that
min W;(xi»min Wi(yJ.

i i
Hence iPy according to MR and LMR which satisfies SEA.

*(3d) Consider SPA and take a case in which 3 Yk: Yk < Yi' From
the antecedent in the statement of SPA we have
It follows that
min Wi(x;) = min W;(Yi)'

i i
Hence Xly according to MR which violates SPA.

But note that this holds only for MR, not for LMR which
in the case of an indifference prescribes to go over to the
next worst-off person in both distributions. In view of
this evidently is person i. Hence given the assumption of

identical individual welfare functions
min W;(y;) < m.in W;(x i )

I I
and iPy according to LMR which satisfies SPA.

(4a) Take a case in which Yi = Yj. Since NEA demands Xi < Xi' it
is evident that
L L [W;(xj)- Wi(X;)] > L L [Wi(Yj)- Wi(y;)].

i j i j
Hence yPi according to ER which violates NEA.

(4b) We assume that Wi(·) = m Wj('), with 0 < m < 1. Given the
statement of SEA, we have W;(Xj) = ~(Xj)' In this case
kXi == xi with 0 < k < 1, k cf. m.
If we consider the distribution of the income shares, Yi
and Yj' there are two possibilities: either Yi > kYj' or Yi ~ kYj.
Now, if Yi > kYj and kXi == Xj then evidently IXj - xd >
IYj - yJ Hence
L L[Wi(xj)- W;(Xj)] > L L [W;(Yj)- W;(y;)]
i j i j
and }iPi according to ER which violates SEA.

But, if Yi ~ kYj and kXi == Xj' then
Hence
L L[W;(xj)- Wi(Xi)]~
i j
L L[Wi(Yj)- W;(y;)]
i j
and iRy according to ER which satisfies SEA.

(4c) If Vy: iRy then under ER
LL [W;(xj) - W;(Xi)]~ L L [W;(Yj)- W;(y;)]'

i j i j
196 LUCIAN KERN
This implies that IXi - xJ~ IYi - yd with xi = Xi as the unique

optimum which evidently satisfies WEA.
(4d) From the antecedent in the statement of SPA we have
Therefore
Hence Li Li [W;(Yi)- W;(Yi)]> Li Li [W;(xi )- Wi(Xj)] and

iPy according to ER which satisfies SPA.
(5a) Given the assumption of identical individual welfare func-
tions, from Yi < Xi ~ Xi < Yi it directly follows that
max Wi(x;) < max Wi(Yi)'

i i
Hence yPi according to CR which violates SPA.

(5b) Assume W;(.') = m"'j(') with 0 < m < 1. If If Vy: iPy then
under CR
Given the fact that
LXi= LYi= Y,
i i
this implies that xi > Xi which violates WEA.

(5c) Follows from the proof of (5b) given the fact that SEA
implies Xi > Xi'
(5d) Follows from the proof of (5b) given the fact that NEA
prescribes Xi < Xi'
III. DISCUSSION
The differences between the conceptions of distributive justice are

brought out very clearly in the context of this comparison, but so are
the points of convergence. To begin with, the much discussed conflict
between utilitarianism and the Rawlsian Maximin Rule is not so total

as it might seem. There certainly is a conflict in so far as the Utilitarian
Rule rejects WEA and SEA, two axioms which imply a transfer of
income in favor of the worst-off person, and which are satisfied by the
Maximin Rule, including its lexicographic extension. Since the
Utilitarian Rule represents a conception of distributive efficiency, it is
not surprising that it is not very equity-conscious.
Nevertheless, the utilitarian principle is compatible with the Maxi-
min Rule on two points. First, both rules satisfy the Symmetry Prefer-
ence Axiom, though the Maximin Rule only for its lexicographic
extension. Hence, under the special condition of identical individual
welfare functions, the utilitarian conception is in accordance with a
principle of reduction of inequality.
Second, the Non-Equity Axiom is violated by the Maximin Rule, but
can also be violated by the Utilitarian Rule. The reason simply is that
NEA does prescribe only the direction of the transfer of income, but
puts no restriction on it. NEA thus allows a transfer of income in favor
of the best-off person even in those cases in which the Utilitarian Rule
would reject it, i.e. when the welfare gain of the best-off person is less
than the welfare loss of the worst-off person and as a result the sum of
individual welfares would be less than without this transfer of income.
Whereas with regard to WEA and SEA the utilitarian principle of
distributive efficiency seemed to be directed against considerations of
equity, it here turns out that it will also operate against a principle
which is rigorously in favor of the best-off person.
This result characterizes at the same time a point of conflict between
the Utilitarian and the Conservative Rule. The other one is the
Symmetry Preference Axiom which is satisfied by UR but violated by
CR. Obviously, the Conservative Rule rejects a transfer of income in
favor of the poorer person even in those cases in which the Utilitarian
Rule would accept it, i.e. under the assumption of identical individual
welfare functions.
But on the other hand there are also points of convergence. Within a
certain range, NEA is satisfied by UR and CR. Furthermore, both
rules of choice violate the Weak and the Strong Equity Axiom, and
thus reject considerations of equity in line with WEA and SEA. This
perhaps is the reason why the utilitarian conception is often said to
be inherently conservative in character. As is shown by the compari-
son, this is only partially true. While the utilitarian conception is
198 LUCIAN KERN
compatible with the Conservative Rule in many cases, both will be in

conflict in others.
Turning now to the Maximin Rule (including its lexicographic exten-
sion) and the Egalitarian Rule, both rules are compatible with regard
to all axioms, except the Strong Equity Axiom which is satisfied by
MR/LMR but violated by the Egalitarian Rule. It should, however, be
added that even here we have no total conflict. Within a certain range,
welfare-egalitarianism can be compatible with income-egalitarianism.
Starting from an unequal distribution of income, every transfer of
income towards an equal distribution will also reduce the differences of
individual levels of welfare, as is shown in the proof of (4b). But by
reducing the differences of individual levels of welfare remaining at the
equal income distribution, we will again have differences of individual
levels of income, thereby violating ER.
From a practical point of view the problem does not seem to be very
important. The differences of income and welfare in most countries are
not such that the conflict between income-egalitarianism and welfare-
egalitarianism is imminent. So the Welfare-Egalitarian may well join
the Income-Egalitarian in his struggle for a more equal distribution
of income since this also serves the purpose of narrowing the welfare
gap.
But, from an ethical point of view the conflict is more serious since it
shows that there is not only one 'egalitarianism', but there are at least
two types of egalitarian conceptions which are mutually exclusive
within a certain range. Now, the welfare-egalitarian conception should
not be dismissed solely on the ground that it is too utopian to merit
serious consideration (which is perhaps the reason why this conflict is
rarely mentioned in the literature). Certainly, as Kolm has shown, a
welfare-egalitarian state in the sense of the Strong Equity Axiom may
be impossible, i.e. outside the set of feasible states, or it may not be
Pareto-efficient [2].
But the welfare-egalitarian conception can also be stated as a rule of
choice for the purpose of 'second-best' comparisons, i.e. of compari-
sons like those above in the context of the pure distribution problem.
Such a rule would select among the feasible states the one at which the
individual levels of welfare are closest to one another. In analogy to
the 'second-best' formulation of the concept of fairness by Varian [4] it
may even be possible to state the rule of choice in a way that the most
equitable state (in the welfare-egalitarian sense) among all feasible and
pareto-optimal states is chosen. It is evident that also this more

'realistic' statement of the welfare-egalitarian conception will come
into conflict with income-egalitarianism.
This conflict is relevant even for socialism as far as it is concerned
with distributive questions. It has already been mentioned that Marx in
his Critique of the Gotha Program proposed a principle of distribution
according to needs which is equivalent to the welfare-egalitarian
conception (as stated by SEA), but that he postponed its ultimate
accomplishment to the higher stage of communism. With regard to the
earlier stage of socialism Marx suggested a principle of distribution
according to work done, or labor, measured by its duration or inten-
sity? The principle thus allows for production (and not only for
exchange as in the income-egalitarian conception) and distributes
income according to the individual contribution to the social product,
but with no correction for the different individual abilities. The princi-
ple recognizes, as Marx put it, "unequal individual endowment as
natural privilege" [5].
Varian has shown that much the same principle will emerge if the
theory of fairness is extended to cover the possibility of production.
This is a principle ('wealth-fairness') which also includes no correction
for ability, i.e. a complaint of a person against some other person who
gets more income is not considered as legitimate unless the complain-
ing person is willing (or able) to do the same work or a corresponding
amount of other work [3]. The Marxian principle of distribution
according to labor therefore seems to be but a variant of income-
egalitarianism.
On the other hand, Marx advanced a principle of distribution
according to needs which we have found to be in conflict (at least
partially) with income-egalitarianism. The Marxian resolution to this
conflict is to relegate the needs principle to a later stage in the socialist
development. But it remains doubtful whether the conflict can be
resolved in this way.
In concluding it should be remembered that this is a conflict between
two egalitarian conceptions which coincide in other respects. Indeed,
from a more general point of view the distributive conceptions pre-
sented above seem to fall into two categories or groups. One group,
comprising ER and MR/LMR, concentrates on considerations of
equity as represented by the Weak and/or the Strong Equity Axiom
and consequently rejects NEA-notwithstanding internal differences.
200 LUCIAN KERN
The other group, UR and CR, gives prominence to other considera-

tions, for instance to considerations of distributive efficiency, and thus
rejects WEA and SEA altogether.
Universitiit Bielefeld
NOTES
1 Assuming full interpersonal comparability of the individual welfare functions.

2 This formulation leaves out an additional component in the original formulation which
ensures pareto-efficiency; see Varian [4].
3 It should be added that this principle would be meaningless from a Marxian point of
view without the preliminary step of socializing the means of production.
BIBLIOGRAPHY
[1] Sen, Amartya K., 'Rawls versus Bentham: An Axiomatic Examination Qf the Pure
Distribution Problem', Theory and Decision 4 (1974), 301-309-.
[2] Kolm, Serge-Christophe, Justice et equite (Monographies du Seminaire d'Econo-
metrie 8.), Paris: Centre National de al Recherche Scientifique, 1972.
[3] Varian, Hal. R., 'Two Problems in the Theory of Fairness', Journal of Public
(1974), 63-91.
[4] Varian, Hal. R., 'Two Problems in the Theory of Fairness', Journal of Public
Economics S (1976), 249-260.
[5] Marx, Karl, Kritik des Gothaer Programms, in: Karl Marx und Friedrich Engels,
Werke (MEW), Berlin [DDR] 19 (1969), .15-32.
CHARLES R. PLOTT
RAWLS'S THEORY OF JUSTICE:

AN IMPOSSIBILITY RESUL T*
The theory of justice developed by John Rawls has been widely and
correctly recognized as one of the great contributions to our under-
standing about the complicated relationships between social institu-
tions and our notions about the morality of social actions. His work is
having substantive impact on economics, and I suspect that the other
social sciences including law are being similarly influenced. For me to
add my own accolades here in view of this almost universal praise,
would be anticlimactic at best; so let's get straight to the point.
If you formulate Rawl's theory in a rather natural way, you can get
an impossibility result. That is, if you formalize the argument, or at
least part of the argument, as a particular set of axioms, you can
deduce propositions which almost anyone, Rawls included, would
reject. This paper explores such a formulation.
The purpose of the exercise is not to criticize Rawls. The purpose is
to clarify the theory and its relationship to economics. The book is long
and very complicated. It is probably fair to say that no one fully
understands it. Clearly he cannot intend for the theory to be sum-
marized by the axioms I explore here, for to do so would be to accept
the negative implications of those axioms. Yet it is not easy to
ascertain exactly where the axioms miss the point. Perhaps as we
learn why my formulation is wrong, and as the axioms are modified
accordingly, a simpler version of his theory will emerge.
1. THE PROBLEM FORMULATION
The substance of Rawls's theory resides in two principles of justice

which, he argues, everyone would agree to upon proper reflection.
These two principles are to help us with our choice of social institu-
tions. The social institutions in turn, along with the desires and powers
of individuals which may themselves have been shaped by the institu-
tions, are to induce a social choice from among the various social
201
Hans w. Gottinger and Werner Leinfellner (eds.), Decision Theory and Social Ethics, Issues in Social Choice, 201-214.
Copyright. © 1978 by D. Reidel Publishing Company, Dordrecht, Holland. All Rights Reseroed.
202 CHARLES R. PLOTT
alternatives which are feasible at any given time. The principles of

justice then, are to be reflected in the day to day choices from the set
of feasible alternatives made by the society through the behavior
induced by its institutions.
The two principles are as follows:
1. Each person has an equal right to the most extensive

scheme of equal basic liberties compatible with a similar
scheme of liberties for all.
2. Social and economic inequalities are to meet two condi-
tions: they must be (a) to the greatest expected benefit to
the least advantaged members of society; and (b) attached
to offices and positions open to all under conditions of fair
equality of opportunity.
The principles are to apply lexicographically. That is, one applies the
second principle only after the requirements of the first have been met.
The demands of the first are to take priority over the demands of the
second. Both principles are stated in terms of words which must be
clarified, and it is upon how one defines the words used in the second
principle that we will ultimately dwell. We will argue that the remain-
der of Rawls's theory necessitates the use of certain definitions at this
foundational stage that everyone is likely to reject.
In order to keep the discussion within reasonable bounds, several
simplifying assumptions will be made. These assumptions will serve to
clarify the complicated aspects of the theory. The assumptions could be
relaxed, but that would only serve to make the discussion even more
opaque. The aim is to observe the operations of Rawls's theory in a
very simple social setting. The difficulties we uncover there would most
certainly carryover to more complicated cases.
Before proceeding further we will need some notations.
E = a universal set of social alternatives.

v = the feasible set, veE.
V = a family of subsets of E termed the admissible feasible
sets.
C( v, . ) is choice function which has the properties
(Vv)VEVC(v, . ) ¢,J and C(v,·) c v.
RAWLS'S THEORY OF JUSTICE 203
If S = (Sl ... sn), then

min S = {the value of the lowest valued component of
the vector s}.
Ri will denote the preference relation of the ith individual
over elements of E. It is a total, reflexive and transi-
tive binary relation.
We should start with the description of a 'social state'-the elements

of E. We will assume that the society will only have available to it
those goods which Rawls classifies as primary. These fall in the broad
categories: rights and liberties, opportunities and powers, income and
wealth, and a sense of one's own worth. In addition, let's make the
even more sweeping assumption that all sets of social institutions under
consideration afford equality of liberties and opportunities thus satisfy-
ing Rawls' first principle of justice. The force of these assumptions is to
focus our attentions on those societies with only a minimal complexity.
Troubles encountered here, if any are found, are likely to remain. We
are assuming then that the society must choose those institutions which
govern the distribution of a few different types of economic com-
modities.
Now this is a slight alteration in the Rawls's scheme. He speaks of
wealth and self-esteem, but one hesitates to assign identifiable proper-
ties to the latter even though such refinements are taken by Rawls to
occur at some state of the process. Perhaps it is best to think of two or
three commodities which, together with an individual's taste, define his
position of wealth. This brings us to our first assumption.
ASSUMPTION 1. There are at least three primary goods.

With this assumption we can proceed to define the elements of E. A
social state, x, an element of E, can be completely described by a
matrix
~11 ... Xlmj

x= [ .
Xnl ... Xnm
where Xij is the amount of the primary good of type j held by

individual i. E is the set of all such elements. This description presup-

poses the existence of m different types of primary goods and n
different individuals. We should mention in passing that we assume
implicitly that each variable Xij could conceivably take on several
different values. We should also mention again that the elements of E
are taken to be a complete description of all relevant events. In our
case this is the distribution of primary goods across the society.
No stand has been taken here on which goods are 'primary'. Such a
discussion would involve us deeply within Rawls's theory. We have
said only that such goods exist and we wish to investigate the structure
of those institutions which will shape their distribution among
individuals.
The second assumption pertains to individual's attitudes towards
primary goods. In the original position people do not know what their
preferences will be in general. They do know, however, that the
primary goods are all desirable to have. Our assumption captures the
spirit of Rawls' discussion by demanding on one hand that an increase
in the amount of primary goods is considered desirable to the indi-
vidual. We leave open, however, the question of relative desirability,
or tradeoffs between primary goods.
ASSUMPTION 2. All preferences over E are admissible so long as

xPS is the case when x involves more of some and no less of any
primary good to individual i, and all other components of x and yare
the same.
By admissible we simply mean it is a preference relation an indi-
vidual can reasonably be anticipated to have at some time. If a
preference is admissible it means we cannot proceed on the assumption
that no one will ever have that preference. The diagram shows that
within these assumptions an individual can order some triples of social
state in every possible way.
These preference relations are perfectly consistent with the assump-
tion that primary social goods are 'good'. We have simply refrained
from taking a hard stand on their relative desirability.
Following Rawls we will assume that individuals have been placed in
the 'original position', and from this position they have unanimously
agreed to his two principles. These are to serve as guides in the
formulation of social institutions. We will focus only upon the second
of Rawls's principles and examine the social behavior which it, to-
gether with other facets of economic organization, induces. Since his
two principles are to apply in lexicographic fashion, the second princi-

ple applies only after the first principle is satisfied, it is sufficient for us
to presuppose throughout that the conditions of the first principle have
been met. We will only examine the structure imposed by the second.
From the original position individuals have presumably agreed upon
two things. The first is a definition of how one determines what
individuals in some social situation are the least advantaged. The
second is a principle which involves this definition in statements about
social affairs and organization. We are not concerned here about how
individuals agree, or why they agree. Let's take it that they do agree;
but, in the process, let's be sure about what it is that they agree upon.
The definition comes first. I take it that the definition of the least
advantaged individual is implicit in some presupposed definition of the
'well-being' of various individuals in society. This latter definition is in
the form of a function which assigns to each individual, for each social
alternative, and for each set of admissible attitudes, a level of 'well-
being'. Formally we have:
DEFINITION
('rJRl> ... , R n), ('r/x)S(R 1 , ••• , R, x) E En

where En is simply a n-dimensional Euclidean space, x is a social
alternative, and R j is the preference relation of the ith individual. If

S(R h ••• , Rm x) = (8, 2, 1, 100, ... , 92) then the level of well-being of
individuals 1, 2, ... are those indexed by the numbers 8, 2, 1 ... , etc.
Rawls does not elaborate on the form taken by this function. His
discussions lead us to believe that some satisfactory definition can be
found. The details of the definition would be embodied in the particu-
lar form taken by the function. Along these lines we make only one
assumption.
ASSUMPTION 3. Suppose xPiy for all i, then S(R 1 , ••• , R n, x»

S(R 1 , ••• , R n, y).
This assumption demands that if everyone prefers social state x to
social state y then the level of 'well-being' of at least one person is
strictly higher at y and the level of well-being of no one is lower. This
assumption will play the role of the Pareto efficiency criterion accepted
by Rawls.
Now suppose the set v is the set of all alternatives available to the
society. This set, the feasible set, is determined by the state of
technological advance, resource endowments, and other things which,
for our purposes are assumed to be controlled by the whims of nature.
The following subsets:
DEFINITION
={XEV: m~n
, S(R 1, ••• , Rm x)~
m~n S(Rj, ... , R n, y) for all Y E v}

,
are of interest. The subsets which are defined by the function

'I'(v, R 1, ••• ,Rn) are those feasible alternatives for which the well-
being of the least advantaged individuals are maximized. These subsets
of alternatives will play a central role. The maximin criterion, on our
definition, will demand that the alternative which results from social
institutions be one of the elements of this set.
We must dwell momentarily on the nature of institutions and formal
representations of institutions. It seems clear that Rawls has in mind,
by way of institutions, something like a game in the formal sense of the

word. Institutions determine the rights and powers of individuals. In
the game theory jargon institutions determine the acts available to
players at the time they act as well as the consequences which result
from any pattern of acts taken by players. Clearly, the consequences,
in terms of the social choice from among the feasible alternatives,
depend upon both the preferences of individuals and the institutions
which define the process. In the game jargon we simply say that the
outcome resulting from the game depends upon the set of feasible
outcomes, individuals' preferences, and the rules of the game. These
rules, which govern, or at least influence, the outcome of the overall
game, form the basic institutions of the society.
We can model a game or a social decision process in the following
crude manner. Let v be the feasible set of outcomes and let
(Rb ... , Rn) be the preference relation for members of society. These
two types of parameters are those considered fundamental, in
economics at least. The institutions or rules together with the be-
havioral laws which govern the outcomes of group interactions deter-
mine, for each n + 1 tuple (v, Rb ... ,Rn) an outcome (or set of
'equilibriums') denoted functionally by C(v, R I , . . . , Rn). A change in
the fundamental social institutions would be reflected by a change in
the functional form of C(v, R I , . . . , Rn). This is a complicated way of
saying that different institutions induce different process behavior.
The fact that the choice function C(v, R I , •.. ,Rn) is to reflect the
behavior of some underlying social decision process has some consequ-
ences. Part of these consequences are reflected in the two following
definitional requirements.
(i) (Vv)(VR I , ... , Rn)C(v, R I , ... , Rn)c v
(ii) (Vv)(VRl> ... , Rn)C(v, Rl> ... , Rn)"# ,1.
The universal quantifiers are taken to range over admissible sets.

These simply demand that the process equilibriums be among the
feasible set. Presumably, choice of the empty set is not possible. The
social process must always result in some outcome.
The next axiom demands that the process models conforms to
known solution concepts. While we do not want to demand that the
outcomes conform to one particular solution concept, such as a Nash
equilibrium or a core, we do want to make sure that the function is not

inconsistent with all solution concepts. The axiom supplies a type of
minimum guarantee along these lines. 1
ASSUMPTION 4. Suppose xR;y ~ xRfy for all i and all x, y E v, then

C(v, R I , ..• , Rn) = C(v, Rf, ... , R~).
We now come to an important aspect of institutional design. Rawls

demands that the basic social institutions result in outcomes consistent
with the maximin principle. Formally we state this as:
ASSUMPTION 5.
The social alternatives which result from the workings of the basic
social institutions must be those for which the well-being of the least
advantaged individual(s) is maximized. The equilibriums of the process
must be exactly those which maximize the benefit of the least advan-
taged members of society.
2. MAJOR RESULT
We can now state a theorem. The theorem tells us something rather

ridiculous about how we must define the least advantaged individual.
We are able to conclude that this general formulation of the problem
places severe restrictions on the definition of S(RlI ... ,Rn> x) used at
the first step. The precise definition, recall, was not provided by Rawls
but, rather was presumed to have emerged as part of the workings in
the original position.
THEOREM. If there are at least three individuals and if the admissi-

ble feasible sets contain all finite subsets of E, and if assumptions one
through four are satisfied, then there is an individual io such that for all
x, y such that no one gets less of all primary goods in one of the social
states, if xPioY then
min S(R I , ••• , R n , x»m.in S(R lI ... , Rm y).

1 1
RA WLS'S THEOR Y OF JUSTICE 209
The theorem says that there exists an individual io such that if he
prefers alternative x to y (and if no one gets strictly less of all primary
goods in one of them), then the least advantaged person is better off at
x than at y. It is as though society has chosen an individual who has the
dictatorial power to define the least advantaged person and the defini-
tion he provides is in terms of his own preferences for the distribution
of primary goods, whatever those preferences might be. If his prefer-
ences are 'selfish' then he always defines himself to be the least
advantaged individual. If primary goods are rearranged to his advan-
tage, then the least advantaged is made better off regardless (within the
qualification of the theorem) of the resulting distribution of primary
goods to other members of the society.
Let's review what happened. We started with at least three primary
goods. Preferences over these goods could take any form as long as the
goods were 'good'. As long as an individual prefers more to less. We
then postulated the existence of a definition of the least advantaged
individual for any given distribution of primary goods among the
members of society and for any given attitudes they might possess. The
definition remained open save a requirement that if everyone preferred
social state x to social state y, the social position of no one is lower at x
than at y. We then assumed that a social decision process had been
created with the property that the alternatives resulting from the
process maximized, from the alternatives available, the position of the
least advantage person. We conclude from these assumptions, that our
definition of 'least advantaged' has a rather undesirable twist. There
must necessarily exist an individual such that any change which he
prefers (within a large set) necessarily improves the lot of the 'least
advantaged' regardless of his holdings, the holdings of others and the
preferences of others.
Proof of the (hearerI'!. Note first that for any fixed vector of
preferences Rb ... ,Rn we can define a social preference by xRsY ¢:>
min
i
S(Rl>' .. , Rn> x)~min,
S(Rl>' .. , Rn , y).
Since for each (R 1 , •.• , R n), min
, S(R 1 , •.• , Rm x) assigns a number
to each x, it follows that Rs is total, reflective, and transitive. By
Axiom 4 we know C(v, R 1 , ••• , RJ contains the Rs maximal elements
of v so when v is a two-element set (which by assumption is admissi-
ble) Axiom 3 becomes the traditional statement Arrow's Independence
of Irrelevant Alternatives. By Axiom 2 we know that xPiy for all i
implies xPsY so we have the Pareto axiom. Finally since we made only
minimal restrictions on the domain of individual preferences, we find
that the set of Axioms 1-4 imply those used by Arrow?
Application of Arrow's theorem (or say Theorem 16.1 in Fish-
burn3 ) gives us the following result. There exists an individual io
such that:
('t/ v )('t/ R 1 , •.• , Rn)C(v, R 1, ••. , Rn) C {x E v: XRioY
for all y E v}
but then application of Axiom 4 yields
('t/v )('t/ R 1, ••• , Rn)'I'( v, R 1, ••• , Rn) C {x E v: xRioY

for all YE v}.
We can now apply the definition of 'I'(v, R I , ... , Rn) and conclude that
xPioY ~ min S(R 1, ••• , Rn> x»min S(R 1, . · . , RnY).

i i
3. GENERAL DISCUSSION
What went wrong? I really don't know for sure but perhaps an inquiry
into the possibilities will prove enlightening. It might help us identify
assumptions which are 'simplifying' as opposed to those which are
critical to the spirit of the theory. If the impossibility result we see, has
been induced by the former, then there is no problem. If not, then we
must look more carefully and critically at the Rawls' thesis. I see six
types of objections.
A. The first objections to any negative conclusions would be to the

effect that the definition of S(R b . . . , Rn> x) which we have deduced is
acceptable. The argument would claim that the cases in which the
'dictator' io gets his way are not of sufficient importance to cause
alarm.
My reply to this claim would first be to ask the critic to look again.
The pairs for which the theorem is operative is large. If x is one of the
social states and Y is anywhere in the shaded area (for every individual)
then we must rely upon io's preference to determine the least advan-
taged.
Secondly, in reply to this claim I offer the following conjecture

which, although possibly tedious to prove, is, I suspect, correct. 4
CONJECTURE. If the conditions of the theorem are satisfied, then

there is an io such that for all x, y if xPioY then
min S(R 1 , ••• , Rm x}>min S(R 1 , ••. , Rm y}.

i i
This means, if true, that the preference of io is sufficient to determine

the qualitative improvement of the least advantaged individual be-
tween any pair of social states.
B. The second class of objections are of a technical nature. They
pertain to the admissible preferences, the admissible v and the 'com-
pleteness' of the domain of S(R 1 , ••• , Rm x). The problems with
changing these assumptions turn on the fact that any changes
suggested must be very carefully chosen otherwise results similar to the
one we have established can be deduced. It is not clear that qualifications
with meaningful interpretations exist.
Take, for example, preference restrictions. Clearly the theorem
would not go through if we always assumed that everyone always had
the same preferences over E-if I prefer the state where I have all of
the primary goods to the state where you have them, then you also
prefer the social state where I have them all. If we claim an individual's
preference depends only on his share of primary goods then we are
still likely to have problems. If we assume there is only one primary
good we eliminate the theorem, but such an assumption would place
the theory on what seem to be rather arbitrary foundations. s
We can alter our assumption about the family of admissible feasible
sets. One might argue that a process need never choose over a finite
feasible set-much less the family of two-element sets. Within the

broader setting of social choice theory very little is known about the
implications of changes along these lines. We do know, however, that
impossibility theorems are lurking about even when we do not demand
choice over two element sets. If a change is made here it must be well
formulated.
What about the domain of the function S(R 1, ••• , Rn, x)? Could it
be restricted in a manner which together with the appropriate changes
in Assumption 4, eliminates the problem? The answer is clearly 'yes'.
For example, assume that it is never defined and that Assumption 4 is
never operative-both the problem and the theory are thus elimi-
nated. Clearly the question is whether or not a 'natural' relaxation is
possible and of this I am doubtful.
c. What about cardinal utilities? Shouldn't 'intensities' be incorpo-

rated into the definition of S(R 1 , ••• , Rm x)? There are two problems
with this. First, given the state of disgrace in which cardinal utility
theory finds itself, I think that is the incumbency of anyone advancing
such an argument to supply along with it the particular conception of
cardinal utility he wishes to use. Not only must he be careful because
of pitfalls in the theory of preference, there are impossibility results
which exist even here as Schwartz and De Meyer and Plott have
shown. In addition to that problem there is a problem of isolating
those institutions which will extract and record the appropriate data.
Rawls's theory is intended to be practical, that is to use institutions
which have some analogy to those which currently exist. If this is the
case then cardinal utilities will be of limited use. One of the major
results of modern preference theory has been to show that the behavior
of economic (and 'game-like') institutions is independent of such
parameters. That is, even if utility magnitudes change, with no corres-
ponding change in preference, processes which we currently under-
stand will not respond at all. So in addition to the problem of defining
what one means by utility, anyone who wishes to alter the theory along
these lines must either supply us with a new theory about the behavior
of political and economic processes or provide us with a new type of
institution.
D. The arguments which may be directed against Assumption 3 have

problems similar to those covered under C above. If Assumption 3 is
to be changed, it must be done so in full recognition of the fact that the

class of institutions we are talking about must be expanded beyond
those which we currently use. Clearly one can define processes which
violate this axiom, but if our current behavioral theories are correct,
these new processes are not likely to really work as imagined. Besides,
if the theory is to be actually applied, surely it should have something
to do with institutions and their behavior as we currently understand
them. Rawls does not intend us to consider his theory as applicable
only to institutions of a sort which have never, nor are likely to ever,
exist.
E. Rawls uses the word 'expectations' a lot. We are to maximize the

expected benefit to the least advantaged. From a formal point of view
we could say that the 'social states' have a random component. This
would change the argument in several places, but this alone is not
likely to change the result. One might argue that the 'social state' is not
a lottery but that the feasible set is random. It would perhaps follow
that the maximin principle is not to be applied as in Assumption 4.
This, in turn, would mean that the process may not choose 'rationally'.
While I find this argument inconsistent with much of what Rawls says,
it may be an interesting way to try to reformulate the problem.
F. The final objection I see rests on the general formulation of the

means by which the 'least advantaged' is defined. Perhaps attitudes and
position in society in terms of primary goods are not sufficient to make
this determination. It may well have to do with the procedures and
institutions themselves. For example, it may be the case that what
constitutes a 'primary good' cannot be determined apart from social
institutions. Take two vectors of preferences and a distribution of
commodities of an economic nature (forgetting self-esteem, etc.). The
definition of the least advantaged individual may well depend not only
upon all these factors, but certain institutional considerations as well.
This argument takes us far afield and it serves to cut Rawls's theory
from the substance of welfare economics. Welfare economics, as a
body of theory, presupposes that the institutions are means to an
end and not an end in themselves. This separation of ends from
institutional means is implicit in the definition of the 'least advantaged'
and it is deeply embedded in my formalization of the problem from
beginning to end. By accepting this argument we can avoid my
impossibility consequences. But this characterization makes it much

more difficult to use Rawls's theory in conjunction with contemporary
welfare economics.
California Institute of Technology
NOTES
* Financial support for this research was supplied by the National Science Foundation.
I For a discussion of the connections between· this axiom and game theory see C. R. Plott,
'Axiomatic Social Choice Theory: An Overview and Interpretation,' American Journal of
Political Science XX (1976), 534-539 and 580-582.
2 K. J. Arrow, Social Choice and Individual Values, Wiley and Sons, Inc., New York, 1963.
3 Peter C. Fishburn, The Theory of Social Choice, Princeton University Press, Princeton,
1973.
4 This conjecture has been proved since this paper was written. See Eric Maskin, 'Social
Welfare Functions for Economics,' Darwin College, Cambridge and Harvard University,
May 1976. Indeed Maskin's result establishes the conjecture for an even more applicable
preference domain than outlined here.
5 The Maskin result above allows for selfishness and only uses two goods.
HEINZ J. SKALA
ARROW'S IMPOSSIBILITY THEOREM: SOME NEW

ASPECTS*
1. SCIENTIFIC BACKGROUND
The results of Brown, Fishburn, Kirman and Sondermann.
1.1. Notation
V is the set of individual s, IVI = n or IVI = w,

X is the set of alternatives,
W is the set of weak orderings on X,
(a) a> b ::} .., b > a,

(b) a > b vb> a v a ~ b,
(c) a> b A b> c ::} a> c,
> v is the weak ordering in W associated with v E V,

(> b > 2>' .. ,> n) or (> b > 2, ... ) is a possible profile,
F is the set of all possible profiles,
a >u b if a >v b for all v E U ~ V,

> v = > v on {a, b} if a > v b iff a > ~ b
b > va iff b > ~ b,
(>1' >2>" .) = (>i, >{, ... ) on {a, b} if >v = >:, on {a, b} for all v E V.
ARROW'S AXIOMS
A1: IVI = n;::: 2.
A2: Ixl;::: 3.
A3: To every profile (>1"", >n> there IS associated a social
ordering > o.
215
Copyright © 1978 by D. Reidel Publi'hing Company, Dordrecht, Holland. All Right, Reserved.
216 HEINZ J. SKALA
A4: If in a profile a >vb, then a >ob. (Pareto-efficient)

AS: (>1'···' >n)= (>1> ... , >n) on {a, b} ~ >0 = >0 on {a, b}.
(Independence)
A6: There is no v E V such that, for all a, bE X, (>1' ... , > n) E
F, a>vb~a>ob. (No dictator)
ARROW'S THEOREM. (AI) through (AS) imply the existence of a

dictator, i.e., (AI) through (A6) are inconsistent.
FISHBURN'S THEOREM. (AI) through (A6) are consistent if
IVI = w (Fishburn 1970).
1.2. Remarks
1. In Fishburn's proof, which is by means of {O, l}-valued measures,
the Axiom of Choice (Zorn's Lemma) is essentially used.
2. By the natural correspondence between ultrafilters and two-valued
measures we may reformulate the proofs of the theorems of Arrow
and Fishburn into the languages of ultrafilters. (See, e.g.,
Kirman/Sondermann (1972).)
3. By a compactification argument Kirman/Sondermann (1972)
showed that dictatorship, in a meaningful sense, persists for infinite
V (invisible dictators).
4. If we only require that the social ordering is a partial order, then
the decisive sets form a filter (not an ultrafilter as above). Note
however that every filter F on V is the meet of all ultrafilters on V
finer than F.
S. There is a close connection between Arrow's problem and the
winning coalitions of simple games which form a filter or ultrafilter.
Such games have been studied by Skala (1971).
6. Weakening the demand on the social ordering to an acyclic relation
Brown (197S) has shown that prefilters naturally arise.
7. The existence of a free ultrafilter on w is strictly weaker than the
Axiom of Choice.
2. BOOLEAN·VALUED AND FUZZY SOCIAL ORDERINGS (THE DICTATOR

V ANISHES FOR FINITE V)
2.1. Boolean-valued Social Orderings
Let I be an index set and let d i = (Ail >i), i E I, be binary relational
systems.
ARROW'S IMPOSSIBILITY THEOREM 217
<n
Let il;E1.sIJi = Ai' R) = (A, R), where R is not a binary relation in
the usual sense but defined as follows:
R: A x A ~ f¥'(I) (f¥'<n denotes the power set of I)

R(a, b) = {i E I: a i >i bJ.
Note. We get a usual binary relation if we use the trivial Boolean

algebra {O, I} instead of f¥'<n.
Setting up a first order language for handling relational systems of
the mentioned type we get the following valuations for the atomic
formulas:
[aRb]={iEI: ai>ibJ
[a = b] = {i E I: a i = bi}.
This valuation can be extended to the formulas of the language:
[ -, cf> ] = I - [ cf> ],
[cf> v t{I]= [cf>]U[t{I]; [cf> A t{I]= [cf>]n[t{I];
[3xcf>(x)] = U [cf>(a)]; ['v'xcf> (x)] =

aEA
n [cf>(a)],
UEA
[cf> ~ t{I] = [cf>] ::} [t{I]= [-,cf>]U[t{I].
Note. Boolean-valued models have proved extremely useful for inde-

pendence results in set theory, in particular the independence of the
Continuum Hypothesis can elegantly be proved in this way. (See, e.g.,
Rosser (1969).) We use here Boolean-valued models of weak order-
ings in order to give a consistency proof of (AI) through (A6) for finite
V.
Using V as index set and denoting the individual orderings by
'/lev = (Xv, > v) we may form the direct product
As in our problem Xv = X for all v E V we write as usual (XV, > G)

218 HEINZ J. SKALA
where:
[a>Gb]={VE V: a>vb}
[a-Gb]={VE V: a-vb}.
Note. We identify the constant sequences a, a, ... E XV with a E X.

By the above construction we got a (Boolean-valued) model of (AI)
through (A6) thus one may state:
THEOREM. For finite V (At) through (A6) are consistent if we only

admit Boolean-valued social orderings.
That in our model all the axioms (At)-(A6) get the Boolean value:d.
is easily verified. In particular> G is a Boolean valued weak ordering.
(a) [-w>Ga]= V-[a>Ga]= V=:d.,

(b) [a>obva-Gbvb>Ga]= V=:d.,
(c) [a>GbAb>Gc~a>Gc]= V=ll.
as otherwise there must exist at least one v E V such that
2.2. Remarks
1. In our simple construction all information available has been used.

Similar results hold for other non-trivial complete Boolean
algebras.
2. We only considered the constant sequences of Xv; the non-
constant ones may be used for extending the social ordering to
mixtures of the pure alternatives.
3. The case where the individual orderings are possibly restricted to
subsets of X can also be treated in our framework.
4. It should be noted that an ultrafilter au defines a homomorphism
au: ~(V) ~ {O, :d.}. As there are no free ultrafilters for finite V it is
seen immediately why the dictator occurs if only ordinary social
orderings are allowed.
5. Defining a measure on ~(V) (e.g., a counting measure) we get a
probabilistic interpretation of our model. Even for infinite V a
counting measure can be defined if it may take values in non-

standard models of the reals. In another context non-standard
measures have been proved to be a useful tool (Skala (1974),
(1975)).
6. Observing that the natural ordering of the used complete Boolean
algebra can be extended to a weak one there is a possibility for a
central authority to have some influence on the social ordering. If
the Kraft/Pratt/Seidenberg condition (1959) or equivalently the
Scott condition (1964) is satisfied this can be given a probabilistic
meaning. (See in this context also Skala/1975).)
2.3. Fuzzy Social Orderings
Fuzzy sets and fuzzy relations have been introduced by Zadeh (1965,
1971). In a recent conference Zadeh especially emphasized the use of
fuzzy concepts in economics.
We characterize a binary fuzzy relation R on X (i.e., a fuzzy subset
of X x X) by a membership function ILR: X x X --+ [0, 1].
The appropriate formal language to handle such relations in princi-
ple goes back to Lukasiewicz/Tarski(1930).
In the above mentioned model we used as truth value structure a
complete Boolean algebra which we now replace by [0,1]. Starting
with a valuation of the atomic formulas [aRb], [a = b] we extend it to
the formulas as follows:
[ ---, ef> ] = 1 - [ ef> ],

[ef> A 1/1] = max ([ef>], [1/1]); [ef> A 1/1] = min ([ef>], [1/1]),
[3xef>(x)] = sup [ef>(a)]; [Vxef>(x)] = inf [ef>(a)],

aEX aEX
For our further discussion it will also be useful to have at hand a

further connector 0.
[ef>01/1] = max (0, [<I>]+[t/I]-1).

220 HEINZ J. SKALA
It has often been proposed to use weights for the individual prefer-
ences. Although this can be done in our framework we suppose
ordinary preference orderings for the individual and weight only the
social ordering. We define:
a? = { 1 if X; >v x)
I) 0 else
and put
[X; ~o xJ = l/card(V) L bij,

v
[X; >0 Xj] = l/card(V) L aij.

v
Obviously
We observe that
In order to see that transitivity in its strong form no longer obtains, we

consider the well known voting paradox:
Xl >1 X2, X 2 >1 X3 and thus Xl >1 X3
X2 >2 X3, X3>2X l and thus X2 >2 X l
X3 >3 X l, Xl >3X2 and thus X3 >3 X2
[Xl >0 X 3 ] =~, [X2 >0 X 3 ] =~, [X 3 >0 Xl] =~.
For this example we get
However, there still remains some sort of transitivity in our model

which we shall call 'pseudo-transitivity':
( If the individual orderings are transitive, it must hold that
Laij + Lajh ~card(V)+ Laih.)

v v v
A similar result holds for the asymmetry of >0. Although in general

[",,(xi >oXj A Xj >0 xJ] -:1-1 we easily verify
The other axioms do not provide any difficulty. Thus we can state:
THEOREM. For finite V (AI) through (A6) are consistent if we only

admit the social relation to be an irreflexive, pseudo-asymmetric and
pseudo-transitive fuzzy relation.
3. THE AXIOM OF DETERMINATENESS
To every subset A ~ WW we associate the following game GA : Players I

and II choose in turn natural numbers;
If {ao, bo, at, bI> . ... }E A, then I wins otherwise II is winning.

GA is called to be determinated if one of the players has a winning
strategy.
AXIOM OF DETERMINATENESS (AD). For every A ~ w" the

game GA is determinated.
THEOREM. If the set of real numbers can be well ordered, then

there exists an A ~ w" such that GA is not determinated.
222 HEINZ J. SKALA
THEOREM. AD contradicts the full Axiom of Choice (AC).
In order to create a manageable measure theory we need the

following weakening of AC:
COUNTABLE AXIOM OF CHOICE (CAC). For any countable

family fJP of non-empty sets of real numbers there is an / such that
/(S) E S for all S E fJP.
CAC implies that the Lebesque measure is countably additive.
AD implies CAe.
AD implies that every set of real numbers is Lebesgue measurable.
Note. The full AC implies the unpleasant fact that there exist 2c sets
of real numbers which are not Lebesgue measurable.
The above mentioned facts are well known. The interested reader
should consult Mycielsky (1964, 1966) and Mycielsky/Swierczkowski
(1964).
We remember that the statement "there exists a free ultrafilter on"
is strictly weaker than Ae. Going thoroughly through the arguments
presented in the paper of Sierpinsky (1938) we conclude that the
existence of a free ultrafilter on w implies the existence of non-
Lebesgue measurable subsets of the reals. Thus, AD implies that there
does not exist a free ultrafilter on w which in turn leads to:
THEOREM. If we assume AD and Ivi = w, then (Al)-(AS) imply

that there exists a (visible) dictator.
As there exists at present no consistency proof for AD (i.e., we do

not know whether one can consistently adjoin AD to the other axioms
of set theory) and as the arithmetic of cardinal numbers becomes quite
cumbersome if we assume AD another possibility for obtaining the
above theorem will be shown.
4. SOLOVAY'S MODEL OF THE REALS
By an extremely complicated forcing argument (there is a very close

connection between forcing arguments and Boolean-valued models)
Solovay (1970) proved:
THEOREM. If the axioms of Zermelo-Fraenkel set theory ZF +

AC + there exists an inaccessible cardinal number is consistent, then so

is ZF + DC + every set of real numbers is Lebesgue measurable.
4.1. Notes
1. A cardinal number is said to be inaccessible if

(a) a is uncountable,
(b) 2 13 < a for all f3 < a, and
(c) every system of less than a has elements all having a cardinality
less than a has a union of a cardinality less than a.
2. DC (Axiom of Dependent Choices): Let R be a binary relation on
X =I- <p and let ('9' x E X) (3 YE X) (xRy), then there exists a sequence
Xo, Xl' ... ,Xi E X such that for all i, xiRxi+l'
3. DC implies CAe.
Obviously the following theorem holds:
THEOREM. If we take Solovay's model and assume IVI = w, then

(A1)-(AS) imply that there exists a (visible) dictator.
Although it is impossible in this paper even to sketch the most

important ideas of Solovay some crude remarks should be useful for
getting more insight.
Solovay starts with a model j,{ of ZF + AC and considers random
numbers (for example the reals X having 1 with frequency 1/10 in their
decimal expansion) which are not in j,{ but in .N';? j,{. For an observer
in j,{ it is thus impossible to have complete knowledge about x. He can
however ask sensible questions about x, thus obtaining at least partial
information. He may for example ask whether X E B, where B is a
Borel set which is codeable in j,{. If f.L(B) = 0, then the answer will be
no and so on. Thus Solovay introduced in his considerations an
uncertainty argument in an essential way. This seems to be of some
philosophical interest as there is a well known analogy in modern
physics.
4.2. Remarks
1. AD does not hold in Solovay's model.

2. It seems disappointing that Solovay's proof depends on the exis-
tence of an inaccessible cardinal number. Looking carefully through
224 HEINZ J. SKALA
the arguments we observe, that the essential features of Solovay's

model are:
(i) every well-ordered set of real numbers is countable,
(ii) (i) + DC imply that ~1 is an inaccessible cardinal number in the
constructible universe.
This indicates that the assumption of an inaccessable cardinal
number lies not at the heart of the proof and could eventually be
dispensed with.
5. CONCLUSION
We have seen that the dictator vanishes and reappears in a nearly

arbitrary fashion depending only on the underlying logic and set
theory. There is hardly a hope that an economic argument can be given
in favour of one set theory or another (even purely mathematical
arguments are missing). Thus it seems that the whole problem is
ill-posed. Perhaps a more constructive point of view (in the sense of
practical computability) is the way out. There are indeed some indica-
tions in this direction. For example Parikh (1971) has shown that
formal systems in which 'large' numbers are treated as if they were
infinite, give correct results for all proofs of reasonable length. This
motivates the
CONJECTURE. The assumption that on 'large' finite sets there exists

a free ultrafilter does give correct results for all proofs of reasonable
length.
This would mean that the dictator 'practically' vanishes for large
societies which is also backed by some empirical results.
Recently Hajek (private communication) proved Parikh's result on
the basis of the theory of semi sets (see also Vopenka/Hajek (1972).)
We hope to give in the near future a proof of our conjecture on the
basis of the theory of semisets. It is our conviction that semisets can
form a sound basis for formulating some economic problems in a more
appropriate way.
We close this paper with one such problem: Is it enough for the
creation of a useful subjective probability theory and inductive logic to
assume the coherence of betting systems only up to a certain reasona-
ble degree of complexity?
University of Paderborn
NOTE
* The author is pleased to acknowledge the stimulating and helpful discussions with Petr
Hajek and Lofti A. Zadeh.
BIBLIOGRAPHY
Arrow, K. J., Social Choice and Individual Values, 2nd ed., Wiley (1963).
Brown, D. J., 'Aggregation of Preferences', Quarterly Journal of Economics (1975),
456-469.
Fishburn, P. C, 'Arrow's Impossibility Theorem: Concise Proof and Infinite Voters',
Journal of Economic Theory (1970), 103-106.
Kirman, A. P. and Sondermann, D., 'Arrow's Theorem. Many Agents and Invisible
Dictators', Journal of Economic Theory (1972), 267-277.
Kraft, C H., Pratt, J. W., and Seidenberg, S., 'Intuitive Probability on Finite Sets', Ann.
Math. Stat. (1959), 40~-419.
Lukasiewicz, J. and Tarski, A., 'Untersuchungen tiber den Aussagenkalkiil', Comptes
Rendus des Seances de la Societe des Sciences et des Lettres de Varsovie, CI. III,
(1930), 30-50.
Mycielsky, J., 'On the Axiom of Determinateness', Fund. Math. (1964), 205-224.
Mycielsky, J., 'On the Axiom of Determinateness II', Fund. Math. (1966), 203-212.
Mycielsky, J. and Swierczkowski, S., 'On the Lebesque Measurability and the Axiom of
Determinateness Fund. Math. (1964), 67-71.
Parikh, R., 'Existence and Feasibility in Arithmetic', Journal of Symbolic Logic (1971),
494-608.
Rosser, J. B., Simplified Independence Proofs, Academic Press (1969).
Scott, D., 'Measurement Models and Linear Inequalities', J. Math. Psychol. (1964),
233-247.
Sierpinski, W., 'Fonctions additives non complement additives et fonctions non measura-
bles', Fund. Math. (1938), 96-99.
Skala, H. J., On Simple Games With Infinitely Many Players I, Discussion Papers, Univ.
Heidelberg (1971).
Skala, H. J., 'Nonstandard Utilies and the Foundation of Game Theory', Journal of
Game Theory (1974),67-81.
Skala, H. J., Non-Archimedean Utility Theory, Reidel (1975).
Solovay, R., 'A Model of Set-theory in Which Every Set of Reals is Lebesque-
measurable', Ann. of Math. (1970), 1-56.
Vopenka, P., Hajek, P., The Theory of Semisets, North-Holland (1972).
Zadeh, L. A., 'Fuzzy Sets', Inf. and Contr. (1965), 338, 353.
Zadeh, L. A., 'Similarity Relations and Fuzzy Orderings', Inf. Sc. (1971), 177-200.
DAVID SCHMEIDLER AND HUGO SONNENSCHEIN
TWO PROOFS OF THE GIBBARD-SATTERTHWAITE

THEOREM ON THE POSSIBILITY OF A STRATEGY-
PROOF SOCIAL CHOICE FUNCTION*
We present two proofs of a result which was formulated independently

by A. Gibbard [2] and M. Satterthwaite [3]. Their theorem provides an
attractive new way of viewing Arrow's classic result on Social Welfare
Functions [1]. By requiring that strategic considerations cannot be
beneficially employed, it frees the statement of the 'General Possibility
Theorem' from the assumption of independence of irrelevant alterna-
tives. The theorem demonstrates that all mechanisms for passing from
individual preferences (over three or more alternatives) to a social
choice are vulnerable to strategic play.
The symbol A denotes a set of basic alternatives, and I denotes the
class of orderings (connected (xPy, yPx, or x = y), asymmetric, and
transitive relations) on A. A Social Welfare Function (SWF) F* is a
function F*: In ~ I. A generic element of the domain of F* is called a
preference profile and is denoted by P = (PI' P2 , ••• ,Pn). A generic
element of the range is called a social preference relation and is denoted
by P. The symbol P' denotes (P', P~, ... ,P~), P" denotes
(Pi, P2, .•. , P~), etc. P I Pi denotes (PI, P2 , ••• , P~, ... , Pn), P I Pi, P~
denotes (Pi, P~, P3 , ••• , Pn), etc.
A SWF F* satisfies
Independence of Irrelevant Alternatives (lIA) if for all pairs

of preference profiles P = (PI' P2 , ••• ,Pn) and P' = (P~,
P~, ... , P~) and for all x, y the following implication holds.
If for all i, Pi and P; agree on {x, y}, then F*(P) and F*(P')
agree on {x, y}.
Pareto (P) on A' c A if for all profiles P and for all x, YEA': xPiy for all i
implies xF*(P)y.
Arrow's Theorem states:

227
Hans W. Gallinger and W.rner Leinf.llner (.ds.), Decision Theory and Social Ethics, Issues in Social Choic., 227-234.
Copyright © 1978 by D. R.idel Publishing Company, Dordrecht, Holland. All Rights R.s....d.
228 DAVID SCHMEIDLER AND HUGO SONNENSCHEIN
if a SWF F* satisfied (IIA), (P) on A', and A' has at least

three elements, then there exist an 'i' such that for all
P=(Pl> P2 , ••• ,Pn ), F*(P)=Pi on A'.
(Individual 'i' is called a SWF dictator on A'.)

The Theorem is usually stated for preferences represented by weak
orderings and A = A'; however, most proofs of Arrow's Theorem
apply equally well to the case we consider here. (The binary relation R
is a weak ordering on A if it is transitive and strongly connected (for
all x, YEA, xRy or yRx).)
A Social Choice Function (SCF) is a function F: In~A. A SCF is
manipulable by i at P E In if there exists Pi E I such that
F(P I PDPiF(P). An SCF is strategy-proof if there is no preference
profile at which it is manipulable. (Note the relation to Nash equilib-
rium.) A Social Choice Function is dictorial if there exists an i such
that for all P and for all x;i F(Pl> P2 , ••• , Pn ) in the range of F,
F(P1, P2 , ••• ,Pn)Pix. (Individual 'i' is called a SCF dictator.) We will
now state the main theorem.
THEOREM (Gibbard-Satterthwaite): If a Social Choice Function F is

strategy-proof and the range A' of F contains at least three alterna-
tives, then it is dictatorial.
Two proofs of this result are presented. The first uses Arrow's
Theorem while the second is self-contained. Since Arrow's Theorem
can be proved as a corollary to the Gibbard-Satterthwaite Theorem
(see [3]) a new proof of Arrow's Theorem obtains. Also, the situation
in which preferences are represented by weak orderings (indifference
allowed) is covered.
Proof I. The proof is organized in four steps, (i)-(iv). We assume that
F is strategy-proof and let IA'I denote the number of elements in A'.
(i) There does not exist (i, P, P;) such that F(P) = x;i Y=
F(P I PD, and xPs if and only if xP;y.
Proof of (i). Either xPs or yPix. If xPs then xP:y and the switch
from P; to Pi manipulates Fat PIP;. If yPix, then the opposite switch
manipulates Fat P.
PROOFS OF GIBBARD-SATTERTHWAITE THEOREM 229
(ii) If cfd B c A' (the range of F), and P satisfies the condition
that for each i, x E Band YEA \ B implies xPjy, then F(P) E
B. (Since F(P) is defined for every P E In, it follows that
IA'I<oo.)
Proof of (ii). Suppose F(P) = xe B, and let YE B. Since cf4 B c A'
there exists P' such that F(P') = y. For 0 ~ i ~ n defines Zj =
F(P I P~, ... , PD and observe that Zo = xe Band Zn = YE B. Let j be
the least integer such that Zj E B. Then F is manipulable by j at
P I Pi, ... ,Pi-I' a contradiction.
The SWF F*: In - I is now defined. Let P - Xl denote the profile P
with Xl moved to the bottom of each individual's ranking. Let P-
Xl' X2 denote P with Xl followed by X2 moved to the bottom of each
individual's ranking, etc. For every PEIn, the ordering F*(P) is
determined in the following manner. F(P) = Xl is first, F(P- Xl) = X2
second, F(P- Xb X2) = X3 third, ... ; this process is carried out IA'I
times and by (ii) yields an ordering of A'. Alternatives not in A' are
placed in a fixed order below the elements of A'.
(iii) F* satisfies (IIA) and (P) on A'.
Proof of (iii). If F* did not satisfy IIA then there would exist P and
P' such that for all i, aPjb if and only if aP;b, aF*(P)b and bF*(P')a.
(It follows from the definition of F* that a, bE A'.) Claim first (*)
F(P) = a, where Pj is formed for each Pj by moving a and b in the P j
given order to the top of P j and leaving other relations fixed. If not,
F(P) = b.
Define I' to be the profile in the F* defining sequence P- Xl,
P- Xl' X 2, ••• such that F(P) = a. Since aF*(P)b, aPjb if and only if
aPjb. Consider b = Zo = F(P), Zl = F(P I PI), Z2 = F(P I1'10 1'2), ... , Zn =
F(P) = a. Let k be the least integer such that zj'l- b. If Zk = c'l- a, let j
be the least iE-teger ~reater than k such that Zj E {a, b}. In this case the
switch from Pj - l to ~-l contradicts the strategy-proof property of F. If
Zk = a a contradiction of (i) obtains: since (aPk-lb if and only if
aPk - l b) and Zk-l = b. This establishes (*). Finally, consider a = Wo =
F(P) , WI = F(P I Pi), ... , Wn = F(P') = b. By (ii) Zj E {a, b} for all i.
Since aPjb if and only if apr b, the hypothesis of (i) applies to each
consecutive pair in the sequence and this leads to a contradiction of (i).
It follows that F* satisfies (IIA). The fact that F* satisfies (P) on A'
follows immediately from (ii) and (IIA).
By Arrow's Theorem F* is dictorial on A'. The next step completes

the proof.
(iv) An F* dictator on A' is an F dictator.
Proof of (iv). If i dictates F* then for all Pe In, F*(P} = Pi on A'.

By the definition of F* this requires F(P}Pix for all x e A' distinct from
F(P}; i.e., i is a dictator for F.
Next, we observe that the proof can be extended to the situation in
which preferences are represented by weak orderings. (Both Gibbard
and Satterthwaite consider this case.) To accomplish this observe that
if F is strategy-proof on the weak order profiles then it is strategy-
proof on those profiles which are orderings in every coordinate. Also,
since the proof in (ii) applies to weak order profiles, the range of F can-
not shrink, and thus by the theorem we have just demonstrated, there is
an individual, say '1', who is a SCF dictator on the restricted domain
In. We will now prove that for all weak order profiles (R l ,
R 2 , ••• , R n), F(R l , R 2 , ••• , Rn} must belong to the set of Rl maximal
elements in the range of F; i.e., '1' is a SCF dictator on the entire
domain of F. Let B denote the Rl maximal elements in the range of F
and let P = (Pl' P2 , • •• , Pn ) e In such that for all y e Band Z E A \ B,
both yPlz and zPiy (i# 1). Since PE~n, F(P}E B. Define Wi = F(Pl ,
P2 , .•• ,Pi> R i +1> ••• , R n ), 0;2i i;2i n, and let j be the least i such that
Wi e B. If j = 1, then F is manipulable by 1; if j > 1, then F is again
manipulable (by j at (pl, P2 , ••• ,Pj , R j + l , ••• , Rn». Thus WoE B.
Proof II. The first two steps are identical to those in the previous
proof. The remaining steps are numbered (iii)'-(viii)'. We will assume
that F is strategy-proof and for simplicity that its range is all of A.
(iii)' F is strongly strategy-proof; i.e., no coalition can manipu-

late F.
Proof of (iii)'. If not, then we assume without loss of generality that

there exist P, P~, P~ such that F(P} = x, F(P, P;, P~} = y, and yPjx,
i = 1, 2. Consider the sequence F(P, P~, P~}, F(P, p~, P~},
F(P, p~, P~}, where the symbol '-' moves x and y to the top of the
ordering it covers and leaves all other relations fixed. The sequence
starts at y, and by (i) and the fact that F is strategy-proof must be
constant; thus, F(P, p~, P;) = y. Consider now the sequence F(P) ,
F(P I PD, F(P I Pi, P~). This starts at x by hypothesis and ends at y. F
strategy-proof and the definition of '-' imply that the first switch from
x must be to y, but yP1x and yP2x, which contradicts the assumption
that F is strategy-proof.
(iv), The Theorem is valid for n = 2 and IAI = 3.

Proof of (iv)'. Stare at the following table.
~
a b a c b c
b a c a c b
c c b b a a
.f!. b (i) ~ c Lh b c ~
abc
1 12 4 14
a (i) ~ a (i) c 1. c (iY
bac
9 8 13 14
~ b (i) .f!. c @ b c @
acb
2 11 4 10&1
a @ b a @ .£ b .f.
cab
5 &, 3 6 4
a (i) ..Q a c (ii) ..Q I c
bca
9 8 13& 14
aE:, b a @ .f. b ..f.

cba
9 3 7 4
~ By unanimity, which is implied by (iii)' or (ii).

@: Excluded by unanimity (U).
&: Excluded, because it is the worst alternative of a player with a better
option.
i: Determined after the entries numbered 1, 2, ... , i-I are determined
(not counting the twelve determined by unanimity).
The entry implied by the hypothesis of the theorem appears in the upper
left corner of each box.
Let (k, l) denote the 'entry' in row k column l.

1. Assume without loss of generality (1, 2) is b; it must be a or b by
unanimity (U), which is implied by (iii)'.
2. (3,2) = b, because if it was a, 1 would defect to (3,2) from the b of
(1,2).
3. Since in (3,2) 1 gets b (his worst alternative), column, 2 has only
b.
4. Because 2 can impose b by column 2, he must get b in column 5.
5. (4, 1) is a becauseIiA and ~
6. (4,3) is a since 2 can obtain a by 5.
7. (6,3) can't be c since (4,3) is not c.
8. Because of 7 column 3 has only a.
9. Because of 8 column 1 has only a.
10. ByliAand~entry (3,6) is c.
11. (3,4) is c, because by 10, (3,6) is c.
12. (1,4) is c because (3,4) is c; thus, there is no a in column 4.
13. By 12 column 4 is all c.
14. Since column 4 is all c, so is column 6.
(v)' The Theorem is valid for n = 2 and IAI ~ 3.
Proof of (v)' (due to S. Barbera). First we observe that the same
individual is a dictator when both individuals place the same three
alternatives on top. If not there would exist C, DcA, each composed
of three elements and differing in only one alternative, such that 1
dictates with C={a, b, c} on top and 2 dictates with D ={a, b, d} on
top.
Then,
a b
b
c c
F d d =a and F =b.
But
= a or b by (ii)
and in either case (i) is violated. The proof of (v)' is completed by

demonstrating that any individual (say 1) who is a dictator when both
individuals place the same three alternatives on top is a dictator. If not,
then there exists (P!> P2 ) such that F(P!, P2 ) = z-l= x, while x is l's
preferred alternative. By (iii)' zP2 x and by strategy-proofness
F(P!> P2) = z, where '-' moves z and x to the top of P2 • But then 1 can
manipulate F, a contradiction.
The set SeN ={I, 2, ... , n} is an oligarchy if for all x and any P
such that x is best for all Pi' with i in S, we have F(P) = x.
(vi)' For all SeN either S or SC = N/S is an oligarchy.
Proof of (vi)'. We use (v)' at every step in the proof. It follows from
(iii), that on the restricted domain of preferences defined by the
property that within Sand SC preferences completely agree, either S
or SC have oligarchic power. Say it is S. If in S there is complete
agreement with a on top and SC all have b over a from some b, then b
cannot be the outcome. As a consequence, if there is complete
agreement in S with a on the top, then a must be the result. This
implies the conclusion.
(vii)' Clearly supersets of oligarchic sets are oligarchic. Also, the
intersection of two oligarchic sets is oligarchic.
Proof of (vii)'. If not, Sand T are oligarchic and S nTis not. By
(vi)' N\ (S n T) is oligarchic. Consider the following preferences.
SnT S\ T Others
x y z
y z x
z x y
By (ii) the outcome must be x, y, or z. But y is not the outcome since

(S n T) U Others::;) T and xPiy for all i E (S n T) U Others. Similarly z is
not the outcome since (S n T) U (S\ T) = Sand yPiz for all i E S.
Finally, x is not the outcome since (S\ T) U Others = N\ (S n T) and
zPix for all i E N\ (S n T).
(viii) If Sand T are not oligarchic then neither is S U T.
Proof of (viii)'. Sand T are not oligarchic implies that SC and rc
are. Thus (S U T)c = SC n T C is oligarchic, and so S U T is not oligar-

chic.
The result follows, since if no individual is a dictator, then the whole
set, which is the union of individuals, can't be oligarchic. But this is
false by (ii).
Allan Gibbard in private correspondence provided us with an alter-
native self-contained proof of the theorem. It appears to be of similar
length. Eric Maskin has results which enable him to reduce the proof
of the theorem to (iv),; Enud Kalai and Eitan Muller have a result
which reduces the proof of the theorem to (v)'.
Tel-Aviv University and Princeton University
NOTES
* We acknowledge the helpful comments of Allan Gibbard, Mark Satterthwaite, and

Leonid Hurwicz. David Schmeidler's research was partially supported by a grant from
the Foerder Institute at Tel-Aviv University and Hugo Sonnenschein's by a grant from
the National Science Foundation of the United States. Our first proof follows Gibbard's
[2] in its reliance on Arrow's General Possibility Theorem, and Satterthwaite's [3] in that
the case of strongly ordered preference is taken up first. The extension from strongly to
weakly ordered preferences is new. The second proof is entirely new.
BIBLIOGRAPHY
[1] Arrow, K. J., Social Choice and Individual Values (2nd ed.), New York, John Wiley
and Sons, Inc., 1963.
[2] Gibbard, A., 'Manipulation of Voting Schemes: A General Result', Econometrica 41
(1973), 587-60l.
[3] Satterthwaite, M., 'Strategy-Proofness and Arrow's Conditions: Existence and Cor-
respondence Theorems for Voting Procedures and Social Welfare Functions', Jour-
nal of Economic Theory 10 (1975), 187-217.
PART 3
SPECIAL TOPICS IN SOCIAL CHOICE

KARL BORCH
ETHICS, INSTITUTIONS AND OPTIMALITY
1. INTRODUCTION
1.1. As a suitable introduction to our subject we shall consider two

competing firms. We shall assume that their situation can be rep-
resented by the game known as the 'Prisoners' Dilemma', and that it
can be described by the following double matrix
Firm 2
Maintain Cut
Price Price
Maintain
Price 1,1 -2,2
Firm
Cut
Price 2, -2 -1,-1
The elements of the matrix can be interpreted as the profits of the

two firms. The only equilibrium point in this game is the pair (-1,
-1).
1.2. Under the usual assumptions about economic behaviour each firm
will seek the decision which maximizes profit, without knowing the
decision made by the competitor. This will lead both firms to cut the
price, and they will both suffer a loss.
Even casual observations of economic activity in the real world
indicate that things don't happen in quite this way. Firms do not
usually engage in this kind of cut-throat competition, which eventually
will drive their competitors out of business. In most countries it is
illegal for the firms to collude and agree to maintain prices, but there
seems to be some tacit agreement to "live and let live". If the firms do
not break the law and collude, it is natural to assume that there are
some ethical motives which prevent them from engaging in all out
competition. My interest in ethical questions springs from observations
237
Hans W. Gottinger and Werner Leinfellner (eds.), Decision Theory and Social Ethics, Issun in Social Choice, 237-249.
Copyright. © 1978 by D. Reidel Publishing COlllptmy. VordrechJ. Holland. All Rights Reserved.
238 KARL BORCH
that firms often seem reluctant to make full use of their competitive
advantages, and this is the question which will be discussed in the
following.
1.3. The problem I have outlined can be approached in several ways:

(i) We can try to formalize the ethical considerations which keep
firms away from aggressive or 'unfair' competition. This approach,
which has been taken i.a. by Baier [2], implies that we try to change
the game so that one of the equilibrium points becomes Pareto
optimal, or at least approximately so.
(ii) We can make experiments, in the first stage to find out how
people actually play the game and in a second stage we can then
construct formal models, which can be tested statistically by further
experiments. The most penetrating studies along these lines seem to be
those of Rapoport [6] and Selten [7].
The subjects in such experiments are usually students, and it is
doubtful if the ethical restraints they observe in the games carryover
to economic and political decisions in the real world.
(iii) A third possible approach would be to interview businessmen,
and ask them to state the reasons why they do not engage in the
unrestrained profit maximization assumed in standard economic
theory. From these statements we may be able to spell out formally the
ethical rules which are observed in economic life, although few authors
seem to have found this approach promising.
1.4. In this paper I shall take none of these three approaches. Instead
we shall discuss other economic situations which seem to have some
properties similar to the situations which can be represented by the
game of the 'Prisoners' Dilemma'. The study of these situations may
reveal something about the ethical considerations behind the observa-
ble economic decisions.
The problem will be presented in the next section and a number of
examples will be discussed in the two following sections.
2. PRESENTATION OF THE PROBLEM
2.1 Social scientists will some times observe that groups of persons in
the real world agree on arrangements which seem to be far from
ETHICS, INSTITUTIONS AND OPTIMALITY 239
optimal. As outside observers, we can see other perfectly feasible

arrangements which appear better from the points of view of all
persons concerned, and it is natural to ask why the persons we observe
do not agree on one of these arrangements. The three most obvious
answers to the question seem to be:
(i) The people we observe may simply be stupid, an explana-

tion which should not be dismissed out of mere politeness.
(ii) The people may have incomplete information, and believe
they have reached the best possible arrangement. In this
case they are simply not aware of the possible arrangements
which the outsider can see.
(iii) Ethical or institutional considerations may prevent the per-
sons from reaching an arrangement which seems the ideal
one to an outside observer.
2.2. In the following we shall discuss problems related only to the last
of the three explanations. We shall as we would expect, find it natural
to use some concepts from game theory.
The 'solution' of a game can be defined as the expected outcome if
the game is played by 'rational' players. If we want to be precise at this
point, we run into some difficulties since there are many different
solution concepts. Most of them-as for instance the 'core'-will
however be included in the set of Pareto optimal arrangements, or in
the set of 'imputations', to use the term from game theory.
To reach agreement on a Pareto optimal arrangement, it is usually
necessary that the players cooperate and coordinate their strategies. If
there is no possibility of coordinating the decisions, the game may be
played in a non-cooperative manner. This means that each player will
look exclusively after his own interest, and use a minimax strategy.
Any non-cooperative game has at least one equilibrium point in mixed
strategies. In general this point will not be an imputation, i.e., it will be
sub-optimal. In many cases equilibrium points represent likely out-
comes of the game, and it may be natural to include them, by
definition in the 'solution'. For instance the different 'bargaining sets'
will contain both the core, and some equilibrium points, and it is
natural to expect that the outcome of the game will be within some set
of this kind.
240 KARL BORCH
Some problems arise if it is optimal to use mixed strategies. In such

cases, it will not be single observations, but their average which will be
optimal.
2.3. When a situation in real life can be represented by a game-
theoretical model, we will usually have some indications as to whether
it is possible or not for the players to cooperate. The two most
interesting cases which can occur in such situations seem to be:
(i) Cooperation between the players appears possible, but the
observed outcome is sUb-optimal. It is then natural to look
for conventions or institutional elements which prevent the
players from reaching an optimal arrangement.
(ii) It seems impossible for the players to communicate and
coordinate their decisions, but they still arrive at an out-
come which is close to the optimum. Such observations
should lead us to look for some ethical considerations which
induce the participants to play in a cooperative manner.
These two cases form a convenient starting point for our explorations.
We shall not try to give any precise definitions of the terms 'institu-
tional' and 'ethical', which in our context stand for different kinds of
constraints in an optimizing problem. Loosely we can apply 'ethical' to
constraints observed as binding by individuals, and 'institutional' to
those binding for the persons as a group.
2.4. Before we discuss our examples, it may be useful to restate some
of the basic results from the economics of uncertainty. They are not
very complex, and can be considered as part of the general knowledge.
Formal proofs have been given in [3] and [4].
We shall consider n persons who have to share an uncertain pros-
pect. Payoff from the prospect will be x, a stochastic variable with the
distribution F(x). Let the attitude to risk of person i be represented by
the utility function ui(x). The most general arrangement the persons
can agree upon can be described by n functions Yl(X) ... Yn(x), where
yJx) is payoff to person i, if payoff from the prospect is x. The
assumption that the persons have to share the whole prospect implies
that
n
(1) L Yi(X) =
i~l
X.
ETHICS. INSTITUTIONS AND OPTIMALITY 241
The arrangement will give person i the utility
One can prove that the Pareto optimal arrangements are given by
the n-tuple of y-functions which satisfies (1) and condition (2) below:
where kl = 1 and k 2 ••• kn are arbitrary positive constants.
2.S. The functions which satisfy (1) and (2) will usually have a compli-
cated form. They will be linear, i.e., we will have yj(x) = ajX + bj only if
all utility functions belong to one of the following three classes:
(i) U;(x)=1-e- a ;x
(ii) Uj(x)=(x-Cj)a
(iii) uj(x) = log (x - c;).
Positive linear transformations of these functions will of course not

change the Pareto optimal arrangements.
These classes do not seem rich enough to accommodate the different
attitudes to risk which we would expect to find in most groups of
people.
Class (i) allows for differences in risk aversion-measured by aj-but
implies that preferences are independent of 'initial wealth'.
Classes (ii) and (iii) imply that all persons have the same risk
aversion function. Differences in preferences can be explained by
differences in initial wealth.
3. SOME EXAMPLES FROM ECONOMICS
3.1. As our first example we shall consider fixed wages versus profit
sharing. Let:
x = A stochastic variable representing the gross profit which
a contractor (Person 1) will get from a certain job.
242 KARL BORCH
w = The wages he pays the labour (Person 2) necessary for

doing the job.
The risk sharing arrangement will then be:
Yl(X)=X-W
Y2(X) = W
with some obvious modification if there is a possibility that the

contractor can go bankrupt and become unable to pay the agreed
wages.
It is clear that an arrangement of this simple linear form cannot in
general be optimal. It should be possible to devise some scheme of
risk- and profit-sharing, which would be considered better by both
parties, and it is difficult to explain why the fixed-wage agreement
seems to dominate in our economies.
3.2. The two main exceptions to the fixed wage contract seem to be:
(i) Pay by piece rates, a system which seems to be on the way
out in industry.
(ii) Share-cropping, a system usually associated with primitive
agriculture.
Both these forms of payment appear to be more flexible than the
fixed wage system, and should make it possible to reach an arrange-
ment closer to the optimum. Piece-rates and share-cropping are often
associated with unethical exploitation of labor, and this may be the
explanation of the dominating role played by the fixed wage contract.
A widely accepted ethical principle is that the entrepreneur should
carry the whole business risk. This does of course lead to fixed wages,
and there is some evidence that labor wants to push the principle
further and press for fixed monthly salaries, and for job security. The
latter demand may force the government to bail out entrepreneurs
whose firms run into difficulties. This may turn the government into the
ultimate risk-carrier, and in a sense lead to socialism, since the
risk-taking entrepreneur will be eliminated.
Under socialism it may be possible to reach a Pareto optimal
division of the risks inherent in society, but we shall not pursue this
intriguing question in the present paper.
3.3. As another example we shall consider the financing of a risky

business. We shall first consider an ordinary loan. Let:
x = A stochastic variable representing the payoff from a
venture which person 1 wants to undertake.
K = The capital required for the venture.
r = The interest rate demanded by person 2 (the banker)
for lending the capital to person!.
The conventional loan arrangement implies that the banker will take
over the assets of person 1 if he should default on the loan. The payoff
functions will then be
Yl(X)=O ifx:5(1+r)K
= x - (1 + r)K if x> (1 + r)K
Y2(X) = x if x:5(1 + r)K
Y2(X) = (1 + r)K if x>(1+r)K.
It is clear that an arrangement of this form will not in general be

optimal, even if the interest rate r is adjusted to the risk of default. In
many cases this seems to be recognized. When the financing of an
important project is discussed, we can frequently observe that the
parties seek some arrangement between the conventional loan scheme
and the 50-50 risk-sharing involved in a joint venture. Presumably
they seek an arrangement which will satisfy the two conditions in 2.4.
3.4. Ethics does not seem to play any important part in negotiations
over the financing of risky business enterprises. It is however clear that
institutional elements may prevent the parties from reaching a Pareto
optimal arrangement. Banks are often not allowed to take an equity
interest in a risky venture, and may be able to offer only conventional
loans-against suitable collateral. Such restrictions on the actions of
banks and financial institutions can obviously in some cases lead to
non-optimal arrangements. The restrictions themselves may of course
have ethical origin. They may for instance have been designed to
protect depositors or share holders.
Risk sharing is only one (possibly a minor) aspect of the two examples
discussed in this section. Arrangements which seem far from optimal
244 KARL BORCH
from a risk sharing point of view, may be fairly close to an optimum

when all aspects are considered. In the next section we shall therefore
discuss a few examples which in some respects are simpler.
4. EXAMPLES FROM INSURANCE
4.1. In insurance we can study risk sharing arrangements virtually

under laboratory conditions, and it is worth studying the optimality of
the arrangements which we can observe. As a first step we shall study
the simplest possible case.
Assume that person 1 is exposed to a risk which can cause him a loss
represented by the stochastic variable x.
Assume further that an insurance company-person 2-is willing to
take over the risk against a premium P.
This arrangement gives the payoff functions
Yt(x) = -P
Y2(X) = P- x.
This arrangement may of course be sub-optimal, and this seems to

be generally recognized. In insurance we find a very wide variety of
different contracts, which presumably bring both parties closer to the
optimum rather than the simple contract with fixed premium and full
cover. The simple contract seems to be used principally when the
premium and the amount at risk are small, i.e., when transaction costs
make it unprofitable to seek a better, but more complicated arrange-
ment.
4.2. Normally a person who seeks insurance against a non-trivial risk

will have a number of options. Let us first assume that by paying a
premium kP he becomes entitled to a compensation kx if his loss
amounts to x. This arrangement will give him the expected utility
U(k)= f" u(S-kP-x+kx)df(x).
Here S stands for the 'initial wealth' of the person.

The problem is now to determine the value of k which maximizes

this expression, under the natural condition that 0::;: k ::;: 1.
r
We find
U'(k)= (x-P)u'(S-x+k(x-P»df(x)
r
and
U"(k) = (x-p?u"(S-x+k(x-P))dF(x).
If our person is a risk averter, so that u"(x) < 0, it follows that

U"(k)<O, and hence U'(k) is a decreasing function.
r
We have
U'(l) = u'(S - P) (x - P) dF(x) = (i - P)u'(S - P).
As u'(S - P) > 0, it follows that U'(l) < 0 if P> i, i.e., if the premium is
greater than the expected payments under the insurance contract. This
will normally be the case, and hence we must conclude that U(k)
cannot have a maximum for k = 1, i.e., it will never be optimal to take
full insurance cover.
It is possible that the equation
U'(k)=O
has a non-negative root k < 1. If so, the equation will give the optimal
quota which our person should insure.
4.3. The result above, which is due to Mossin [5], is clearly con-
tradicted by observations. If a person takes fire insurance on his house,
he does not insure it for 60 or 80 per cent of its value. He will take
insurance for the full value, and often add something as a safety
margin. This is demonstrated by virtually all insurance statistics, so that
Mossin's result calls for an explanation. It may be tempting to just
reject the consistency assumptions behind the expected utility theorem,
and the assumption that the underlying utility function is concave. This
246 KARL BaRCH
implies however that we throw overboard a good deal of contemporary

decision theory, so it is advisable to study possible explanations with
less drastic implications, before jumping to conclusions.
In the early days fire insurance was almost invariably made on the
basis of assessed value. Persons who suffered losses should receive full
compensation, and neither more nor less; and they should pay fair
premiums. These are of course ethical principles, and they seem to
survive as conventions, also in a commercial age, when an owner is
free to insure his property for any value he chooses. This is at least a
plausible explanation of the discrepancy, between theory and observa-
tions, found by Mossin.
4.4. In the example above we have assumed that the insured would
receive a compensation proportional to his loss. The obvious generali-
zation is to assume that he can conclude an insurance contract which will
pay him a compensation y(x) if the loss amounts to x. His problem is
then to determine the function y(x) which maximizes the expected
utility
1"" u(S-P-x+y(x»dF(x)
where the premium P depends on the function y(x).
Arrow [1] assumes that the premium is proportional to the expected
compensation, i.e.:
P=(I+A) 1"" y(x)dF(x)

where A;::: O. He then proves that the optimal insurance contract is
defined by the function
y(x)= 0 for x::5D

y(x)=x-D for D<x.
This means that the insured, himself, will pay all losses smaller than
the 'deductible' D. For larger losses, the excess will be fully covered by
the insurance.
4.5. Many insurance contracts in the real world are of this form. It is
comforting to note that this often holds for important contracts, which
presumably have been concluded after careful considerations. This
should indicate that existing arrangements are not too far removed
from optimality.
In property insurance the maximum possible loss is necessarily finite.
In medical insurance, and in many forms of liability insurance there is
no upper limit to the possible loss. Insurance companies seem reluctant
to accept unlimited liability, and the payoff function for insurance
contracts of this kind will usually be of the form:
y(x) = 0 for x::sD

y(x)=x-D for D<x::sM
y(x)=M-D for M<x.
This arrangement is obviously non-optimal, and it means that the

insurance is not effective when it is most needed.
For the insurance contracts bought by the ordinary household, the
companies could without serious difficulties accept unlimited liability,
and give the customer virtually full security. In fact insurance com-
panies do this in the countries where the law requires unlimited cover
for third person automobile liability.
The premium must of course be adjusted if the upper limit on the
liability is removed. This should however be a simple matter. For large
M, the difference between
1= (x - D) dF(x)
and
I M
(X-D)dF(X)+(M-D) [dF(X)
will be almost negligible.
4.6. Arrow's result depends on the assumption that the premium paid
for an insurance contract is proportional to expected claim payments
248 KARL BORCH
under the contract. This is often considered an ethical principle,

defining the 'fair' premium.
It is worth noting that Arrow's result can be obtained as a special
case of the general result in 2.4, if we assume that the utility function
of the insurance company is linear. This assumption implies that the
insurance company must be risk neutral. The existence of reinsurance
shows that insurance companies also have risk aversion, and this is
probably the reason why they don't offer the customer the insurance
contract which he considers as optimal.
5.1. In this paper we have considered some economic situations in

which the persons concerned seem to have arrived at a solution which
is sub-optimal. We have tried to explain these observations by pointing
out ethical and institutional factors which may play their part in the
decision process. We have not tried- to separate and analyse these
factors, since they all seem to hang together. Ethical norms, once they
are generally accepted, tend to be codified and become the conven-
tions and institutional framework of the next generation. Institutions
and conventions seem to have their inertia, and tend to remain
unchanged for a long time after the ethical norms have changed.
5.2. The paper does not contain any basically new results. It is
however hoped that some of our observations may help in locating new
fields of empirical research in social sciences.
Norwegian School of Economics

and Business Administration
BIBLIOGRAPHY
[1] Arrow, K. J., 'Optimal Insurance and Generalized Deductibles', Scandinavian

Actuarial Journal (1974), 1-42.
[2] Baier, K., 'Rationality and Morality', Erkenntnis, 1977.
[3] Borch, K., 'The Safety Loading of Reinsurance Premiums', Skandinavisk Ak-
tuarietidskrift (1960), 163-184.
[4] Borch, K., 'Equilibrium in a Reinsurance Market', Econometrica (1962), 424-444.

[5] Mossin, J., 'Aspects of Rational Insurance Purchasing', Journal of Political Economy
(1968), 553-568.
[6] Rapoport, A. and Chamman, A. M., Prisoner's Dilemma, University of Michigan
Press, 1965.
[7] Selten, R., 'The Equity Principle in Economic Behavior', in this Volume.
HANS W. GOTTINGER
COMPLEXITY AND SOCIAL DECISION

RULES
1. INTRODUCTION
The notion of 'global rationality' underlying the construction of

'economic man' that is generally accepted at least in normative
economics has come increasingly under attack by those who care for
more fruitful behavioral assumptions in economic reasoning. This
notion is intrinsically related to various optimization programs that
have been implemented in economics but that have been found only of
limited use in realistic, complex situations. H. A. Simon [8] deserves
credit having observed the limitation of global rationality and suggest-
ing a modification of this program by introducing his concept of
'limited rationality'. To a great extent these ideas were carried forward
in studying human thought processes where it was found that decision-
makers, for purposes of problem-solving, go through several stages of
goal formation, a hierarchical representation of goals, super- and
subgoals, where at every stage goal attainment rather than optimiza-
tion is called for. Such programs are motivated by the complexity of
problem-solving tasks that are treated successfully by decomposing
problem-solving in a sequential way and by associating to every stage
of the process the attainment of a subgoal. Goal-oriented behavior,
therefore, is non-optimizing behavior and only improvement-related
with respect to the attainment of the next goal in a sequence. (G. W.
Ernst and A. Newell [2].)
Simon [11] relates a need for revision of the 'economic man' to the
limitation of access of information and computational capacities being
available to human decision-makers. The computational dimension is
probably the most important aspect of characterizing 'limited rational-
ity'. In fact, this point has been brought up in a similar connection by
H. Leibenstein [6] where he interprets 'rationality' in terms of 'cal-
culatedness' (computability) and tightness or looseness of ca1culated-
ness is supposed to cover the whole spectrum between rationality and
limited rationality.
The computational dimension of limited rationality as applied to the
social choice process is analyzed here in a more rigorous fashion than
251
Copyright © 1978 by D. Reidel Publishing Company, Dordrecht, Holland. All Rights Reserued.
252 HANS W. GOTTINGER
has been done before. It turns out that complexity is an essential tool
for analyzing constraints on the decision process. Moreover, any ax-
iomatic system of 'limited rationality', yet to be defined, must contain
complexity as a primitive notion.
The paper attempts to show how a social decision function can be
constructed, by unconventional tools, such that it is compatible with
individual decision functions. Complexity enters the construction as the
basic limiting factor.
2. CHOICE PROCESSES AND COMPLEXITY
On the level of individual or social choice problems complexity relates

to the ability or inability of human beings to make effective choices in
a consistent or rational way. In this regard complexity exhibits some
kind of uncertainty that cannot be treated properly in terms of prob-
abilities.
One clear indication when complexity enters individual decision-
making is given by the inability to prove that a utility function
representing preferences or choices does exist. If this proves to be a
legitimate question on the level of individual decision-making, it is
even more so on a social choice level. 1 F. S. Roberts [9, 127] proposes
two ways out of this dilemma:
... one approach to the decision-making is to describe a procedure whereby we can

modify or redefine or make explicit our preferences in the course of decision-making in
order to become more 'rational' (Le., that such a utility function will exist).
A second approach, somewhat less demanding, is to settle for a

utility assignment which best approximates the utility function.
It is doubtful that the first approach leads to a satisfactory solution.
Since even if it is possible to teach individuals how to act more
rationally than they used to behave, they will never be 'perfect com-
puters' and there is a threshold of complexity beyond which they
cannot effectively handle situations, for instance, making choices
among many alternatives. Put in a different way, you can try to teach
subjects how to make optimal decisions in a simple course of actions,
as J. Marschak [7] suggests on the basis of psychological studies on that
matter. But still teaching optimality does not cope with the problem
COMPLEXITY AND SOCIAL DECISION RULES 253
that people simply make mistakes because of complexity or emba"as de

richesse in selecting among many alternatives-in the same way as
people may understand simple arithmetical rules but cannot solve
complicated arithmetical problems in the large because of time, re-
source and computational constraints.
The alternative then is that people adopt reasonable behavior
strategies (in the sense of being within their 'computational budget')
which cope with the intrinsic complexity of (social) choices, e.g., those
rules exhibiting non-optimizing behavior.
Regarding the second approach, much of the contribution by meas-
urement theory has been in the direction of weakening preference
requirements (for example, Luce's semi-order theory, avoiding in-
difference, but admitting thresholds).
The weaker assumptions aim at reducing the computational burden
of decision-makers, yet they fail to make explicit the complexity
bounds in forming decision rules.
Many choice processes in the real world, in contrast to theoretical
constructs used by choice theorists, represent essentially ill-structured
problems to the extent that solutions of these problems are not readily
available and they involve an excessive amount of computational
power. In general, a problem is considered to be well-structured if it
satisfies a number of criteria, the most important of which relate to the
existence of at least one problem space that provides for solvability
with the help of a practicable (reasonable) amount of computation or
search. Apparently well-structured problems such as theorem-proving
and chess playing in artificial intelligence turn out in many instances to
be ill-structured, given the problem-solving power of problem-solving
methods. There seems to be an intrinsic relationship between well- or
ill-structuredness of a problem and the threshold of complexity (in von
Neumann's sense) below which a system shows a regular, stable and
predictable behavior but beyond which often quite different, sometimes
counterintuitive modes of behavior can occur. A problem can be
well-structured in the small, but ill-structured in the large. According
to H. Simon [13] "the difficulty stems from the immense gap between
computability in principle and practical computability in problem spaces
as large as those of games like chess". This generally applies to
complicated choice processes.
Therefore, the problem of complexity is similar to the problem a
chess player faces when searching for a 'satisfactory' strategy in chess.
The social choice problem resembles the choice of strategies in chess-

playing to the extent that the decision-maker is involved in a choice
problem of combinatorial dimension. To search for all game-
theoretically possible alternatives goes far beyond the computational
ability of the human being.
One conclusion, therefore appears to be obvious: we have to depart
from behavioral hypotheses involving optimizing behavior, as conve-
nient as it might be in mathematical terms, since it does not come to
grips with non-trivial choice problems in complex situations. We do
not have to leave the grounds of rationality. A rule-of-thumb method
may be rational in a restrictive sense, thus we have to view it in terms
of 'limited rationality'. Rule-of-thumb methods may be applied for
various reasons: either because the individual faces expected costs of
computation to be far beyond expected utility of further searches in
choice-theoretic behavior or he (she) is faced with an immense mass of
alternatives to the effect that he (she) is psychologically outstripped by
the ensuing 'complexity of computation'. Chess players tend to choose
simpler decision rules. They do not consider all possible strategies and
pick up the best, but generate and examine a rather small number,
making a choice as soon as they discover one that they regard as
satisfactory. According to H. Simon [12], "limits of rationality in chess
involve (a) uncertainty about the consequences that would follow
from each alternative, (b) incomplete information about the set of
alternatives, and (c) complexity preventing the necessary computations
from being carried out".
All three properties may be subsumed under a more general concept
of complexity in choice-theoretic situations. For example, uncertainty
and lack of information may here assume different aspects to what is
widely known in statistical decision theory and the economics of
uncertainty, e.g., uncertainty resulting from computational incapability
when faced with a large number of choice alternatives. These are
essentially non-probabilistic situations. Thus, complexity is an impor-
tant tool for evaluating decision rules, in fact, it may prove instrumen-
tal for an axiomatic analysis of 'bounded rationality' which is still
lacking.
3. SOME FORMAL PREREQUISITES
We present here some formal definitions toward developing a more

general theory of complexity for social choice situations that may
prove useful to understand the concepts to be used throughout the

following section. In this particular context, such a general theory of
complexity has been introduced earlier by C. Futia [3], more generally
see Gottinger [5].
(1) If A is a non-empty set of symbols, then let A * represent the set
of all strings whose members are elements of A, i.e., A * =
{(aI' ... , a,.): n ~ 1 and aj E A}. Then we define a sequential machine
as a function f: A * ~ B where A is the basic input set, B is the output
set and f(a l , . . . , an) = bn is the output at time n if aj is the input at
time j (1:s j:S n). This is the external description of a sequential
machine by specifying a function f: A * ~ B.
The internal description involves a circuit (A, B, Z, A, 8), where A
and B are defined as above, Z is the (nonempty) set of internal states,
8: Z x A ~ B is the output function, A: Z x A ~ Z is the next-state
function. the step from the external to the internal description of a
system is referred to as identification. It is a problem to show that given
f we may find a C and a Z E Z such that C 'realizes' f with f = Cz-
For example, let Cz : A * ~ B be the system given by starting C =
(A, B, Z, A, 8) in state Z E Z, then Cz is defined inductively in a
straight-forward way:
Cz(a l ) = 8(z, a l )
Cz (aI' ... , an) = CA (Z,4,)(a 2 , ••• ,a,.) for n > 2.
(2) Let f: A * ~ B be a machine. Then r,

the semigroup of f, is
given by the congruence =[ on A * where for t, rEA *, t =f r if and
only if f(at(3) = f(ar(3) for all a, (3 E A * U {1}. Then, if [t]f denotes the
equivalence class of the equivalence relation =f containing t, we have
fS = {[t]f: tEA *} and [tJr . [r]f = [tr]f (where tr denotes the product in
A * and, denotes the product in r).
{1} is the empty string.
(3) A semigroup S is combinatorial if and only if each subgroup of S
is of·order 1.
(4) A right mapping semigroup or right transformation semigroup is a
pair (X, S), where X is a nonempty set, and S is a subsemigroup of
FR(X) the semigroup of all mappings of X into X under the multiplica-
tion (f. g)(x) = g(f(x)). For each x E X, S E S, let xs = (x)s. Then the
following conditions are satisfied:
(1) X(SlS2) = (XS l )S2'

(2) S1> S2 E Sand Sl:J; S2 omply xsl:J; xs 2 for some x E X.
(5) (Wreath Product) Let (Xj, Sj) be right mapping semigroups for
j= 1, ... , n. Let X=Xnx ... xXl . Let S be the semigroup of FR(X)
consisting of all functions t/!: X ~ X satisfying the two following condi-
tions:
(i) (triangular action) If Pk: X ~ X k denotes the kth projection
map, then for each k = 1, ... ,n there exists A: X k X ... X Xl ~ X k
such that
for all ti E Xi' i = 1, ... , n.

(ii) (kth component action lies in Sk) We require 11 E S1, and, for all
k = 2, ... ,n and all a == (tk-l> ... , t1) E X k- 1X ... X Xl' the function
&. E FR(Xk) given by g.(Yk) == Ik(Yk, tk- 1, ... , t1) is an element of Sk'
Then (Xn, SnH . . . 1(X1' Sl) = (X, S) is the wreath product of
(Xn> Sn), ... , (Xl' Sl), and (Xn> Sn)w . .. w(X1, Sl) is the abstract
semigroup determined by (X, S).
(6) Let (X, S) and (Y, T) be right mapping semigroups. Then we
write (X, S) I(Y, T), read (X, S) divides (Y, T), if and only if (1) there
exists a subset Y' of Y and a subsemigroup T' of T such that Y' is
invariant under the action of T' (i.e., Y'T' ~ Y'); and (2) there exists a
map 8: Y' ~ ~ X (~~ means onto) and an epimorphism cfJ: T' ~ ~
S such that 8(yt) = 8(y)cfJ(t) for all YE Y', tE T'.
(7) (Krohn-Rhodes Decomposition [8]) Let (X, S) be a right map-
ping semigroup. Then the (group complexity #G (X, S) = #G (S) is
defined to be the smallest nonnegative integer n such that
holds with Gl>' .. , G n being finite groups and Co, ... , Cn finite com-
binatorial semigroups (flip-flops), i.e., the minimal number of alterna-
tions of blocks of simple groups and blocks of combinatorial semi-
groups necessary to obtain (X, S). Hence by making full use of decom-
position results on sequential machines one could redefine complexity
in terms of the phase space decomposition.
Therefore, complexity finds its group-theoretic roots in the fact that
the transformation semigroup can be simulated (realized) by the
wreath product of all pairs of component machines, whose semigroups
are simple groups, and those machines whose semigroups are finite
combinatorial semigroups (== flip-flop machines). Intuitively speaking,
a combinatorial semigroup corresponds to a machine that virtually does

no computation but rather switches inputs and outputs among various
input-output configurations. This property reminds us of information
theory when selecting events which have information measure zero.
Since these types of machines generate regular patterns which are
expected, they do not yield any surprises. Therefore, their behavior
does not produce information. Since everybody understands it, it
cannot be complex. This result has some immmediate impact on
possible applications. It suggests that if we are able to detect subsys-
tems that behave like flip-flops we could erase these subsystems
without changing the structural complexity associated to other subsys-
tems but, nevertheless, decreasing the computational complexity in
terms of length of computations.
On the other hand, simple groups conform to machines that perform
simple arithmetic operations (such as addition, multiplication, ... ).
Many examples of that sort have been given by John Rhodes [8]. A
simple group constitutes the basic (irreducible) complexity element
which increases the complexity of the machine by just one unit. Hence
punching out groups, of that kind, in the decomposition will lower the
complexity at most by one. Now what is the significance of the
Kroh-Rhodes theory? It shows us to what extent we can decompose a
machine into components that are primitive, irreducible and that the
solution depends on the structure of components and the length of
computation. Hence, complexity does not depend only on how long a
chain of components is, but also on how complicated each component
is. Therefore, complexity not only takes into account the total number
of computations in a chain (the computational aspect), but it also does
so for the inherent complexity of the subsemigroups (submachines)
hooked together via the wreath product (the structural aspect). The
structural aspect can be heuristically represented by the amount of
'looping' in a computer program that computes S on X. This has been
proposed by C. Futia [3] for computing sequential decision or search
rules? These are the key features of an algebraic theory of complexity.
4. AN EXAMPLE OF A DECISION OR SEARCH RULE
The subsequent example has been adapted as an illustration from a

similar search problem presented by Futia [3]. An individual, as a
member of society (or voter) is subsequently confronted in a 'large'

market of public goods to choose among different kinds of com-
modities or services (nuclear energy, missiles, health care, etc.) offered
to him for sale by different government agencies at different prices
(i.e., tax rates). In order to receive a tax rate quotation (or possibly
some other relevant information) from any given agency, the voter
must incur some (not necessarily monetary) cost constituting his margi-
nal search cost. The voter's goal is: given a certain bundle of public
goods that satisfies his aspiration he wants to search for low tax rates
such that his final taxes (plus total search costs) will be kept as low as
possible. This problem can be formalized as follows:
Let ti denote the tax rate quotation of agency i. Let t = (t 1 , • •• ,tn) be
the tax structure and suppose ti E [0,1] = 1. Denote by 1" the n-
dimensional Cartesian product of I, and define a probability density F
on 1" representing the voter's initial belief about which tax rates the
agencies are likely to quote. The order of quotations presented to the
voter is considered to be irrelevant, thus, for simplicity, it is assumed
that F is symmetric, i.e., if p is a permutation of {I, 2, ... , n} and if
tV = (tp (1), ••• , tv(n») then F(t) = F(tV).
The set-up of this problem enables us to construct a decision rule
which prescribes to the voter, for each i, whether to stop searching
after receiving i quotations or whether to continue searching on the
basis of the i quotations he has received. A decision rule is assumed to
be a mapping from a set of observations into a set of actions. In this
problem, for each i, let the set of actions be A = {'accept', 'reject'}, and
the set of observations be q = t. Then a decision rule is a sequence of
functions D = (D 1 , ••• ,Dn- 1 ), where D i : q ~ A if (tl"'" tJ E q,
then Di(t!, . .. , tJ records the voter's decision to either accept the tax
rates that have been quoted to him and choose (by vote) the given
bundle of public goods presented to him, or to continue searching and
reject tax rates t1 , . . . , ti •
Now it is perfectly legitimate to ask, for this kind of problem, what is
the voter's optimal decision rule? This question could be answered by
the machinery provided in statistical decision theory to find optimal
solutions for search problems (see Gottinger [Sa]).
Instead, we are interested here in the basic ill-structuredness of the
problem given by the complexity of the decision rule. To this end, on
the basis of the previous section, we proceed to associate with every
decision rule D a (computer) program fn which computes D. This
permits us to define the complexity of the program by the amount of

'looping' between subprograms (computational complexity) and the
intrinsic complexity of the subprograms (structural complexity). Hence,
a sequential machine is used as a metaphor for determining complexity
of sequential decision rules. This can be-further illustrated by elaborat-
ing on the problem above by using the sequential machine framework.
Let A = set of observable tax rates = finite subset of [0, 1]. Let
B = {'stop', continue to i + 1, i = 1, 2, ... , n}. Then the machine fD is
defined inductively on the length of the input sequence by
Dt(tt) if m = 1, or if
fD(tt, ... , tm-t) = 'stop' or=Di(tm-i,···, tm)
if fD(tt, ... , tm-t) =
'continue to i + l'
The computational length and the structural complexity of subsystems

that are needed to compute fD reflects a measure of complexity for fD
(equivalently for the decision rule D). Obviously, optimal is a rule that
is generally more complex and more expensive but which may very
well be beyond the computational power and sophistication of the
voter. Hence the voter, facing an ill-structured problem wants to make
it well-structured by seeking a decision rule which matches his compu-
tational ability and sophistication.
5. COMPLEXITY OF DECISION RULES
We suppose that the decision-maker identifies alternatives in his choice

space and does express preferences between at least two alternatives
by simply computing, else he finds alternatives 'undecidable' or 'in-
comparable' that cannot be computed. Preference statements are
therefore translated into computing devices, indifference statements
are kept out because of possible vagueness. The decision-maker,
represented as a simple finite-state machine, can be decomposed by
performing these tasks. 3 In the first case the job to be done, e.g.,
computing preferences, is achieved by a simple group machine (that is
a decision machine acting as a simple group in the mathematical
sense). In the second case the activity consists of a combinatorial
machine, acting as a 'flip-flop' which does not compute anything. 4
Realizing a decision-rule therefore means a decomposition of the

decision process according to the decomposition of machines into
component machines that, when 'hooked' together, (via the wreath
product) realize the overall machine. Of course, the complexity of
decision rules may vary; a 'soJYhisticated' decision-maker may activate
more simple groups, less flip-flops, or groups that compute faster, more
accurately and more reliably. This type of decision-maker will carry
more structural complexity in the sense given in the previous section.
A (social) decision rule is a sequential decision rule and as such is
considered to be a finite state machine (associated to a finite semi-
group), and according to complexity theory it has a finite decomposi-
tion. In this regard the results of Krohn-Rhodes complexity theory
apply. The idea involved here is to factor a social choice process into
parts (components) where the global process is modelled as a transfor-
mation semigroup associated to a social decision rule, and the local
parts are represented by transformation subsemigroups. The new tools
originate from decomposition results in automata theory.
Consider a choice set of finitely many alternatives X =
{a, b, .. . , x, y, z} and let Di = 1 iff i prefers x to y, Di = 0 iff i is
'undecided' about x and y, Di = -1 iff i prefers y to x. Let qjJ be a
nonempty set of decision rules D j , ~ a nonempty collection of subsets
of X, a social decision function (SDF) then is a function F: ::r x qjJ ~
P(X) , P(X) being the power set. A SDF for individual i is given by
F({x, y}, D i ), x, y E X.
Social decision functions are in fact decision machines in the sense
that they decide on propositions about accepting or rejecting social
states, computing them by discrimination, (preference, non-
preference). By doing this, they generate, as outputs, decision rules
and induce next states representing changes in preference profiles or
configurations. There is good reason to argue that we should leave out
indifference statements since they cannot clearly be distinguished from
the phenomenon of 'undecidability'. Intransitive indifference arises in
situations where a chain of indifferences, each of which seems reasona-
ble, adds up to a sufficiently large difference to yield a definite
preference between the first and the last items in the chain. We would
like to avoid intransitive indifference, therefore we require the decision
machine only to accept preference rather than indifference statements.
In order to construct such a decision machine let us state the
following
PROBLEM: Let xn = Xl X ... X Xn be the social choice set when the

OM is confronted with a sequence of finitely many social alternatives.
Let A o c:; Al c:; ... c:; An, more precisely given in the time sequence
to, t10 ... , tm be those sets of alternatives in which the OM can actually find
comparisons (in the sense that he prefers alternatives in these sets and finds
himself in a position to compute preferences). Let .st1 be a nonempty
collection of all Ao, AI> ... , An- Then he constructs selection functions
Po, PI> ... , Pm Pi: xn~.st1 such that for all Xi EX;, p(Xi ) E Ai. In a way, Pi
constitutes a reduction mechanism by reducing all possible alternatives
with which the OM is confronted to those which are computed as actual
choices. 5 It is said that the OM accepts the decision rule Di(xo, ... , x;) if
p(xo, ... , Xi) E Ai, more explicitly, accept Do(xo) if p(xo) E Ao, accept
DI (Xo, Xl) if p(Xo, Xl) E AI, etc.
There is an upper bound, representing the complexity bound of the
OM, beyond which he is unable to compute his preferences. The upper
bound somewhat restricts him in selecting decision rules which are
'beyond his complexity'. Therefore, let l(D) be the largest integer
satisfying the bound such that A'{(D)-l ~ A'{(D). How is the bound to be
determined?
In a different context, regarding the complexity of (dynamic) finite-
state systems, I distinguish between design and control complexity.
To quote (d. Gottinger [5]), under design complexity I understand
that complexity (number) associated to the transformation semigroup
in which full use of the system potential is made. Under control
complexity I understand that specific complexity (number) that results
from computations which keep the entire system or at least part of it
under complete control. A qualitatively stable decision rule would be a
rule for which design and control complexity coincide. However, in
most practical cases design complexity will exceed control complexity.
Since one cannot assume that the control complexity of an average
(unsophisticated) OM can be increased by teaching him how to behave
in a rational manner one should pick up designs of decisions rules for
which there is a reasonable understanding and control. 6
Example. In a game of chess the number of all possible strategies to
achieve a check-mate corresponds to the design complexity of a
chess-playing program. The number of all actual strategies chosen by a
particular chess player to achieve success corresponds to his control
complexity. Given two chess players both initially endowed with the
same knowledge of how to play chess, and if in a sufficiently long
sequence of how to play chess, and if in a sufficiently long sequence of

repetitive plays one does better than the other, he exhibits a better
understanding of the game, e.g., a higher control complexity.
In a certain way both concepts are naturally associated to 'programs
of optimization' and 'programs of satisficing' or bounded rationality),
respectively. That is to say, design complexity pertains to that decision
rule (which is best in some appropriate sense). In general an optimiza-
tion principle is involved, which, however, cannot be realized given the
limited computational resources of the DM (control complexity).
To which extent this bound can effectively be determined by experi-
ments appears to be a problem in experimental psychology. However,
it is possible, at least in principle, to give a set of criteria under which it
can be determined whether a DM chooses decision rules violating his
bound of complexity.? Whenever individuals violate in experiments a
set of consistency postulates (such as transitivity), namely those which
they have accepted at the very beginning, they will realize that they
have committed computational errors. Thus commitment of errors or
violating consistency postulates seem to be suitable criteria for deter-
mining complexity bounds of computation. In experimental situations,
subjects then have to be confronted with various decision rules of a
different complicated character and the class of decision rules in which
no errors or almost no errors occur constitute those which satisfy the
control complexity of the DM.
Those decision rules are called qualitatively stable. Only qualita-
tively stable decision rules guarantee that social, economic and political
processes can be controlled in any effective way by social choice,
otherwise the amount of error, misrepresentation of preferences, etc.,
could easily lead to a destabilization of the social system, and a degree
of rationality can no longer be maintained.
6. A CONSTRUCTION OF COMPATIBLE SOCIAL DECISION RULES
Let PI, P2 , .•. be sets of computable preference profiles for i = 1,2, ...
individuals of the social group achieving a common social decision rule
D (matching the preference profile of the social group). Let there be
Db D 2 , •.. decision rules acting as sequential machines such that Dk
computes the preference profile Pk • Then we define the complexity of
the social decision rule D, 8(D), to be equal to min {(J(Dj): j =

1,2, ... }.
In short, the complexity of a social decision rule is bounded by the
minimum complexity of any individual decision rule D j which is able to
generate any individual preference profile matching the preference
profile of the social decision' rule. We proceed to associate a social
decision rule (SDR) D for the social choice problem with a finite
semigroup SeD). We could envisage the social choice process as a
transformation semigroup (X, SeD) where X is the set of social choice
alternatives each individual (in the social group) is searching for, while
elements of SeD) will be finite sequences of preference quotations
generating the preference profile.
We could define X = {*} U Ao U Al U ... U A n - l with U disjoint. this
is the set of the DM's choice histories. Then p(x 1 , ••• , xJ E Ai repres-
ents the history of the DM's preference statements who has completed
i searches and has made choices over Xl' ... , Xi'
A DM will stop searching if further searching will violate reasonable
consistency criteria. The stop rule of searching is imposed by the
complexity bound of the social decision rule. By construction, the
complexity of D, (J(D), is equal to the complexity of SeD), (J(S(D)).
Again the complexity of the SDR D is bounded by the minimum
complexity of the individual decision rules D j (finite state machines)
which by interacting realize a compatible social decision rule.
The procedure how to generate a computable SDR when all members
of the society set up their own individual decision rules can be
described as a sequential game among the members. If the game has a
von Neumann value we agree to say that a compatible SDR has been
realized.
For simplicity, let us assume that there are only two members of the
society which after having computed their individual decision functions
want to find a compatible SDR (which satisfies both).
Assume that the game starts in Czo with strategy P constituting the
selection rule of the first member of society, then the circuit C =
(A, B, Z, A, 8) is the preference profile with A: A x Z ~ Z and 8: Z x
A ~ B. Let A be the set of social choices that have been made by
Player I (and the configuration is revealed to Player II). Then B is the
set of resulting social choices of Player II that adjust to the preference
profile of Player I. Z is the set of adjusted social choice configurations
of the game as they appear to Player I. A(z, a) and 8(z, a) are
interpreted as follows: if z is the adjusted social choice configuration,

as it appears to Player I, and a is the choice which enters as input to
Player II, let z . a be the social choice configuration after the choice a
is made on the configuration z. Let D(z . a) = b be the decision rule
generated by C when the position presented to C is z· a. Define
B(z, a) = b = D(z . a) and furthermore define A(z, a) = (z . a) . b ==
(z . a) . D(z . a), where Zo is the initial position. Suppose our SDR can
be put in binary form, whenever the 'compute preferences' key is
followed we assign 1, otherwise 0.
The latter case will be interpreted as meaning that no consistent
preference statement can be made since the number of choices in-
volved is too large. Therefore we have to eliminate redundant choice
alternatives. Under these circumstances, we could consider, for at least
two players, the construction of a compatible SDR to be equivalent to
a game tree with binary outcomes.
Example. In this game each player plays zero or one successively-
corresponding to the construction of the decision rule. Let us assume
the circuit C is a player who responds to the action of the first player,
and the circuit C. W denotes a win for the player, L denotes a loss for
the player. The payoff is +1 for W, and -1 for L. Clearly, the von
Neumann value for this game is +1 for the player who goes second.
Assuming C goes second the strategies achieving the von Neumann
value + 1 can be listed (and read out of the game tree), as in
Figure 1.
Let C = (A, B, Z, A, B) be defined as follows:
A = {O, 1(0, L), (0, W), (1, L), (1, W)}, B = A,

Z={q" a, b, c, d, e,f, ... , r, s, t}.
Then Czo : A * ~ B induces a sequential social decision rule to which

there is associated a complexity, the complexity of the transformation
semigroup (X, S). The problem is to find a minimal complexity of the
transformation semigroup that permits a construction of a social deci-
sion rule compatible with the choice behavior of individual members of
the society. In view of (a)-(d) we succeed in doing this by finding the
string of minimal length, i.e., the decision rule with the minimal
complexity. The upper bound for the complexity follows from the
d
~-";;"'-L
1,0
;.e.--_W
P
L
t
Fig:. 1. Game tree with binary outcomes (winning strategies for C)
(a) (q" 1), (a, 1), (c, 1), (g, 1), (k, W),
(b) (q" 1), (a, 1), (c,O), (h,O), (n, W),
(c) (q,,0), (b,O), (t, 1), (i, (1, 0)), (p, W),
(d) (q,,0), (b,O), (t,O), (j, (1, 0)), (q, (1, 0)), (v, 1), (s, W)
following result:
PROPOSITION (J. Rhodes): Let S be a semigroup of mappings on
the finite set X (sequential choice space). Let r be the maximum range
(or fixed points) of any idempotent e=e 2 ES. Then #G(S)~r-l.
Proof. Let f be the ideal generated by the idempotents of S. Then
S/f is combinatorial and f ~{f: X -+ X: If(x)1 ~ r}= fr. Further fk' k =
1, ... , n are the ideals of FR(X), the semigroup of all mappings of X
into X. Then by tht: results of Rhodes et al. [8] it can be shown that
#O<S) = #0<1) and #O<Ir)~r-l. q.e.d.
7. SUMMARY AND EXTENSION
We have noticed how choice processes could be factored into compo-

nent subprocesses and how these are associated to properties of
transformation semigroups. A social choice process could be under-

stood as a sequential game, as an interaction between individual choice
processes in such a way that the interaction generates a SDR that is
compatible with all individual choice processes. To achieve this, we use
new tools of 'limited rationality', derived from automata theory, em-
bodied in the system of social decision-making. Complexity as a crucial
factor in the choice of decision rules is related to limitations of human
decision-making in terms of their capacity to recall, memorize and
compute only relatively few items among which consistent choices can
be made. In contrast to conventional social choice theory we only
consider preference profiles that are in a certain sense 'computable',
thus restricting the social choice process to reasonable behavior rules.
It is not yet clear to what extent the ideas expressed herein will have
an impact on traditional social choice theory, namely relating to
Arrow-type impossibility or possibility theorems. In actual human
decision-making, alternatives are often examined sequentially, conse-
quently we consider this approach to be basically of sequential type,
whereas traditional theory is static, e.g., all alternatives are evaluated
before a choice is made. Furthermore, in view of Arrow's assumptions
on constructing a social welfare function (SWF) it appears that the
assumption of 'unrestricted domain' of the choice set will no longer
hold because of imposing strict computational requirements.
An obvious extension would consist of using complexity of decision
rules as a primitive notion for an axiomatization of economic behavior
that introduces explicitly behavioral assumptions related to limited
computability. The DM is not only limited in his choice behavior by
computational requirements, but equally important, he is also re-
stricted by acting as a member of a group or social class where, in
order to achieve some consensus (for example, a common group
decision function), he has to adjust his behavior to past choices of
other group members. This is illustrated by looking at the adjustment
mechanism as a sequential game. The determinants of the game
(environmental conditions, previous choice configurations) are them-
selves determined as outcomes of complicated cognitive processes,
bounded by complexity. Complexity of this kind virtually covers two
aspects: one is structural, the other computational. Structural complex-
ity here relates to the 'sophistication' of the DM, how he can reason
when confronted with difficult tasks, depending on his problem-
solving capability (as discussed in the example of the missionaries and
the cannibals, see Ernst and Newell [2]).
Computational complexity relates to experience, to the ability to

learn doing things, organizing computations. Both factors are likely to
be highly correlated, but to a certain degree there will be tradeoffs
between both, thus they are comprised in one complexity measure. For
a particular decision-making design both factors add up to yielding the
control complexity which together with the given design complexity
provides the fundamental evolution complexity relation. This again has
a clear interpretation in defining qualitatively stable decision rules.
ACKNOWLEDGEMENT
Research supported in part by Thyssen-Stiftung, Cologne (Kaln), W.

Germany.
Most work has been done during my visit to Western Management
Science Institute, UCLA, in the Summer of 1976. The help and
hospitality of this institution is much appreciated. In particular, I am
indebted to Miss Naomi Yano, Los Angeles, and Ms. Goergel,
Bielefeld, for typing the manuscript.
University of Bielefeld
NOTES
1 Likewise, a similar problem arises if you want to capture (probabilistic) uncertainty by

the representation of finite subjective probability measures. Here it is by no means clear
that the representation is unique. P. Suppes [14] reports, in referring to Scott's axioms of
finite probability, derived from a qualitative probability structure:
The more profound difficulty ... is the combinatorial explosion (my italics)
that occurs in verifying the axioms when the number of events is large. To
check connectedness, for example, we need only consider pairs of events,
and to check transitivity, only tuples of events. But, it is fundamental for
the kind of axiom schema required to express necessary and sufficient
conditions in the finite case that n-tuples of events of arbitrary n must be
studied as the number of events increases. As a possible empirical theory
of belief, or as a rational one, this seems impractical, and even for fairly
small experiments, the effort to determine whether there is a representing
unique probability measure requires the use of a moderate size computer
facility.
P. Suppes then sets out to search for simpler axioms, which he terms 'inexact measure-
ment', that attempts to reduce the implicit complexity of finding unique measures of
belief.
2 In a different context, such a problem-solving machine transforming 'tasks' into

'satisfactory actions' (controls) as a model for an adaptive mechanism has been described
by B. R. Gaines [4].
3 This decision-making process, organized in this way, is somewhat related to the
heuristic conceptualization of the decision-making process as proposed by R. Selten in

his 'Chain Store Paradox' [10]. The simple group machine pertains to his level of
reasoning which is characterized by a conscious effort to analyse the situation in a
rational way on the basis of explicit assumptions whose validity is examined in the light
of past experience and logical thinking. On the other hand, the combinatorial group
machine applies to his routine level where "decisions are made without any conscious
effort". Now it seems evident that the higher level of reasoning brings 'sophistication' in
the decision process, increases complexity (structurally) whereas routine decisions do not
establish structural complexity by itself. This is not to say, in agreement with Selten, that
the higher level always yields the better decision, but this is to say that decision problems
of the problem-solving variety require the activation of computational devices with more
rather than less structural complexity. But in general, again in agreement with Selten, it
depends oli the nature of the decision problem.
4 According to C. Futia [3], since combinatorial semigroups ('flip-flops') generate no
feedbacks, he argues that feedbacks are only provided by the basic complexity elements,
the simple groups, in the Krohn-Rhodes decomposition. Since complexity of his sequen-
tial decision rule D, equivalent to the complexity of the associated semigroup SeD), is
considered to be proportional to the amount of 'feedback' or 'looping' in a computer
program that executes D, it is obvious that he measures only a restrictive notion of
complexity, what I call structural complexity. However, he neglects the number of wires
or interconnections between all components within the Krohn-Rhodes decomposition,
i.e., the length of computations, what I call computational complexity. But only struc-
tural plus computational complexity provides a comprehensive measure of complexity
for sequential processes. The distinction between both is important, particularly in view
of possible tradeoffs between both in the design of decision rules and by comparing
decision rules with different designs.
5 Now this reduction mechanism induces the choice space to be partitioned into at least
two parts, one part which is 'computable', generated by computable preference state-
ments, the other part is 'non-computable', imposed by indecisiveness in choosing among
alternatives. Therefore the actual choice space generated by the selection functions is
derived from the following equivalence: computable choice space equals given choice
space modulo non-computable choice subspace.
6 Another way of looking at it utilizes H. Simon's [13] distinction between a well-
structured and an ill-structured problem. A stable decision rule is equivalent to a
well-structured problem. An unstable decision rule results from the possible 'computa-
tional gap' which may occur in the problem-solving process. As Simon [13, p. 186] puts
it: " ... definiteness of problem structure is largely an illusion when we systematically
confound the idealized problem that is presented to an idealized (and unlimitedly
powerful) problem-solver with the actual problem that is to be attacked by a problem-
solver with limited (even if large) computational capacities". So, in a way, if the
problem-solver's control complexity is below the design complexity of the decision rule,
he himself encounters an ill-structured problem, or equivalently, his decision rule is
unstable. Then, it is desirable to redesign the decision rule in such a way that his
ill-structured problem becomes well-structured to the extent that the new design
coincides with the computational power of the problem-solver.
7 H. Simon suggests a 'common sense' test based on the introspective knowledge of our
own judgmental process.
BIBLIOGRAPHY
[1] Arbib, M. A., (ed.), Algebraic Theory of Machines, Languages and Semigroups,
Academic Press, New York, 1968.
[2] Ernst, G. W. and Newell, A., GPS: A Case Study in Generality and Problem
Solving, Academic Press, New York, 1969.
[3] Futia, C., 'The Complexity of Economic Decision Rules' I, Bell Laboratories,
Murray Hill, Jan. 1975.
[4] Gaines, B. R., 'Axioms for Adaptive Behavior', Int. Jour. Man-Machine Studies 4
(1972), 169-199.
[5] Gottinger, H. W., 'Complexity and Dynamics: Application of Dynamic System
Theory', IEEE Transactions SMC (1976), 867-873.
[5a] Gottinger, H. W., 'On a Problem of Optimal Search', Working Paper No. 30, Oct.
1975, Inst. of Math. Economics, Univ. of Bielefeld, W. Germany, to appear in
Zeits. Oper. Research, Ser. A, 1977.
[6] Leibenstein, H., Beyond Economic Man: A New Foundation for Micro-economics,
Harvard Univ. Press, Cambridge (Mass.), 1976.
[7] Marschak, J., 'Guided Soul-Searching for Multiple-Criterion Decisions', in M.
Zeleny (ed.), Multiple-Criteria Decision-Making, Springer Verlag, New York 1976,
pp. 1-16.
[8] Rhodes, 1., Application of Automata Theory and Algebra, Lecture Notes, Dept. of
Mathematics, Univ. of California, Berkeley, CA.
[9] Roberts, F. S., 'What if a Utility Function Does Not Exist,' Theory and Decision 2
(1972).
[10] Selten, R., 'The Chain Store Paradox', Working Paper No. 18, Institute of
Mathematical Economics, University of Bielefeld, W. Germany, July 1974.
[11] Simon, H. A., 'A Behavioral Model of Rational Choice', in H. A. Simon, Models of
Man, 1. Wiley, New York, 1957, Chapter 14.
[12] Simon, H. A., 'Bounded Rationality', in C. B. McGuire and R. Radner (eds.),
Decision and Organization, North Holland, Amsterdam, 1971.
[13] Simon, H. A., 'The Structure of Ill-structured Problems', Artificial Intelligence 4
(1973), 181-201.
[14] Suppes, P., 'The Measurement of Belief', Jour. Royal Statist. Soc. 36 (1974),
160-175.
DEEPAK K. MERCHANT"I
DISCRETE OPTIMIZATION AND SOCIAL

DECISION METHODS*
O. INTRODUCTION
Optimizational methods have been commonly used in societal resource

allocation-distribution problems in the last few decades. A particular
social decision problem is of aggregating individual preferences into a
social preference. Such an aggregation of preferences over a set of
alternatives gives rise to two basic problems: (i) the ranking problem
(or the agenda stipulation problem) where the society has to produce a
ranking of alternatives, and (ii) the choice problem (or the candidate
selection problem) where the society is interested in selecting one or
more of the alternatives. Axiomatic approaches to the aggregation
problems have been researched since the fifties, and there are varied
possibility and impossibility results which specify environments re-
stricted to differing degrees a'S they relate to aggregation procedures.
Most of the research along such lines may be referenced in Arrow [1],
Black [2], Riker and Ordeshook [18] and Sen [21].
This paper concentrates on the dual aspect of the research men-
tioned so far: that of engineering a social decision when individual
preference profiles are given. We are primarily interested in identifica-
tion and analysis of procedures that when applied to preference data
produce social ranking or desired decision. More formally, given a set
of alternatives d = {I, 2, ... , n}, a set of individuals {I, 2, ... , m}, and
a profile rz; = {Pl' ... ,Pm}, we are interested in procedures ~ which
map the profile rz; of the m individuals into a set '1It;
~: rz; ~ '1It.
Here '1It may be the set of all orderings or all preorderings, and
elements Pi of rz; can be in terms of pairwise comparison of alternatives
or ordering type data or preorderings. The properties of the same
mapping ~ can vary significantly depending on what restrictions are
imposed on the inputs. We do not commence with axiomatic premises
about what properties must be satisfied by g to qualify, but first
stipulate g and examine the properties to see which are not obeyed and
271
272 DEEPAK K. MERCHANT
whether we can tolerate such omissions. Many such functions have

been proposed for selecting a winner from a set of alternatives or
ranking the elements of such a set. No one method can satisfy all the
nice properties that one could think of (the impossibility theorem
guarantees no more than three out of the well-known set of four
reasonable properties), and, therefore, the voters usually select a
method which gives them a set of properties they consider suitable for
their voting situation. Very often simplicity of use commands a pre-
mium, and thus the method of majority rule is a very commonly
accepted voting procedure. This, however, should not preclude a
careful analysis of the various voting procedures for establishing their
benefits and disadvantages, so that informed voters may have a bigger
set of procedures to select from. Such analyses are useful especially
when the disadvantages associated with common procedures are
deemed unacceptable.
The approach we have stated is liable to give rise to enumerable
mappings ~. However, not many manage to qualify as 'reasonable'
from the viewpoint of tolerable property sets. Also, it so happens that
most of the optimizational methods that have been proposed from
different motivations are in fact equivalent as we shall see later.
The paper has three sections corresponding to the three objectives
for writing it. The first section deals with aggregation procedures that
have been suggested for producing societal rankings. We develop these
procedures from definitions and try to bring out fully the inherent
equivalences within them thereby laying a strong claim for inter-
disciplinary efforts for further research in the area of social decision
making. The second part deals with some basic analysis of strategy-
proofness considerations for optimization procedures. Here we are
trying to exhibit the enormous combinatorial complexity associated
with any such endeavour. Finally, some conclusions are drawn and
potential areas of research are suggested. Effort has been made to
make this paper as self-contained as possible.
1. PROCEDURES FOR AGGREGATION
1.1. Historical Developments
Research in practical approaches to making social decisions dates back

to the eighteenth century with researchers such as Borda [4], Condor-
DISCRETE OPTIMIZATION 273
cet [7] and Dodgson (alias Lewis Carroll) [8]. Condorcet, after encoun-
tering intransitivity in aggregation of individual preferences, proposed
in 1785 that, for the purpose of selecting one alternative out of many,
if no alternative receives an absolute majority, then the alternative that
is preferred to each of the alternatives in pairwise comparison by
simple majority rule should be selected winner. Such a winner (com-
monly referred to as Condorcet winner) may or may not exist in a
given voting situation. Dodgson [8] in one of his several small pam-
phlets on this issue seems to favor the concept of Condorcet winner,
and suggests that if a Condorcet winner does not exist, then the
alternative that would acquire the status of a Condorcet winner
through the least number of 'inversions' of votes may be declared
elected. An interesting commentary on these and other historical
narrations are available in Black [2].
Borda ranking function [4] is an old and simple method. Each
individual ranks the n alternatives, and the Borda function assigns a
score b to the last ranked alternative and b + (n - r)a to the rth ranked
alternative, where a> 0, b 2: O. Then it sums up the scores for each
alternative, and the social ranking is determined by giving first rank to
the alternative with the highest total score, second rank to the alterna-
tive with the next highest total score, etc. It is easy to see that the
outcome is invariant under linear transformations of the scoring func-
tion, that is, it does not matter what values of a and b are selected
when a> 0 and b 2: O. Usually, a = 1 and b = 0 have been the popular
choice. Borda function is easy to use and as it can be verified easily,
gives transitive outcomes. It also has nice properties including Pareto
optimality, but suffers from the defect of sometimes making the
outcome a function of the number of alternatives. Almost all the work
on mappings ~ in recent years has taken help from discrete optimiza-
tion methods. Such formulations have been investigated by Blin,
Bowman, Colantoni, Kemeny, Kemperman, Levenglick, Merchant,
Rao, Whinston, and others (see references [3], [5], [10], [11], [13],
[15], [16] and [17]). We shall now deal with some of the different
procedures and their equivalences.
1.2. The Kemeny Model
First we shall study the Kemeny model. It has been presented by

Kemeny [10], and a good discussion of it is available in Roberts [19,
Ch. 7]. Kemeny function operates on a distance metric d. When there

are n alternatives {aI' a2, .. . , an }= V, and m voters specify their
likings by giving preorderings over the set V as {RJ> R 2, ... , R m },
Kemeny function seeks a preordering R such that
m m
L {d(R, Ri )}' :5 L {d(R, RiW

i=l i=l
for any preordering Rover V. Normally we consider the median

problem resulting from 1= 1. For 1= 2, we get the mean problem, which
seems to cause substantial complexity in analysis, so most work related
to Kemeny method has been restricted to the median problem. As is
the case with problems involving optimization, there exists here, as
well, some arbitrariness or sUbjectivity in deciding the nature of the
criterion function.
The next question involves selection of the distance metric. The
distance function d is a real-valued function (since we shall need real
numbers for determining 'optimality') d: !JJt x !JJt ~ R 1 where !JJt is the
set of all permutations (rankings) and Rl is the real line. The function
d is also stipulated to satisfy the following axioms:
AXIOM 1
(i) d(Rl> R 2) ~ 0 for R 1 , R2 E!JJt, and d(R 1 , R 2) = 0 if and only
if Rl =R 2,
(ii) d(R 1 , R 2) = d(R 2, R 1 ), and
(iii) D(R 1 , R 2 ) + d(R2' R 3) ~ d(R 1 , R 3), and the equality holds if
and only if R2 is 'between' Rl and R 3.
The 'betweenness' is defined thus: R2 is between Rl and R3 if for any
two alternatives i and j, R2 agrees with the ranking of Rl or agrees
with the ranking of R 3, or if Rl prefers i over j and R3 prefers j over i
and R2 ties i with j.
AXIOM 2. If 1T is any rule of permutation, then d(Rl> R 2 ) = d( 1T(R 1 ),

1T(R2 »·
AXIOM 3. Let Rl = {a~, ... , a~} and R2 = {ai, . .. , a~}, and let af =
af for l:5i:5k and t:5i:5n. Then, d(Rl>R2)=d(RLR~), where
R l-{a
i -
i
k+l> ... , ai,-1'
}
AXIOM 4. (Condition for convenient multiples). If RI ~ R2> then

d(R 1 , R 2 ) 2: 1, and there exist distance Rl and R2 in rJt such that
d(Rl> R 2 ) = 1.
Kemeny [10] has shown that for n 2: 2, there exists a unique distance
function d: R x R ~ IR which satisfies the four axioms.
If an individual prefers alternative s over alternative t, it will be
denoted as sPt, and if a social outcome has the same preference, it will
be given as s» t. In either case, sIt will denote indifference. The
distance function used by Kemeny is d(Rl> R 2) = Li>j cf>R"R2 (i, j), where
2 if Rl has iPj, R z has jPi,

2 if RI has jPi, R2 has iPj,
1 if Rl has iPj or jPi, R2 has iIj,
<I> R b R 2 (i, i) =
1 if Rl has iIj, R2 has iPj or jPi,
0 if Rl & R2 have the same preference
vis-a-vis i and ;.
Then the median problem can be written as the problem to find R such
that
m m
L L <l>R.R (i, j) ~ L L <l>R,R (i, j),

k=l i>j
k
k=l i>j
k
for any R. The function <I> can be alternatively written as
4>R b R2 (i, j) = 18R1(i, j)- 8 R2 (i, j)1,
where 8 R '(i, j) is 1, 0, -1 when R t has iPj, iIj, and jPi respectively.

Though this problem is well formulated, determining R is not an easy
task in general from the computational point of view. Also the formu-
lation is in terms of absolute values of differences of certain index
functions, and hence it is difficult to obtain any direct insight. In
Section 1.7, we shall introduce an integer programming formulation of
the Kemeny model which has directly interpretable variables.
1.3. The Integer Programming Model
We first need to characterize transitivity property. A binary relation is

said to be transitive if for all triples {aI' a2' a3} in set V of alternatives,
It is well known (see for instance, Sen [21], p. 47]) that if transitivity
holds for all triples, then it must hold for the whole set V. We can give
this condition in terms of a set of inequalities on a set of discrete
points. Let {PiJ be a set of variables satisfying
(1) Pij +Pji = 1, 'Vi, j E V, i¥- j,
(2) Pij+Pjk+Pki:52, 'Vi¥-j¥-k¥-i; i,jEV,
and
(3) Pij=O or 1.
There are 2" solutions to (1) and (3), but only n! of these satisfy (2) as
well. Let us give a correspondence to {Pij} in terms of ranking. If Pij=l,
it shall be taken to mean i» j. Then (1) and (3) imply completeness,
that is, for any pair of alternatives i and j, the social outcome will
either prefer i over j or j over i. Condition (2) then is easily seen to
en~urc transitivity over all triples. Since the relation is complete, the
tnmsitivity property also belongs to the whole set V. To see this,
consiJer a small example. Suppose a set of four alternatives is intransi-
tive with Pij =l, Pjk =l, P kl =l, and Pli=l. Now either Pik=O or Pik=l.
If Pik = 0, then by (1) P ki = 1, and we get a violation to condition (2)
since Pi; +Pjk + Pki = 3. If Pik = 1, then we get a violation to condition (2)
since Pkl +Pli +Pik = 3. Thus in general it can be shown that a solution to
(1), (2), and (3) always corresponds to a transitive (strict) ordering and
vice versa. It may be noted that this mechanism does not have the
capability of considering indifference, but later (in Section 1.7) we shall
expand the constraint set to take care of this deficiency.
We shall now consider some of the objective functions proposed and
analyzed by Bowman and Colantoni [5], Blin and Whinston [3],
Merchant and Rao [17], and Merchant [15]. Let us define p* = {pm as
the voting matrix where an element pt is the fraction of votes
'favoring' i over j. For the time being, the indifference votes may be
handled in two ways as suggested by Merchant and Rao [17]: Let vij be
the votes favoring i over j, and vij be the votes indifferent between i
and j. Then one way is to apportion vt equally, that is, let pt =
(Vii + vi/2)/m and pt = (Vji + vi/l)/m. The second way is to ignore the
indifferent votes and normalize the preference votes by having pt =
Vi/(Vij + vj ;) and pt = 1- pt. Then we define a class of real-valued
distance functions:
d(P*, P) = L dij(Pt, P
i=j
ij )
where
(i) {Pij} satisfy (1), (2), and (3)

(ii) dij(Pt, (3) $ dij(Pt, 1- (3) when {3 corresponds to
min/3E{o,l} IPt- (31, and
(iii) d;j(pt + ,,/, (3) ~ dij(Pt, (3) for any perturbation "/ (maintain-
ing 0 $ pt + "/:::; 1) when (e - (3)( ,,/) > 0 where {3 E {O, 1} and
O<e<1.
These obscure looking conditions are, in fact, for obtaining a ranking
(condition (i)), and for imposing monotonicity of Pii and pt (conditions
(ii) and (iii) respectively). These functions are equivalent to a class of
majority decision functions given in [5]:
(4) d(P*, P) = Li,i (Xij IPt- Pijl\
for k > 0, (Xii> O. Bowman and Colantoni [5] show that (4) is actually a
linear function in variables Pii, say Li gijPij. So the social decision
problem can now be formulated as an integer programming problem
that minimizes L,j gijPij subject to (1), (2), and (3). This formulation
respects a simple majority rule decision, if transitivity is inherently
provided, that is, if pairwise choice based on simple majority rule gives
a transitive order, then the integer program will also give that order as
optimal (see Merchant [16]).
Some more results relating to this formulation may be mentioned
here briefly. Merchant and Rao [17] have shown that the optimal
orders given by k = 1 and k = 2 in (4) are identical, and have derived
two algorithms for the Tchebychev problem when k = 00. Merchant
[16] has shown that for 1 < k < 2 in (4), the problem need not be the
same as when k = 1 or k = 2.
1.4. The Permutation Formulation
Blin and Whinston [3] present this formulation in terms of permutation

points with motivation from the subject of pattern recognition.
Consider the P* matrix defined in the previous section. Let 'IT be a

permutation on set V. Then the permutation formulation seeks that 'IT
which maximizes Li<j P'!(i), .... (j)' or equivalently, the permutation corres-
ponding to which the sum of all the elements of the permuted p*
matrix above the main diagonal is maximized. Here also it is not
difficult to see that if simple pairwise comparison yields a transitive
ordering by the method of majority rule, the permutation model will
give the same order as optimal as did the integer programming model
in the previous section. The reason is that each element above the
main diagonal is at least 0.5, a situation which cannot be improved
upon. It can be shown, in fact, that the permutation formulation is
equivalent to the integer programming formulation (see Merchant
[16]). The intuitive interpretation given to the permutation model
is that it gives an ordering which maximizes an index of societal
agreement.
1.5. A Social Ranking Function
We shall now briefly describe another function called SRF (Merchant

[15]). Let Vij be the number of votes for i over j, (i, j E V), and the
excess votes be Cij = vij -- vii" Also let 'T be the set of ordered pairs (i, j)
where cij is strictly positive. Then SRF seeks {Pij} that minimize
L(i,j)ET Cij~i subject to (1), (2), and (3). The formulation can be inter-
preted as the one that finds a ranking which is closest to the given
voting data (p*) in terms of the number of perturbations applied in
order to get transitivity. The formulation can also be used to give
further interpretations and analyze properties given in Section 1.6.
Coincidentally, this model also comes out to be equivalent to the
integer programming model (k = 1,2) and the permutation model.
1.6. Properties of the Equivalent Functions
Through the SRF formulation, one can study (see [15]) most of the
properties commonly associated with ranking functions vis-a-vis the
equivalent functions that have just been presented. Of the five proper-
ties in the Arrow's impossibility theorem, our functions satisfy
monotonicity (positive association of social and individual values),
unrestricted domain, citizens' sovereignty, and non-dictatorship, but
fails to satisfy the condition of independence of irrelevant alternatives.
It is known (see for instance Riker and Ordeshook [18, p. 92]) that two
of the conditions mentioned above as satisfied also imply that the
property of Pareto optimality (when all voters prefer i to j, the social
outcome does the same) is also satisfied. In addition, properties of
non-vetoer (no one individual can block any outcome), faithfulness
(when the society consists of only one member, his ranking is the
societal ranking), neutrality (the alternatives count, not their indexing
number), and anonymity (no use made of the properties of the voter
himself) are also satisfied by our functions.
Not satisfying the condition of independence of irrelevant alterna-
tives (IIA) seems to be the key defect of these functions. However, this
property has always been controversial. We shall cite two references in
this regard. Luce and Raiffa [14, Section 14.5] raise objections to IIA
as a possible bone of contention, and Riker and Ordeshook [17, Ch. 4]
criticize IIA for not allowing interpersonal comparisons of utility and
measures of intensity. However, the latter pair of authors favor IIA in
its property of selecting Condorcet winners. We may note that our
procedures always select Condorcet winners (as shown in [15] for the
SRF). In addition it is also shown that given a social ranking at»
a2 » ... »an> if some alternatives from the front tail (starting with at)
and/or some alternatives from the end tail (ending with an) are
eliminated from consideration altogether, the remainder of the set V
still has the truncated ranking as an optimal ranking.
Computations for these problems are unfortunately not easy since
the problem structure is NP-complete. Small problems can be handled
easily with comp.Lete enumeration (n!). A heuristic has been suggested
(see [15]) which appears to give excellent results for n = 5, 6, and 7
alternatives through hand calculations.
1. 7. Kemeny Model as an Integer Program
We noted in Section 1.2 that the Kemeny model, as was initially

formulated obscured the structure of the problem through use of
indexing functions. An integer programming formulation has been given
by Merchant [16]. The new formulation does not reduce computational
complexity, but is in terms of direct variables and possibly lets us
understand the problem much better. The model is built by adding
variables that allow for indifference possibilities. In addition to the
variables {Pij} defined before, let us define Pij = Pji = 1 if the social
outcome gives ilj. Then condition (1) is modified to
(1') ~i +Pij =1
for all pairs {i, j}. Next, we would like to guarantee indifference
consistency which consists of two conditions: (i) If k» i and ilj, then
social outcome must give k» j, and (ii) if ilj and jlk, then the social
outcome must give ilk. It is shown in [16] that indifference consistency
is achieved by imposing two more types of constraints: for all triples i,
j, k,
(5) Pij + P jk +Pki ::;.2,
and
(6) Pij + ~k + P ki ::;.2.

Also, let
Pij = 0,1.
Now to construct the objective function, we note that if in the solution
Pij=l, then the cost is 2Vji +Vij , where vij (or VjJ is the number of
voters who reveal indifference between alternatives i and j. Similarly if
~i = 1, the cost is 2 Vij + Vij' and if Pij ~ 1, th~n the cost is vii + Vii' Since
only one of the variables P ij , ~i and P ij (or Pji ) can be 1, it follows that
the objective function is (2Vji + Vij)Pij + (2Vij + Vij)Pji + (Vij + Vji)Pij, or the
algebraic equivalent
where c ij = v ij - Vji> for each pair {i, j}. So the Kemeny model can now
be equivalently written as minimizing summation over ordered pairs
{i, j} the expression (8) subject to (1'), (2), (3), (5), (6) and (7).
To relate the Kemeny model to the other models is now a relatively
easy task. Firstly we observe that if indifferent votes are not allowed
from the individual voters (the so called condition of concerned
voters), then Vij == Vji is identically equal to zero, and the objective
function becomes mini¢j CjiPij which is the same as that for SRF (by
Section 1.5, and Lemma 1 in [15]). Secondly, constraints (5) and (6)
become redundant if we stipulate that indifference is not allowed in the

outcome, i.e., Fij == O. Then the constraint set reverts back to (1), (2),
and (3), and thus the Kemeny model becomes specialized to SRF and
hence equivalent to the other formulations we studied earlier. Thus
this different formulation of the Kemeny model has enabled us to
establish rather easily the fact that Kemeny model is the most general
model which contains the other models.
Prior to going to Section 2 where we shall consider some aspects of
strategy-proofness, we shall note that some well-known procedures in
non-parametric statistics can also be identified with certain optimiza-
tional procedures we have studied.
1.8. Non-parametric Approaches
We shall briefly consider two non-parametric ranking methods: Ken-

dall's correlation coefficient tau (7) and Spearman's correlation coeffi-
cient rho (p). Consider R1 and R2 to be two rankings where IVI = n.
Score +1 if R1 and R2 agree about ranking i and j and -1 otherwise.
Let W denote the sum of the scores over all the unordered pairs {i, j}.
Then Kendall's tau is defined by
It is interesting to find (Kendall [12]) that Kendall's tau is simply a

linear transformation of the Kemeny distance function, the relationship
being given by
Next let,
if i > j in R i,
if j> i in R i•
Let,
n n
Xj = I
i=1
P~j' and Yj = I
i=1
P~.
i"j i"j
Then Spearman's rho is given by,
where
L (x; - y;)2.
n
q = (1/2)
;=1
It can be seen (Kendall [12]) that given a voter profile {Rl' ... , R m }, R
which minimizes L g(R;, R) is exactly the ranking that is given by the
Borda method.
2. STRATEGY-PROOFNESS AND OPTIMIZATION METHODS
Here we consider a very different aspect of the optimization models:

the question of strategy-proofness, that is, the implications of revela-
tion of false preferences. Most of the literature dealing with choice
problems and manipulability of voting schemes is of recent vintage.
Gibbard [9] and Satterthwaite [20] have shown that for three or more
alternatives, the only non-manipulable procedure is dictatorial. With-
out going further into that literature, we shall attempt some basic
analysis of sincere voting (or revealing true preferences) and sophisti-
cated voting as it applies to the general optimization model.
Let us consider three voters voting on three alternatives {a, b, c}. Let
(Xi> f3;, 'Y; represent the rankings specified by voters 1, 2, and 3
respectively, where
6
c»b»a
Now applying SRF model, we consider 63 = 216 possible combinations

of orders revealed, and Table I notes the alternative that wins in each
case. The symbol tl represents a three-way tie, that is, SRF does not
give a unique winner.
Table II gives the number of times a particular alternative won when
the third voter revealed his vote to be ranking 'Y; for all i.
TABLE I
SRF winners
'Yl 'Y2 'Y3 'Y4 'Y5 'Yr,
aI' {31 a a a a a a
aI' {32 a a a a a a
aI' {33 a a b b a b
aI' (34 a a b b A b
aI' {3s a a a A c c
aI' {36 a a b b c c
a 2, {31 a a a a a a
a z, {32 a a a a a a
a2' {33 a a b b a A
a2' {34 a a b b c c
a z, {35 a a a c c c
a z,{36 a a A c c c
a3' {31 a a b b a b
a 3, {32 a a b b a A
a3' {33 b b b b b b
a 3, {34 b b b b b b
a3' {35 a a b b c C
a3,{36 b A b b c C
a 4, {31 a a b b A b
a4' (3z a a b b c c
a 4, {33 b b b b b b
a 4,{34 b b b b b b
a4,{35 A c b b c c
a 4, {36 b C b b c c
as, (31 a a a A c c
a 5, {3z a a a c c c
a5' {33 a a b b c C
a2' {34 A C b b c c
as, {35 C C C C C C
a5' {36 C C C C C C
a6' {31 a a b b c C
a 6, (3z a a A c c C
a6,(33 b A b b c c
a 6,{34 b c b b c c
a6' {35 c C c c c c
a6, {36 c C c c c c
TABLE II
Number of times winner
Winner
Orde
revealed a b c ~
a»b»c 22 8 4 2
a»c»b 22 4 8 2
b»a»c 8 22 4 2
b»c»a 4 22 8 2
c»a»b 8 4 22 2
c»b»a 4 8 22 2
This analysis appears to be compatible with intuition. When a voter

does not know the preferences of the other two voters when SRF is
being used to decide the outcome, the dominating strategy is to reveal
the true preferences. This domination is uniformly monotonic in the
sense that if ai is revealed to be preferred to aj' then the probability of
ai being selected the winner is strictly greater than that of a j being so
selected. This analysis gives an additional reason to consider SRF (and
equivalent procedures) consistent. It may be conjectured in passing
(since the author is unfamiliar with any such result) that the strategy of
revealing true preferences under total uncertainty may be the dominating
one whenever the rule used for selection is non-perverse, that is, satisfies
the condition of positive association of social values with individual
values.
The more interesting gaming situation occurs when the voters are
aware of the true preferences of each other, but have the option of
revealing any ranking for the purpose of selecting the winner. At this
stage, we can look back at the Gibbard-Satterthwaite theorem which
essentially equates the existence of a social welfare function satisfying
Arrow's axioms with the existence of a non-dictatorial strategy-proof
procedure. Thus we know that SRF cannot be strategy-proof, and we
shall not get a Nash equilibrium. So we attempt to see what kind of
mixed strategy produces an equilibrium.
Consider again the same case with three voters and three alterna-
tives. We make a restrictive assumption: If u(i) is utility for alternative
i, and if {a, b, c} is the order preferred, then u(a) - u(b) < u(b)- u(c).
This corresponds to the condition that the individual prefers his second
choice to a tie between all three alternatives. This can be seen as
follows:
1(u(a)+ u(b)+ u(c»< u(b)
¢> u(a)+ u(b)+ u(c)<3u(b).
¢> u(a) = u(b)< u(b)- u(c).
Let u(a) = p" u(b) = 1 and u(c) = 0, where 1::::; p, < 2. By working out
the algebra, we find that the equilibrium occurs when the true prefer-
ence ranking is revealed with probability (2p, -1)/(P,1 + 1) and the first
two alternatives of the true preference ranking are interchanged with
probability (2-P,)/(P,1 + 1).
Unfortunately, such analysis neither gives us more insight nor seems
to be of any practical interest. In fact, analysis of deception tends to be
very involved algebraically. Brams and Zagare [6] have studied certain
deception techniques in other three voter, three alternatives situations.
It is their opinion that unless significant theoretical simplifications are
made, it may not be worthwhile to extend their models any further
since the computations the voters must make rapidly become highly
complicated as the games grow in size. The increase in numbers of
implicit or explicit coalitions will, of course, complicate the analysis
even further. The only major results in related areas are the negative
type or the impossibility type which seem to be provable in rather
general settings.
3. POTENTIAL RESEARCH AREAS AND CONCLUDING COMMENTS
Based on the discussion and results presented so far, we can isolate the
following as interesting research topics.
(1) Perhaps several methods, which are well known from different
considerations, may have bearings on optimizational methods of social
choice. For example, the work done in the analysis of paired compari-
sons may be of great interest. A multi-disciplinary approach is more
likely to be successful in such research.
(2) While all the models look reasonable, it is necessary to find out
what appeal they have from a practical point of view. In other words, it
would be of interest to know under what circumstances would a group
want to use one of the optimization procedures. Such information

would establish the relative priorities groups tend to give to simplicity
of use as against the properties of optimization procedures.
(3) Often we are not interested in the whole rankings, but simply in
subsets to be preferred. Under those circumstances we may tolerate
inconsistencies or in trans itivi ties in the output while optimizing the
appropriate criterion functions. When such methods are devised, it
would be interesting to see whether these procedures are robust and
consistent.
(4) Just as there is potential for deception in individual strategies,
there could be deception potential within the selection of the procedure
itself. The relative positions of different optimizational as well as
non-optimizational procedures need to be studied since this aspect
precedes all others.
(5) Different models should be extensively questioned even though
they may appear respectable in literature. For instance, Kemeny
method gives half of a point for change from indifference to strict
preference. If indifference is to be expressed as 'it does not matter
which alternative turns out better in the outcome' philosophy, then
perhaps the cost structure modelling is inappropriate in the Kemeny
method.
To sum up, we can say that researchers have been able to develop an
interesting application of mathematical tools and operations research
to a long-standing problem in social sciences and welfare economics.
Though real life applications of optimizational approaches are known,
the practicability of these methods is not yet established. Many social
decision problems tend to degenerate into the dictatorial format, and
the question of equal importance to each voter does not arise. The
optimizational methods given relate primarily to voter groups where
the decisions are not made by subgroups or when a representative idea
is to be obtained from a large group of voters. More work along the
lines of suggestion (2) will be helpful in clearing these questions.
NOTE
t The editors deeply regret that D. K. Merchant died in April 1978.

* This paper was presented at the International Symposium on Decision Theory and
Social Ethics held at Schloss Reiscnsburg, Germany, June 24-30, 1976.
BIBLIOGRAPHY
[1] Arrow, K. J., Social Choice and Individual Values (2nd Ed.,), Wiley and Sons,
1962.
[2] Black, D., The Theory of Committees and Elections, Cambridge University Press,
1958.
[3] Blin, J. M. and Whinston, A. B., 'Discriminant Functions and Majority Voting',
Management Science 21, 5 (1975), 557-566.
[4] Borda, Jean-Charle, de, 'Memoire sur les E1ctions au Scrutin', Histoire de
l'Academie Royale des Sciences, 1781; discussion also in Black [2].
[5] Bowman, V. J. and Colantoni, C. S., 'Majority Rule Under Transitivity Con-
straints', Management Science 19, 9 (1973), 1029-1041.
[6] Brahms, S. J. and Zagare, F. c., 'Deception in Simple Voting Games', mimeo-
graphed draft, Department of Political Science, New York University, October
1975.
[7] Condorcet, Marquis de, Essai sur I' Application de I' Analyse a la Probabilite des
Decisions Rendues a la Pluralite des Voix, Paris, 1785; discussion also in Black [2].
[8] Dodgson, C. L., A Method of Taking Votes on More than Two Issues, Clarendon
Press, Oxford, 1876; also reprinted in Black [2].
[9] Gibbard, A., 'Manipulation of Voting Schemes: A General Result', Econometrica
41 (1973), 587--602.
[10] Kemeny, J., 'Mathematics Without Numbers', Daedalus 88 (1959), 577-591.
[11] Kemperman, J. H. B., 'A Study of the Kemeny and Borda Social Orderings',
mimeograph, Department of Mathematics, University of Rochester.
[12] Kendall, M. G., Rank Correlation Methods, Charles Griffin & Co., 1948.
[13] Levenglick, A., 'Fair and Reasonable Election Systems', Behavioral Science 20
(1975), 34-46.
[14] Luce, R. D. and Rai/fa, H., Games and Decisions, Wiley & Sons, Inc., 1957.
[I?] Merchant, D. K., 'A Social Ranking Function', WP-7541, Graduate School of
Management, University of Rochester, Rochester, New York.
[16] Merchant, D. K., 'On Certain Preference Aggregation Procedures', WP-7647,
Graduate School of Management, University of Rochester, Rochester, New York.
[17] Merchant, D. K. and Rao, M. R., 'Majority Decisions and Transitivity: Some
Special Cases', Management Science 23, 2, October 1976.
[18] Riker, W. H., and Ordeshook, P. c., An Introduction to Positive Political Theory,
Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1973.
[19] Roberts, F. S., Discrete Mathematical Models, Prentice-Hall, Inc., 1976.
[20] Satterthwaite, M. A., 'Strategy-Proofness and Arrow's Conditions: Existence and
Correspondence Theorems for Voting Procedures and Social Welfare Functions', to
appear in Journal of Economic Theory.
[21] Sen, A. K., Collective Choice and Social Welfare, Holden-Day, Inc., San Francisco,
California, 1970.
REINHARD SEL TEN
THE EQUITY PRINCIPLE IN

ECONOMIC BEHAVIOR
It is the aim of this paper to throw some light on the way in which a
simple equity principle of reward allocation influences observed
economic behavior. Experimental results strongly suggest the rele-
vance of the principle for the resolution of economic distribution
conflicts.
The basis of the theoretical explanation proposed here is Homans's
theory of distributive justice, even though his terminology will not be
employed (Homans, 1961).1
From the normative point of view of modern utilitarian ethnical
theory, as it appears in the work of J. C. Harsanyi (Harsanyi, 1955),
the equity principle may not be justifiable as an adequate tool of
collective decision-making. Nevertheless, the fact that certain norma-
tive rules are often applied in practice, should not be neglected by the
theorist. Discrepancies between normative results of Bayesian decision
theory and empirically observed human behavior must be expected in
the light of the theory of bounded rationality (Simon, 1959; Sauer-
mann and Selten, 1962). The equity principle looks very reasonable as
a normative rule which can be applied by decision-makers without
extraordinary capabilities of logical analysis and computation.
Dividing a dollar. Let us first look at a very simple experimental

situation: Two experimental subjects are asked to divide a dollar
among themselves. This experiment has actually been performed by
Nydegger and Owen (Nydegger and Owen, 1974). Invariably the
subjects agreed to split evenly. Each of them received 50 cents.
There are at least three different explanations for this kind of
behavior:
(A) The agreement is based on a normative equity principle.
(B) The agreement reflects the symmetry of the power situation.
(C) The agreement is at the only prominent point in the sense
of Schelling (Schelling, 1960).
289
Hans W. Gorringer and Werner LeinfeUner (eds.). Decision Theory and Social Ethics. Issues in Social Choice. 289-30 l.
Copyright © 1978 by D. Reidel Publishing Company. Dordrecht. Holland. All Rights Reserued.
290 REINHARD SEL TEN
Owen and Nydegger did not consider the ethical explanation (A) and
the prominence explanation (C). It was their intention to test game
theoretical solution concepts applicable to the situation.
Dividing 120 poker chips. In another experiment performed by

Nydegger and Owen (Nydegger and Owen, 1974) two subjects A and
B are asked to divide 120 poker chips among themselves; A receives a
payoff of 2 cents per poker chip and B receives a payoff of 1 cent per
poker chip. Invariably the result was that the subjects agreed on 40
chips for A and 80 poker chips for B. Thus they achieved an equal
division where each of them received 80 cents.
According to the Nash solution of the bargaining problem (Nash,
1950) favored by most game theorists, both A and B should receive 60
poker chips which corresponds to a payoff of 120 cents for A and of 60
cents for B.
Obviously the ethical explanation (A) and the power explanation (B)
are possible here, too. The applicability of the prominence explanation
(C) is dubious since the Nash solution, where both receive the same
number of poker chips, does not seem to be less prominent than the
equal decision with a payoff of 80 cents for both bargainers. One may
of course say that the equal division is more prominent because of its
normative significance. This version of explanation (C) is hard to
distinguish from explanation (A).
As we shall see in the light of other experiments it is not advisable to
follow the natural inclination of a game theorist to concentrate his
attention on power explanations.
Reward allocation experiments. An interesting line of experimental

research on individual reward allocation has been initiated by
Leventhal and his co-workers (Leventhal and Michaels, 1969) and has
been further pursued by Mikula and his associates (Mikula, 1973;
Mikula and Uray, 1973; Mikula, 1975).2 In a typical reward allocation
experiment two subjects perform a common task in separate rooms;
afterwards one of the subjects is asked to distribute a sum of money
between both of them. He can divide the sum of money in any way he
wants; he is free to take everything for himself.
In actual fact an experimental subject is rarely observed to exploit
his power in this situation. An equal division of the reward is a
frequent outcome.
EQUITY PRINCIPLE IN ECONOMIC BEHAVIOR 291
In most of Mikula's experiments the subject was led to believe that

he had contributed more (e.g., 60%) or less (e.g., 40%) to the common
goal. In the latter case, where the subject's own contribution appeared
to be inferior, a tendency towards a reward distribution in proportion
to the announced contributions was observed whereas in the former
case, where the subject's own contribution appeared to be superior,
the outcome was more in the direction of an equal division of the total
sum.
Obviously the experimental reward allocation decisions were
strongly motivated by considerations of social justice. The availability
of a measure of achievement enables the reward allocator to apply a
proportional equity rule. The proportional equity rule can be thought
of as a modification of the equal division principle. Whereas the equal
division principle prescribes the same reward for every person, the
proportional equity rule prescribes the same reward for every unit of
achievement.
The reward allocating subject in Mikula's experiments seems to
choose between two conflicting norms: the simple equal division prin-
ciple and the proportional equity rule. It is important to note that he
tends to solve this conflict in his own disfavor. Mikula attributes this to
a general norm of modesty which regulates social interactions between
persons of different status. Status differences are expected to be
acknowledged by the inferior partner and to be de-emphasized by the
superior partner (Mikula, 1975).
It must be pointed out that the monetary payoffs in the reward
allocation experiments reported in the literature were moderate. One
may ask the question whether a different kind of behavior would be
observed if the same experiments were performed with high money
payoffs. One may conjecture that the influence of social norms is
diminished in the face of substantial monetary incentives.
As we have seen, power explanations do not contribute anything to
the understanding of observed behavior in reward allocation experi-
ments. This suggests that equal payoff divisions in game experiments
with moderate money payoffs are due to the fact that the subjects'
behavior is guided by equity norms rather than power considerations.
Friedman's duopoly experiments. In Friedman's duopoly experiments

subjects who played the same asymmetric duopoly over many periods
were permitted to exchange written messages. Generally the subjects
succeeded to reach cooperation at a Pareto-optimal combination

(Friedman, 1967, 1970). Frequently this combination is at the 'equal
split point' where both profits are approximately equal. In other cases
the agreement is between the equal split point and the joint profit
maximum. Clearly the influence of the equal division principle can be
seen here, too, even if this principle is modified by a tendency towards
joint profit maximization. An interpretation in terms of a compromise
between two different social norms suggests itself.
Some further evidence from duopoly experiments. In the duopoly exper-
iments with continuous time and face to face bargaining performed by
C. C. Berg and the author the subjects usually succeeded to cooperate
in spite of the fact that agreements were not enforcible (Selten and
Berg, 1970). Two distinctly different modes of cooperation were
observed: (a) agreements with side payments providing for equal
money payoffs for both players at the end of the game and (b)
agreements without side payments at Pareto-optimal points with ap-
proximately equal profits for both players. These two modes of cooper-
ation explain fifteen of eighteen cases where cooperation took place.
Both modes of cooperation employ the same principle of equal
division but the measure of reward to which it is applied is different in
both cases since money payoffs included initial assets which were not
included in profits.
Power differences did not seem to have a visible influence on the
way in which payoffs were distributed as a result of agreements. Our
interpretation of the results was partly in terms of the prominence of
the equal division and partly in terms of the stronger player's willing-
ness to sacrifice his advantage for a chance to reach cooperation
quickly. A revision of this interpretation seems to be indicated in the
light of the research on reward allocation. These results suggest that
the influence of the principle of equal division is due to its character as
a social norm of distributive justice.
A general equity principle. The principle of equal division in its various
modes of application and the proportional equity rule can be under-
stood as special cases of a more general equity principle, applicable to
a wide range of situations which require the allocation of rewards to
the members of a group. Suppose that the group has n members,
numbered from 1, ... , n. In order to be able to apply an equity rule
similar to those discussed above it is necessary that there is an accepted
way to measure rewards; we shall refer to this way of measurement as

standard of distribution. For every possible reward allocation the stan-
dard of distribution defines a measure of reward rj for every group
member i, where rj is a non-negative real number.
If the situation requires nothing else than the distribution of a sum
of money it is natural to apply a standard of distribution which takes
the money payoffs to the group members as the measures of reward rj.
In order to illustrate the possibility of other standards of distribution
one may think of cartel bargaining about supply quotas where these
quotas can be taken as measures of reward. The case of the two modes
of cooperation in the duopoly experiments performed by C. C. Berg
and the author shows that sometimes several different standards of
distribution may be applicable to the same problem.
A second requirement for the application of the more general equity
principle is the availability of an accepted way to define an equitable
reward combination (r1>' .. , rn). This is done with the help of a stand-
ard of comparison which assigns a positive weight Wj to each group
member i. In many cases it is natural to apply an egalitarian standard
of comparison with Wi = 1 for i = 1, ... , n, but other standards of com-
parison are clearly possible. In the case of the reward allocation
experiments discussed above the announced measures of contribution to
the common goal supplied an alternative standard of comparison.
An equitable reward combination can now be defined as a combina-
tion (r1' ... , rn) which satisfies the following condition:
An equitable reward combination may be described as a combina-

tion which allocates the same number of reward units to every weight
unit. It is clear that the definition of an equitable reward combination
crucially depends on the standard of distribution and on the standard
of comparison which is applied to the situation.
Equitable cost distributions. The general equity principle can also be

applied to problems involving the distribution of costs rather than
rewards. Thus for example the costs of producing a public good may be
distributed among its users according to a suitable standard of com-
parison. The formal structure of the equity principle remains the same
in these cases, in spite of the fact that here a burden and not a benefit
is distributed among the members of a group.
Properties of standards of distribution and comparison. The standards of
distribution and comparison are not always uniquely determined by the
character of the situation. On the other hand, they are by no means
completely arbitrary. Generally the nature of the problem suggests a
finite number of alternative possibilities, among which the group
members have to agree.
An obvious requirement which must be satisfied by reasonable
standards of distribution and comparison is relevance to the problem.
A standard of distribution must be a meaningful measure of the
rewards or burdens to be distributed and a standard of comparison
must be justifiable as substantially connected to the problem. Admit-
tedly, this criterion of relevance is rather vague and needs interpreta-
tion in every special case. Nevertheless, it has an important influence
on the selection of standards.
A second property which standards of distribution and comparison
need in order to be able to serve their function as a basis for the
computation of equitable distributions, may be called 'accessibility'.
The numbers ri and Wi must be easily observable without any am-
biguity by all members of the group. Hidden variables like individual
utilities are not accessible and therefore not feasible as standards of
distribution or comparison. Social norms must be socially controllable.
Therefore accessibility is a very important property of the standards of
distribution and comparison.
Quota cartels. The literature on cartel formation illustrates the appli-
cation of the equity principle in an economic context (Kastl, 1963). In
quota cartels the supply quotas are a natural standard of distribution.
Some average of past supplies is often taken as standard of compari-
son. Capacities may serve the same purpose if the technology is such
that an unambiguous method of measurement is easily available.
Equity and power. It is hard to believe that the influence of the equity
principle on the resolution of economic distribution conflicts like that
of the quota cartel should be entirely due to a desire to conform to
social norms. It is plausible to expect that a powerful group member
tries to get more than his share. Nevertheless there may be compelling
reasons why a powerful individual may find it more profitable not to
press his advantage. Suppose for example that two partners A and B
must agree on the division of 100 money units and that on the one
hand no other standard of comparison than the egalitarian one is
applicable and on the other hand partner A is in some sense obviously
more powerful and therefore has a very good reason to ask for more
than 50. But how much more should he demand? In most cases it will
not be easy to justify any number between 50 and 100 as a natural
share of A. Hard bargaining may be required before any agreement is
reached if A insists on any such share, say 70. On the other hand B
knows that A is more powerful; therefore B accepts the principle that
A should get at least 50. If A proposes the even split, B will
immediately accept. In this way A can save himself a lot of trouble;
moreover he shows his magnanimity and establishes a favorable spirit
of cooperation.
Partner B has the same interest as A to reach an agreement quickly,
but unlike A he does not have a natural lower limit to his share other
than O. He cannot make a reasonable demand which is un disputably
smaller than his power adequate share. Therefore only A has the
possibility to act magnanimously in a secure way.
The concept of power. In the remarks on equity and power which have
been made above the concept of power has been used in a naive sense
which can be clarified by the following loose definition: power is the
capability to secure more than one's equitable share.-Those who are
able to do this are powerful whereas those who cannot even secure
their equitable shares suffer from a power deficit.
In comparison to J. C. Harsanyi's thorough discussion of the dimen-
sions of power this explanation is a rather crude one which cannot
claim to exhaust the problem (Harsanyi, 1962a,b). Nevertheless an
important aspect of the everyday use of the word seems to be captured
by relating power to equity.
Equity and coalition formation. It has been shown elsewhere that the
results of characteristic function game experiments with face to face
coalition bargaining agree surprisingly well with a rather simple theory
called equal share analysis (Selten, 1972). Three hypotheses charac-
terize a regular payoff configuration in the sense of this theory. The
first hypothesis, exhaustiveness, requires that no union of coalitions
which have been formed could have secured a greater collective payoff.
The second hypothesis is satisfied if the payoff configuration is in the

equal division core; this is the case if no alternative coalition could
have been formed by giving each of its members the same amount and
more than he received in the end. The third hypothesis requires that
within a coalition which has been formed a stronger player does not
receive a smaller payoff than a weaker player. (The exact definition of
'stronger' and 'weaker' will not be repeated here. In most experimental
cases the order of strength is intuitively clear.)
It has been shown that the set of regular payoff configuration is
always non-empty (Selten, 1972).
In order to illustrate the concept, let us look at the following
3-person game v in characteristic function form:
v(i)=O for i=1,2,3

v(1, 2) = 100 v(1, 3) = 90 v(2, 3) = 80
v(1, 2, 3) = 120.
Exhaustiveness requires that the three-person coalition forms and

distributes 120 among its members. Player 1 is stronger than players 2
and 3 and player 2 is stronger than player 3. The third hypothesis
asserts that the players agree on a payoff vector (Xl, X2, X3) which
reflects the order of strength; we must have
At least one of the players 1 and 2 must receive at least 50;

otherwise the payoff configuration could not be in the equal division
core, since (1,2) could form and divide the payoff of 100 evenly and
both 1 and 2 would receive more than in (Xl' X2' X3). In view of the
conditions imposed by the order of strength it follows that player 1's
payoff Xl is at least 50. Similarly it can be seen that (Xl' X 2 , X3) cannot
be in the equal division core unless at least one of the players 2 and 3
receives at least 40. It follows by X22: X3 that we must have X2 2: 40.
The payoff vectors belonging to the regular configurations for v are
characterized by the following conditions:
XI 2:50 X22:40
X I 2: X2 2: X3 2: 0
Xl + X2+ X3 = 120.
Obviously the egalitarian payoff vector Xl = X2 = X3 = 40 is excluded

by these conditions. Among the payoff vectors belonging to regular
configurations, the vector (50, 40, 30) may be thought of as least
different from the equitable distribution with the egalitarian standard
of comparison.
As we have seen equal share analysis does not simply predict equal
payoff divisions, but nevertheless the equity principle plays an impor-
tant role in the determination of the set of regular payoff configura-
tions. Whereas the payoff vectors in the ordinary core are stable
against alternative coalition possibilities with arbitrary payoff divisions,
the equal division core requires a weaker stability property. Only those
distributions of coalition payoffs are considered to be potentially
destabilizing which correspond to the principle of equal division. Such
coalition agreements are especially dangerous alternatives since the
equity norm makes it easier to accept them. The weaker partners know
that they cannot expect more than an equal share and the stronger
partners do not have to justify their demands if they propose an equal
division.
The strength of a player is perceived as related to his power in the
sense which has been discussed above. Therefore it appears to be
unreasonable to form a coalition where a weaker partner receives a
higher share of the payoff than a stronger partner. This is quite clear if
power is seen as related to equity.
Generalization of the equal division core. The experimental situations
which gave rise to the development of equal share analysis are such
that no other standard of comparison than the egalitarian one suggests
itself. In practical economic conflict situations, which can be modelled
as characteristic function games, other standards of comparison may be
more natural. If the players are firms and the coalitions have the
meaning of mergers, the value of a firm's total assets may be a suitable
standard of comparison. Obviously for any given standard of compari-
son we can introduce a corresponding modification of the equal
division core which may be called the equity core: Let WI> ••• ,Wn be
the weights of the players according to the standard of comparisons;
the equity core of an n-person characteristic function game v is the set
of all payoff configurations whose payoff vectors (Xl' ... , xn) have the
property that there is no non-empty coalition C with:
L w·' v( C) > Xi for every i E C.

iECWi
The left side of this inequality shows the equitable share of player i
in coalition C. As in the case of the equal division core the standard of
distribution is given by the payoff Xi' If the characteristic function v is
such that v(i) = 0 does not hold for every player i, one may wish to
consider another standard of distribution, namely Xi - v(i). In this way
we receive the normed equity core characterized by the condition that
for no non-empty coalition C we have:
L Wi
ieCwi
[V(C)- L V(i)]>Xi-V(i).
ieC
This is the obvious generalization of the normed equal division core

which has been defined elsewhere (Seiten, 1972).
Non-equitable distribution conflicts. Undoubtedly there are some im-

portant economic distribution conflicts to which the equity principle
cannot be applied, since it is impossible to find reasonable standards of
distribution and comparison. Collective wage bargaining seems to be a
case of this kind. Such distribution conflicts may be called non-
equitable.
A fruitful experimental approach to wage bargaining has been
provided by the macroeconomic decision game KRESKO (Tietz,
1973). R. Tietz and H.-J. Weber have developed several ingenious
theoretical explanations of the KRESKO-data (Tietz and Weber,
1972; Tietz, 1975; Weber and Tietz, 1975). This research suggests that
in non-equitable two-person bargaining situations the outcome is de-
termined by a principle of balanced aspiration levels whose spirit is not
dissimilar to that of the equity principle. The theoretical explanations
by R. Tietz and H.-J. Weber do not only concern the final outcome but
the whole bargaining process. A detailed discussion of this work will
not be given here. We shall restrict our attention on the final outcome
in order to exhibit the connections between the principle of balanced
aspiration levels and the equity principle.
The principle of balanced aspiration levels. The principle is based on

the idea that before the beginning of a bargaining session both partners
form various aspiration levels and expectations about the outcome of
the negotiations. Thus they form an estimate of what they can mini-
mally secure, of what they can normally expect, etc. In the KRESKO
game the bargainers have to fill in questionnaires where they have to

answer questions about five such levels. The levels can be arranged on
an ordinal scale where ranks increase with increasing desirability and
decreasing attainability. We shall refer to this scale as the aspiration
scale.
An agreement satisfies the principle of balanced aspiration levels if
the outcome is equally high on the aspiration scale for both bargainers.
In spite of the fact that the subjects in the KRESKO-game are not
informed about the opponent's levels on the aspiration scale, they
succeed in attaining approximately balanced aspiration levels at the
final outcome. A feeling for the missing information seems to be
developed as a result of the exchange of arguments during the verbal
communication in the bargaining process.
The principle of balanced aspiration levels is not dissimilar to the
equity principle discussed above. In both cases one can identify success
related measures which are equalized. In this sense we may say that
the idea of equity is also inherent in the principle of balanced aspira-
tion levels. On the other hand, the common scale of measurement
which makes the aspirations and expectations of both bargainers
comparable does not have the property of accessibility which is a
crucial characteristic of the standards of distribution and comparison.
Equity and the formation of aspiration levels. Tietz and Weber did not
explain the formation of aspiration levels. In this respect up to now
only qualitative results could be derived from the KRESKO-data
(Weber, 1976). In the case of equitable distribution conflicts, where
standards of distribution and comparison are available, it is plausible to
conjecture that the formation of aspiration levels will already be
guided by the equity principle. Suppose for example that the group
members perceive each other as equally powerful. Then nobody has a
good reason to demand more than his equitable share. In experimental
situations of this type the equitable share is a natural focus point for
the formation of aspiration levels. Therefore one can expect that at the
equitable distribution the aspiration levels of all group members will be
equal on the aspiration scale. If this is the case the equity principle
coincides with the principle of balanced aspiration levels.
Experimental characteristic function games provide examples for
distribution conflicts between partners of unequal power. Here we
cannot expect the same coincidence of both principles as in situations
without obvious power differences. A stronger player may aim at a

higher payoff share than a weaker player. Considerations of equity can
still have an indirect influence on the formation of aspiration levels.
Equal shares of alternative coalition payoffs may serve as natural focus
points. This is in agreement with the spirit of equal share analysis.
University of Bielefeld
NOTES
1 In economic contexts it is advisable to avoid the use of the word 'investment' in the
sense of Homans.
2 Additional references can be found in the last mentioned paper by Mikula.
BIBLIOGRAPHY
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(1967), 379-397.
Friedman, J. W., 'Equal Profits as a Fair Division', in H. Sauermann (ed.), Beitriige zur
experimentellen Wirtschaftsforschung-Contributions to Experimental Economics, Vol.
II, J. C. B. Mohr, Tiibingen, 1970, 19-32.
Harsanyi, J. C., 'Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons
of Utility', Journal of Political Economy 63 (1955), 309-21.
Harsanyi, J. C., 'Measurement of Social Power, Opportunity Costs and the Theory of
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tions', Behavioral Science 7 (1962b), 81-91.
Romans, G. c., Social Behavior: Its Elementary Forms, Hartcourt, Brace and World,
New York, 1961.
Kastl, L. (ed.), 'Kartelle in der Wirklichkeit' Festschrift fur Max Metzner, Carl Heymans
Verlag, Koln-Berlin-Bonn, 1963.
Leventhal, G. S. and Michaels, J. W., 'Extending the Equity Model, Perception of Inputs
and Allocation of Rewards as a Function of Duration and Quantity of Performance',
Journal of Personality and Social Psychology 12 (1969), 303-309.
Mikula, G., 'Gewinnaufteilungsverhalten in Dyaden bei variiertem Leistungsverhiiltnis',
Zeitschrift fur Sozialpsychologie 3 (1973), 126-133.
Mikula, G., Studies on Reward Allocation, Berichte aus dem Institut fiir Psychologie der
Universitiit Graz A 8010 Graz, Schuberstr. 6a/ll, 1975.
Mikula, G. and Uray, R., 'Die Vernachliissigung individueller Leistungen bei der
Lohnaufteilung in Sozialsituationen', Zeitschrift fur Sozialpsychologie 4 (1973), 136-
144.
Nash, J. F., 'The Bargaining Problem', Econometrica 18 (1950), 155-162.
Nydegger, R. V. and Owen, G., 'Two-Person Bargaining, An Experimental Test of the

Nash Axioms', International Journal of Game Theory 3 (1974), 239-250.
Sauermann, H. and Selten, R., 'Anspruchsanpassungstheorie der Unternehmung',
Zeitschrift fiir die gesamte Staatswissenschaft (1962), 577-597.
Schelling, Th., The Strategy of Conflict, Harvard University Press, Cambridge (Mass.),
1960.
Selten, R., 'Equal Share Analysis of Characteristic Function Experiments', in H.
Sauermann (ed.), Beitriige zur experimentellen Wirtschaftsforschung-Contributions to
Experimental Economics, Vol. III, J. C. B. Mohr, Tiibingen, 1972, 130-165.
Selten, R. and Berg, C. c., 'Drei experimentelle Oligopolspielserien mit kontinuier-
lichem Zeitablauf', in H. Sauermann (ed.), Beitriige zur experimentellen
Wirtschaftsforschung-Contributions to Experimental Economics, Vol. II, J. C. B. Mohr,
Tiibingen, 1970, 162-221.
Simon, H. A., 'Theories of Decision Making in Economics and Behavioral Science',
American Economic Review (1959), 253-283.
Tietz, R., 'Ein anspruchsanpassungsorientiertes Wachstums- und Konjunkturmodell
(KRESKO)', in H. Sauermann (ed.), Beitriige zur experimentellen Wirtschaftsforschung,
J. C. B. Mohr, Tiibingen, 1973, Vol. IV.
Tietz, R., 'An Experimental Analysis of Wage Bargaining Behavior', Zeitschrift fiir die
gesamte Staatswissenschaft, 131 (1975), 44-91.
Tietz, R. and Weber, H.-J., 'On the Nature of the Bargaining Process', in H. Sauermann
(ed.), Beitriige zur experimentellen Wirtschaftsforschung-Contributions to Experimental
Economics, Vol. III, J. C. B. Mohr, Tiibingen, 1972, 305-334.
Weber, H.-J., 'Zur Theorie der Anspruchsanpassung in repetetiven Ent-
scheidungssituationen', Frankfurter Arbeiten zur experimentellen Wirtschaftsforschung,
Nr. A4, April 1976.
Weber, H.-J. and Tietz, R., 'Statische und dynamische Vorteilsausgleichstheorien der
Verhandlung', in O. Becker und R. Richter (eds.), Dynamische Wirtschaftsanalyse, J.
C. B. Mohr, Tiibingen, 1975.
PATRICK SUPPES
THE DISTRIBUTIVE JUSTICE OF INCOME

INEQUALITyl
I. VIEWPOINT
The dominant trend of political and social ideology in the twentieth

century is such as to make many of us uncomfortable, as a matter of
principle, with the acceptance of any form of inequality. Since inequality
of wealth or income is one.of the most permanent and salient features of
the human condition, there is little question of not accepting inequality in
practice. A discrepancy of such evident magnitude between principle and
practice is cause for philosophical uneasiness.
It is natural, therefore, to look for possibilities that use explicitly in a
positive way the idea of inequality. There are at least three natur~l forms
of ideal societies that are hierarchical rather than egalitarian. One is a
society of seniority, the second a caste society, and the third a meritoc-
racy. None of these ideal types of societies is realized in practice, and
probably most of us would reject their pure forms. On the other hand, two
of the three seem as meaningful and defensible as a society of pure
equality in which the distribution of income or wealth is uniform. The
pure caste society is the one that is now rejected by almost everybody
except for pockets of unreconstructed Brahmins here and there. But, and
this is the important point, in the politics of the real world the ideal society
of seniority or the ideal meritocracy plays as important a role in thinking
about change as the society of pure equality.
What is the normative case for the continued existence of income
inequalities in universities, public bureaucracies, or whole secieties? A
reexamination of the non-egalitarian Marxist slogan, "From each accord-
ing to his ability and to each according to his need", will yield, I think, the
proper capitalist revision. Clearly, one factor determining income
inequality is productivity. Members of a society, nation, social group,
institution, or what have you, who are more productive are compensated
accordingly. Individual counterexamples rush to the minds of all of us
when such a pronouncement about productivity is made, but the facts
support this statistical generalization. Making that case is not part of my
303
304 PATRICK SUPPES
burden here. The issue of productivity is intertwined with an array of

other issues, but the relation of productivity to the theory of human
capital should be mentioned, and an excellent survey of these matters is to
be found in Mincer (1970).
From a broad normative standpoint, considerations of productivity are
relatively invariant across different economic theories of why income
inequalities appear in the marketplace. Thus, whether we are more
enamored of the classical factor-share approach of Ricardo or of more
recent human capital approaches, the role of productivity seems secure in
a general way. Moral philosophers who find repugnant the invisible hand
of the market should be encouraged by the thrust of recent human capital
theory, because it views the distribution of earnings as being primarily
determined by individual choice - the individual's decision to invest in his
human capital through education, improvement on the job, etc. In any
case, it seems unlikely that any society will totally ignore productivity,
although the concept has not been sufficiently considered in normative
theories of distributive justice - about the only place that it has tradition-
ally entered has been through some form of the Pareto optimality
principle, which is far too weak an axiom to fix the real allocation of
income.
The second half of the Marxist slogan says, "To each according to his
need". Undoubtedly there is an aspect of income inequality justified in
terms of need, but the proper contrast is productivity or work, on the one
hand, and need or desert, on the other. An excellent discussion of these
matters is to be found in the final chapter of Sen (1973). Sen's detailed
analysis brings out the basic difficulties of either the need allocation of
income or the utilitarian desert allocation. Moreover, the kinds of
examples he gives show clearly enough how unwilling we are to make any
allocation of need, say, in terms of cash income. For example, no one is
really willing to do this to replace some form of national health insurance
or national health service. In the same way, no one takes seriously the
individual idiosyncrasies of wants, desires, or values in assessing what is a
just desert for a given individual. The measurement of actual income or
wealth is notoriously difficult, but fixed wages, or salaries, are even a
matter of public record for many occupational groups, and much of the
discussion about equity is centered around the fixed scales of compensa-
tion and not the real income or wealth of individuals occupying a
DISTRIBUTIVE JUSTICE OF INCOME INEQUALITY 305
particular position in the occupational group. A good example is pro-

vided by compensation in most public universities. Marital status,
number of dependents, external income, or inherited wealth is not
ordinarily considered in fixing the salaries of an individual at a given rank
with a given number of years of seniority. Moreover, in discussions about
the equity of various salary scales, the numbers occupying any given
position on the scale are usually not considered of major importance as a
matter of equity, although such data are of major importance from a
budgetary standpoint.
Building on the earlier work of Lerner (1944) and others, Sen shows
neatly how the problems of individual idiosyncrasy can be avoided by
making explicit the random assignment of any particular welfare function
to any particular individual. In many ways this seems to be a welfare
equivalent of Kant's categorical imperative.
But the facts are against the whole line of classical arguments that Sen
succinctly summarizes. I have emphasized here the important problem of
seniority, because it seems to me the existence of such hierarchies
according to experience and age is deeply embedded in almost all
societies, social institutions, and economic units. 2 It also seems extremely
unlikely that in most instances a case based purely on questions of
efficiency or productivity can account for the differentials implied by
seniority. The matter of seniority goes beyond differential pay for a given
type of job, because it is in fact positively correlated in most large
institutions, whether public or private, with height in the institutional
hierarchy.
There is something fundamentally sound about the idea of greater
rewards with seniority. (My intuition about this is presumably not simply
a function of my current age.) It seems to me it is a generally accepted
intuition that if individuals entering a vocation were faced with exactly
the same real income from the beginning to the end of their careers in that
vocation, they would find the prospects dreary indeed. Somehow this
principle of increasing compensation with age, which is collinear with
increases in productivity, seems much more persuasive than any abstract
utilitarian principle.
There are implicit strong feelings of equity about questions of seniority,
and, as far as I know, they have not been adequately discussed either in
the literature of welfare economics or of moral philosophy - at least if
306 PATRICK SUPPES
they have, I am certainly ignorant of their existence. I return to this topic

in a more formal way in the next section.
To a large extent, the theoretical literature in economics and
philosophy on inequality has concentrated on the procedures by which a
distribution of wealth or income should be made. Our intuitions about
inequality or social welfare are then tested by appeal to axioms that
restrict the kind of procedures we consider acceptable, rather than by
examination of actual distributions. There is no doubt that much that is
useful and important has been found out by this approach to the subject.
It need scarcely be mentioned that the primary modern source of these
discussions is Arrow (1951); more recent discussions, including Rawls',
primarily fall within this procedural approach. The procedural approach
should not be abandoned, but direct consideration of various distribu-
tions can deepen our intuitions and lead, perhaps, to some new ideas
about distributive justice. The basic method I adopt is to consider various
ideal types of societies in which inequality is an intrinsic feature and
compare the degree of inequality with empirical measurements for
various developed and developing nations. I also look at some smaller
social groups, especially the distributions of income in the academic
world.
I should emphasize that the results set forth here are in no way
definitive. My only ambition is to provide a framework for sharpening our
intuitions about the degree of inequality that seems reasonable and
equitable in a society and how those feelings compare with what is
actually observed today among various nations and social groups.
II. QUALITATIVE THEORY OF EQUAL CLASS INTERVALS
In this section I develop the qualitative theory of equal class intervals and
show how the simple qualitative theory leads to a ratio or difference
model according to a conventional decision about the appropriate nu-
merical representation of the qualitative theory. The formal details of the
qualitative theory developed here can be found in Suppes (1972). The
basic set of classes will be assumed to be nonempty and finite, and a
quaternary relation will be postulated on this set. The intuitive interpre-
tation of the quaternary relation ;;;!: is that ab;;;!: cd if and only if the
qualitative algebraic difference between a and b is equal to or greater

than that between c and d. In the present case, this judgment of difference
is a judgment of difference in income.
There are at least two distinct ways of interpreting judgments of
difference in income. One may be thought of as a social welfare judgment
that the difference between classes in the hierarchical scale based on
seniority and productivity as discussed earlier is equally spaced. Thus, as
one moves up the scale on the basis of either merit or seniority, each step
has about the same general improvement in utility or welfare as any
other. Note that this is already highly schematic. One basis of judgment is
simply an individual judgment of utility or value. Another is a judgment
based upon a collective procedure, so that the evaluation of equality of
interval represents some form of social welfare function. A second kind of
interpretation is to be thought of in terms of the life history of a given
individual. On the basis of merit and seniority it is anticipated that he will
move upward on the income scale, and the equal differences now repre-
sent differences in income increment at each stage of the life history of the
given individual. It is also easy to formulate this view in terms of
individual utilities, but again there is a note of unrealism about such
individual judgments. In actual fact, the scales of compensation are
determined by a complex process of collective negotiation and, conse-
quently, whatever we may think of the exact character of the procedures
by which the judgment is reached, the results must be judged to be much
more an expression of a group or social preference function than an
individual preference function. The axioms stated below are such as to
guarantee under the interpretation just discussed that the social pJ;'efer-
ence function allocates income increases in an evenhanded manner,
where, now, evenhanded means qualitative judgments of equal differ-
ence.
In terms of the quaternary relation ;;;, we define a strict inequality and
an equivalence relation in the standard manner:
ab > cd if and only if not cd ;;;, ab,

ab - cd if and only if ab ;;;, cd and cd ;;;, ab .
It is also useful to define a binary relation of strict preference and a binary

308 PATRICK SUPPES
relation of equivalence or indifference. These definitions are also stan-

dard:
a >b if and only if ab >aa.
a- b if and only if ab - ba.
To express the equal-spacing part of the theory, we need one additional

definition, namely, the definition that requires that adjacent objects in the
ordering be equally spaced. For this purpose we introduce the definition
of the binary relation J which is just the relation of immediate predeces-
sor. The intuitive idea of Axiom 4 below, which uses this relation J, is that
if a stands in the relation J to b, and c stands in the relation J to d, then the
difference between a and b is judged to be the same as the difference
between c and d, due account being taken of algebraic sign. The formal
definition of the binary relation J is this:
alb if and only if a > b and for all c in A if a > c, then either
b -c or b >c.
With the concepts defined, we can formulate in simple fashion the

definition of finite equal-difference structures. The axioms given here
were first stated in Suppes and Zinnes (1963).
DEFINITION. A quaternary structure ~=(A,~) is a finite, equal-

difference structure if and only if the following axioms are satisfied for
every, a, b, c, and d in A:
(1) The relation ~ is a weak ordering of A X A;
(2) If ab ~ cd, then ac ~ bd;
(3) If ab ~ cd, then de ~ ba ;
(4) If alb and cJd, then ab - cd.
The intended intuitive interpretation of each axiom is rather obvious.

The first axiom requires that the quaternary relation ~ be a weak
ordering of the qualitative difference between objects, incomes of typical
class members in the present case. Axioms 2 and 3 express simple
qualitative algebraic properties, and Axiom 4 embodies the equal-
spacing assumption just stated. In terms of the two representation
theorems we state below, the first three axioms are necessary conditions
of the representation; the fourth is not.
The ratio and difference representations of interest here-are formu-
lated in the following two theorems.
THEOREM 1 (Ratio Representation). Let ~ = (A, ~) be a finite, equal-

difference structure. Then there exists a real-valued positive function 'P on A
such that for every a, b, c, and d in A
'P(a)/'P(b) ~'P(c)/'P(d) if and only if ab ~cd.
Moreover, if 'P' is any other real-valued positive function having the same
property, then 'P and 'P' are related by a power transformation, i.e., there
exist positive real numbers a and {:J such that for every a in A
'P' = a'P(a)f3.
The corresponding representation and uniqueness theorem for differ-
ence structures is formulated as follows.
THEOREM 2 (Difference Representation). Let ~ =(A, ~) be a finite,

equal-difference structure. Then there exists a real-valued function on A
such that for every a, b, c, and d in A
'P(a) -'P(b);!!: ({)(c) - ({)(d) if and only if ab;!!: cd.
Moreover, if'P I is any other real-valued function having the same property,
then'P and 'P' are related by a (positive) linear transformation, i.e., there
exist real numbers a and (:J with a > 0 such that for every a in A
'P'(a) =a'P(a) +{:J •
The proof of Theorem 2 is given in detail in Suppes (1972), and the
proof of Theorem 1 is similar in structure.
The apparently arbitrary choice between these two representation
theorems calls for some further analysis. We may regard each of the two
representations or models as providing a utility function u, possibly a
social preference function. Assuming that typical members of all classes
have approximately the same utility functions, the next step is to intro-
duce a hypothesis about the relation between utility and monetary
income.
310 PATRICK SUPPES
Hypothesis U. For every a in A the utility of a is proportional to the

logarithm of the monetary value of income a, i.e., u (a) "'" log Sa.
Under this more or less standard hypothesis the difference representa-
tion is the appropriate choice to express the standard formulations for
equalizing marginal utility, and in terms of income this yields the ratio
income model discussed in the next section, for we have:
ab';?!:cd iff u(a)-a(b)';?!:u(c)-u(d)

iff log Sa -log Sb ';?!: log Sc -log Sd
iff Sa/Sb ';?!: Sc/Sd.
Notice that if we chose the ratio utility model and retained Hypothesis U,
we obtain:
ab ';?!: cd iff log Sa/log Sb ';?!: log $c/log Sd .
A deeper and more important problem is to find axioms based on

welfare or moral considerations that lead to the selection of equal-
difference structures as the proper qualitative theory of income compen-
sation across occupational classes. Other things being equal, we can
always make the argument that if the distribution is not egalitarian, then
the differences in distribution should be egalitarian, and this is essentially
what is expressed in the characterization of equal-difference structures.
In many ways, the equal-difference structure is pJausible once a hierarchi-
cal structure is itself justified in some form. This is the twin problem of
justifying compensation according to productivity and seniority discussed
earlier. The basis for the productivity argument has been rather
thoroughly explored in the literature, but the seniority issue much less so.
It seems to me that a line of argument could be made formal and explicit
along the following lines. Entry-level income for an occupation should be
equal for all and that point of entry itself should ordinarily represent a
quantum jump in income from the previous income of the individual. On
the other hand, individuals have a deep expectation of improvement, and
it is necessary to build in a differential for seniority to take account of this
psychological expectation. There are a variety of psychological studies
from different domains indicating the positive response to change on the
part of almost all people - I refer, of course, to change that is not
disastrously negative in its consequences. Taking account of such broadly
based psychological facts is not something that has been well thought out
either in welfare economics or in moral philosophy. It can also be said that
the scientific theory of such psychological wants is not well developed. In
the absence of deeper running theory, what is needed is more explicit
analysis of the rationale behind wage differentials for status and seniority,
and workers' relative feeling of satisfaction in a given structure.
Psychologists have only recently begun to think seriously about long-
term trends in people's wants and desires. There is a certain body of
empirical information available, but the theory of motivation, from
whatever general theoretical perspective we approach it, is still almost
completely lacking in concepts that deal with the problems of secular
change that seem critical to an adequate theory of income distribution.
III. MEASUREMENT OF INEQUALITY
The analysis of inequality ordinarily centers around the Lorenz curve for
income distribution. This curve is constructed in the following fashion.
The percentages of the population in question are arranged from the
poorest to the richest along the abscissa, and the percentages of income
received by the lowest x percent of the population are shown on the
vertical axis. Clearly, 0 percent of the population receives 0 percent of the
income, and 100 percent of the population receives all of the income.
From the ordering required of the population from poorest to richest it is
easy to show that a Lorenz curve must lie below the diagonal of the unit
square and must be convex from below. If the Lorenz curve lies along the
diagonal, then the distribution is uniform or absolutely equal. These
matters are illustrated in Figure 1. The Lorenz curve shown there is not
the typical one, because it is a piecewise linear curve, which will be the
subject of discussion later.
There is broad agreement on using the Lorenz curve to represent the
distribution of income or wealth, but there is much less agreement over
how to define a single. measure of inequality to be derived from the
Lorenz curve. The classical and most widely used measure is the Gini
coefficient, which is defined as follows:
(1) Gini Coefficient = Area between Lorenz curve and diagonal

Total area under diagonal
312 PATRICK SUPPES
i
.:
"0
.,
CI'
a
.,u
i:
cr
Pe rcenta<;le of populotion
Fig. 1. Lorenz curve for income distribution.
Because the total area under the diagonal is one-half, we will find it
convenient for analytical study to write this in the equivalent form:
(2) Gini Coefficient = 1- 2 x Area under Lorenz curve.
The economic literature is replete with conceptual and technical objec-
tions to the adequacy of the Gini coefficient as the appropriate measure of
inequality (see, especially, Atkinson, 1970, 1975; Newbery, 1970; and
Sen, 1973). In spite of the objections that can be raised, the measure is
good enough for the purposes to be used here. (A new positive case for
the measurement of poverty is given by Sen, 1976.) There is an additional
reason for using it in the present context: the extensive data available on
measures of inequality that are reported only in the form of Gini
coefficients.
I now turn to the derivation of the Gini coefficient for a society of
classes. For the mathematical models considered here, it is sufficient to
know the number n of classes and the income differential between the
classes. For purposes of simplification, I restrict myself to two models, an
income ratio model and an income difference model for the fixed rate of
income increase in movement from membership in one class to the next
higher adjacent class. I represent this by j, the percentage increase. Thus,

for example, if j = 0.05, in moving from one class to the next higher class
the income benefit in the ratib model is an increase of 5 percent. It shall be
assumed that the income is in monetary units that are constant across
time, e.g., constant dollars. A possible point of confusion is that, under
Hypothesis U introduced in the last section, the income ratio model
corresponds to the utility difference model. The income difference model
would correspond to the utility difference model only under the
hypothesis that utility is linear in money.
The next critical assumption is that the society is in equilibrium with
each class occupied by the same number of members. This is an assump-
tion not met by any actual society, but a reasonable one for thinking about
an ideal type of society.
First, under these assumptions it is easy to show for the ratio model that
if x is the income of a member of the lowest class, then x(1 +j)k-l is the
income of a member of the kth class counting from the bottom upward.
Because we are only interested in proportionality results, we may here-
after ignore the actual amount of income and thus ignore x. Second, it is
then easy to show that the proportion of income Yk distributed to the first
k classes is:
(3)
(1 + j)k -1
Yk = (1 + j)" - 1.
The piecewise linear Lorenz curve plotted in Figure 1 is in terms of these

coordinates Yk for the case of 20 classes, i.e., n = 20, and a rate of increase
between adjacent classes of 5 percent, i.e., j = 0.05.
Our next task is to compute the Gini coefficient as a function of n andj.
This is easy and direct because the area underneath the Lorenz curve
between Yk-l and Yk is a trapezoid whose area is easy to compute:
(4)
1
=2n (Yk + Yk-l)
=~[(1 +j)k + (1 +j)k-l_ 2]
2n (1 +it -1 .
314 PATRICK SUPPES
To obtain the total area under the Lorenz curve, we simply sum the areas
of the trapezoids from k = 1 to k = n.
(5) Total Area
n
=I Area (Yk-t. Yk)
k=l
1
=-----
2n[(1 + jr -1]
x[(l+j)«l/jr-1)+(l+jr-1 2n]
2+j 1
= 2jn (l+jr-1'
Using Equation (2), the Gini coefficient G(j, n) is then given by the
following expression (the subscript R denotes the income ratio model):
2 2+'
(6) GR(j, n) = 1 + (1 + jr -1 jn'
When n = 1, it is easy to see that G(j, 1) = 0. The expression for the Gini
coefficient is undefined when j = 0, but by going back to the original
assumptions, or taking the limit as j approaches 0, it is easy to see that for
°
this case the coefficient must be 0. It is natural to restrict consideration to
the cases where j > and n ;?: 1.
It is also worth noting the income ratio of different classes. It is easy to
show that the ratio of l k , the income of the kth class, to 1m , the income of
the m th class, is:
It is obvious, but worth noting, that this ratio depends only on j and not on
the total number n of classes.
I turn now to the income difference model as an alternative. The only
change is in the assumption of how the increase in income is to be applied
uniformly as we move from one class to the next adjacent class. A simple
difference rule will yield the same general sense of equal spacing and yet
quite different numerical results. In this case we take a percentage j of the
compensation x in the first class, and add jx as additional compensation in
the second class. Thus, in general, the compensation to a member of the

kth class would then be x + (k -l)jx. Using z rather than y to denote the
ordinate in this case, it is then easy to compute the ordinate of the Lorenz
curve at the terminal point of the kth class:
k jk(k-1)
+ 2
(8) Zk = . (n- 1) .
In
n+ 2
Following the steps in the previous model, we obtain corresponding

expressions for the area of a given trapezoid and then for the total area
under the Lorenz curve. I give here only the result for the total area and
use the subscript D for this income difference model.
~ [ n +j +~(n + 1)(2n - 5) ]
(9) Total AreaD = . (1) .
In n-
n+ 2
We then easily obtain the Gini coefficient for this difference model.
[ n +j +~ (n + l)(2n - 5)]
(10) GD (j,n)=l- jn(n+1)
n+ 2
Finally, we may express the difference of income of the k th and m th classes

corresponding to Equation (7) for the ratio mode).
(11) Ik - 1m =(k -m)jx.
It is easy to summarize the basic assumptions of both models. First,
they share two axioms.
Population Axiom. The population is uniformly distributed across the n
classes, with n ;i!: 1.
Axiom of Increasing Income. If I ~ k < m ~ n then
O<Ik <1m •
Second, each model uses the appropriate one of the following two
axioms.
316 PATRICK SUPPES
Equal Ratio Axiom. For adjacent classes
1k+l 1m+l
J;:= 1m .
Equal Difference Axiom. For adjacent classes

1 k + 1 - 1k =1m+l - 1m.
Whatever abstract feelings of equity may vaguely dictate, it seems to be

the case that the income ratio model described first is more widely used in
determining income increases as one moves from one position on an
occupational scale to another, although I have not really checked any
quantitative examples and it would be interesting to do so.
IV. SOME DATA
It may be useful to get a sense of what real data about income distribution
look like. In Table I are shown Gini coefficients for a number of countries.
TABLE 1
Gini coefficients of national income distributions for
active workers (after Chenery etat., 1974)
Brazil (1970) 0.61

Colombia (1970) 0.54
Czechoslovakia (1964) 0.18
El Salvador (1969) 0.45
Hungary (1969) 0.34
New Zealand (1969) 0.37
Norway (1963) 0.35
South Africa (1965) 0.56
Sweden (1963) 0.39
Uganda (1970) 0.38
United States (1970) 0.31
The range is enormous, Czechoslovakia (1964) being the lowest with a

Gini coefficient of 0.18 and Brazil (1970) the highest with a Gini
coefficient of 0.61. Given the complexity of assembling correctly national
data, the exact values can be disputed. I have cited them from the
prepublication draft of the chapter by Ahluwalia and Chenery in Chen-
ery, Ahluwalia, Bell, Duloy, and Jolly (1974). (These data were deleted
from the final publication.)
To get a sense of comparison let us take a look at data for salary
distributions of academic staff in American universities. Fortunately, an
excellent survey of these matters has just been published ('Nearly Keep-
ing Up', 1976). Data are given for a large number of American univer-
sities. What I shall look at are the average levels of compensation at the
rank of professor, associate professor, assistant professor, and instructor.
This gives us a maximum of four classes in terms of the theory being
considered here, for no distribution data within a given rank are generally
available. Also, it is my purpose here only to give a sense of approximate
magnitude. By assuming that the mean of a given rank leads to a good
approximation of the actual distribution, an error is certainly introduced,
but not a severe one. In addition to giving the salaries of each of the four
ranks indicated, the numbers occupying those ranks for a given institution
are also included. To begin at home, in the case of my own university,
Stanford, the data are as follows: 432 professors at an average salary of
$32,700, 131 associate professors at an average salary of $23,500, 179
assistant professors at an average salary of $17,800, and there are no
instructors, that rank having been abolished. The Gini coefficient for
these three classes is approximately O(Stanford) = 0.12, so that if we
wanted to be facetious we might say that the income distribution is more
egalitarian at Stanford than in any of the socialist countries reported in
the survey of Ahluwalia and Chenery. (Czechoslovakia, with a Gini
coefficient of 0.18, was the lowest of the countries they surveyed.)
Stanford's distribution is relativeiy egalitarian, but I looked through the
survey for still more egalitarian examples. A good one is the first
institution listed in the survey, Alabama Agricultural and Mechanical
University. The data are as follows for this institution: 27 professors at an
average salary of $20,200, 55 associate professors at an average salary of
$18,400,89 assistant professors at an average salary of $15,600, and 41
instructors at an average salary of $13,100. The Gini coefficient is
approximately O(Alabama A & M) =0.08. Neither Stanford nor
Alabama A & M exactly satisfies either the income ratio or the income
difference model discussed above. Stanford, however, is not too far off
from the ratio model. The ratio of assistant professors to associate
professors is 0.76 and of associate professors to professors is 0.72. In the
318 PATRICK SUPPES
case of Alabama, the ratio of instructors to assist~nt professors is 0.839

and the ratio of assistant professors to associate professors is 0.847, which
are highly comparable figures, but the ratio of associate professors to
professors is 0.91l.
I also examined the data for Harvard and the University of California
(all campuses). In the case of Harvard, there are 492 professors at an
average salary of $35,700, 117 associate professors at an average salary
of $22,300, and 230 assistant professors at an average salary of $17,200.
The Gini coefficient is G(Harvard) = 0.15. That Harvard's coefficient
would be above Stanford's can be inferred at once from the data, for the
average salaries of assistant professors and associate professors are
higher at Stanford than at Harvard but the average salary of professors is
lower at Stanford.
The University of California data are as follows: 2,570 professors at an
average salary of $31,900,1,273 associate professors at an average salary
of $22,100, and 1,181 assistant professors at an average salary of
$18,600. To two decimals, the Gini coefficient is the same as Stanford's,
namely, G(California) = 0.12.
It is useful to compare the range of data just given to the income ratio
model of equal class intervals discussed earlier. For a percentage increase
with j = 0.05 and the number of classes, n = 20, which is the Lorenz curve
of Figure 1, the Gini coefficient is GR (0.05, 20) = 0.16. If we halve the
number of classes we approximately halve the Gini coefficient,
GR (0.05, 10) = 0.08. The last result matches that for Alabama A & M.
I conjecture that many members of the academic profession would find
this schedule of pay increments too egalitarian.
The data of Table I show that the range of income inequality is much
greater for countries as a whole than for homogeneous social institutions
like universities. In the case of universities, however, I have looked only
at the faculty income data. It would be useful to look at the Gini
coefficients for the entire staff and faculty of the institutions considered.
The important point, however, for present purposes is simply to exhibit a
range of data that give some sense of the actual levels of income
inequality. Significant nonzero Gini coefficients are surely to be found for
almost all institutions of any size in almost all parts of the world.
The seductive appeal of principles that lead to an equal distribution of
income is matched by the seductive appeal of similar principles in the
theory of belief. In this latter case, the result is a uniform probability

distribution as the appropriate prior distribution. Several of the main
principles used to defend a uniform distribution of value have also been
used to defend a uniform distribution of belief, or conversely. I have in
mind especially the use of the principle of insufficient reason to justify a
uniform distribution in either case. The Bayesian attack on a simple
principle of uniformity of belief has had a powerful impact. Of course, in
real problems, the uniform distribution has never had the role it was
presumed to have in the classical theory of probability. This is easily seen
in Laplace's classical treatise. He announces that probability is to be
defined in terms of the ratio of favorable cases to possible cases, but then
the definition scarcely enters in any of the complex developments of the
theory or in any of the realistic applications. The story has remained the
same, and the modern Bayesians have emphasized the fairy-tale quality
of uniform prior distributions. As remarked at the beginning, the
discrepancy between principle and practice is just as great in the case of
income distribution or distribution of value, but the intellectual attack on
the discrepancy is not yet as substantial as the Bayesian attack on classical
or ,logical theories of probability that have attempted to justify the
uniform distribution of belief as the only natural prior distribution. The
Bayesian approach to belief is, in fact, suggestive of the proper approach
to matters of equity. It is a mistake to think only in terms of simple first
principles that justify egalitarianism. As Aristotle emphasized in the
Nichomachean Ethics (1131 a 27), "All men agree that what is just in
distribution must be according to merit in some sense, though they do not
all specify the same sort of merit." The models set forth in this article
constitute at most schematic prolegomena to the substantive analysis of
different senses of merit.
Stanford University, Stanford, Calif.
NOTES
1 I am indebted to Dean Jamison for several stimulating conversations about the normative
theory of income distribution, and I also am indebted to him for several of the references to
the economic literature. Georg Kreisel suggested a number of improvements of an earlier
draft; I have benefited considerably from his detailed critique,
320 PATRICK SUPPES
2 It can be argued that seniority now plays the role that caste played in the past. This is true
of ancient theory as well as practice. Consideration of caste, but not of seniority, is

important, for instance, in Aristotle's Politics, although a functional place (or age is
proposed in discussing who should be rulers (1332 b 30ff.).
REFERENCES
Arrow, K.: Social Choice and Individual Values, New York: Wiley, 1951.
Atkinson, A. B.: 'On the Measurement ofInequality' ,Journal of Economic Theory, 1970,2,
244-263.
Atkinson, A. B.: The Economics of Inequality, London: Oxford University Press, 1975.
Chenery, H., Ahluwalia, M. S., Bell, C. L. G., Duloy, J. H., and Jolly, R.: Redistribution with
Growth, London: Oxford University Press, 1974.
Lerner, A. P.: The Economics of Control, London: Macmillan, 1944.
Mincer, J.: 'The Distribution of Labor Incomes: A Survey (with special reference to the
human capital approach)', Journal of Economic Literature, 1970,8,1-26.
'Nearly keeping up: Report on the Economic Status of the Profession, 1975-76', AAUP
Bulletin, 1976,62,195-284.
Newbery, D.: 'A Theorem on the Measurement of Inequality', Journal of Economic
Theory, 1970,2,264-266.
Sen, A.: On Economic Inequality, London: Oxford University Press, 1973.
Sen, A.: 'Poverty: An Ordinal Approach to Measurement', Econometrica, 1976, 44,
219-231.
Suppes, P.: 'Finite Equal-interval Measurement Structures', Theoria, 1972,38,45-63.
Suppes, P., and Zinnes, J.: 'Basic Measurement Theory', in R. D. Luce, R. R. Bush, and E.
H. Galanter (eds.), Handbook of Mathematical Psychology (Vol. I), New York: Wiley,
1963.
INDEX OF NAMES
Aristotle 321 Gehrlein, W. 102

Arrow, K. 33, 54, 59, 67,107,135,160, Gibbard, A. F. 11, 102, 109, 120-124,
161, 163, 169, 210, 215, 216, 246, 126, 129, 155, 158, 227, 228, 230,
247, 248, 266, 271, 278, 306 234,282
Atkinson, A. B. 312 Grether, D. M. 128
Gottinger, H. W. 251, 258, 261
Baier, K. 239
Barbera, S. 101, 232 Hajek, P. 224
Becker, W. 36 Hammond, P. J. 60
Bentham, J. 55, 56 Hard, A. 297
Black, D. 271, 275 Hare, R. M. 53
Blau, J. H. 119, 124, 125, 127, 129 Harrod, R. F. 10
Blin, J. M. 273, 276, 277 Harsanyi, J. C. 3-6, 33, 54-56, 96, 289,
Borch, K. 232, 237 295
Borda, J. Ch. 108, 154,272 Hart, H. L. 63
Bowman, V. J. 276 Heinicke, A. 169
Brams, S. J. 285 Homans, G. G. 291
Brandt, R. B. 3, 10, 11, 20 Hurwics, M. 189
Brown, D. J. 215, 216
Inada, K. 169, 179, 183
Carroll, Lewis 273, see also Dodgson, C. Intriligator, M. D. 102, 135
L.
Churchman, C. W. 55 Kalai, E. 234
Colantoni, C. S. 273, 276 Kant, I. 5, 55, 56, 305
Coleman, J. S. 135 Kemeny, J. 273, 275, 286
Condorcet, M. 141, 142, 143, 272 Kemperman, J. H. 273
Kendall, M. G. 281, 282
Darwin, Ch. 50 Kern, L. 187
Devlin, P. 63 Keynes, J. M. 46, 49
Dodgson, C. L. alias Carroll Lewis 273 Kirman, A. P. 215, 216
Kolm, S. Ch. 187, 198
Epicurus 52, 55
Kopmans, T. C. 61
Ernst, G. W. 266
Kraft, C. H. 219
Ezorsky, G. 11
Kuhn, T. S. 33, 52
Ferejohn, J. A. 128
Fishburn, P. 101, 133, 135, 210, 215 Leibenstein, H. 251
Fleming, J. M. 33, 54 Leinfellner, W. 33, 57
Friedman, M. 63 Lerner, A. P. 305
Futia, C. 257 Levenglick, A. 273
Leventhal, G. S. 290
Gartner, W. 169 Lewis, D. K. 160
Galbraith, J. K. 61 Luce, D. 57, 81, 253, 279
321
322 INDEX OF NAMES
l:'ukasiewicz, J. 219 Riker, W. H. 271, 279

Luxemburg, R. 49 Robert, F. S. 252, 273
Lyons, D. 3, 11, 20 Rosser, J. B. 217
Macpherson, C. B. 62 Saposnik, R. 169, 183, 185

Marschak, J. 252 Satterthwaite, M. A. 155,227,228,230,
Maruse, H. 61 282
Marx, K. 33-35, 191, 199, 363 Sauerman, H. 289
Maskin, E. 232 Schelling, Th. 289
Merchant, D. K. 271, 276, 277, 279 Schmeidler, D. 227
Michaels, J. W. 290 Schwartz, Th. 212
Mikula, G. 290, 291 Scott, D. 219
Mill, J. St. 9, 55, 56, 64, 90, 92, 93 Seidenberg, S. 219
Mincer, J. 304 Selten, R. 81, 238, 289, 295, 296, 298
Moore, G. E. 3, 5 Sen, A. 33, 51, 54, 55, 101, 119, 120,
Mossin, J. 245, 246 12~ 125, 16~ 182, 187, 271, 304
Muller, E. 234 Shubik, M. 46
Mycielsky, J. 222 Sierpinski, W. 222
Simon, H. A. 251,253, 254, 289
Nash, J. F. 55, 81, 207, 229, 290 Skala, H. J. 215, 216, 219
Neumann, J. von 264 Skinner, B. F. 38
Newbery, D. 312 Smith, A. 33, 35, 46
Newell, A. 251, 266 Solovay, R. 222, 223
Newell, G. W. 251 Solow, R. 64
Nydegger, R. V. 289, 290 Sonderman, D. 215, 216
Ordeshook, P. C. 271, 279 Sonnenschein, H. 227
Owen, G. 289, 290 Spearman, C. E. 281, 282
Strotz, R. H. 60
Pareto, W. 54, 55, 81, 95, 116, 121, Suppes, P. 303, 306, 308, 309
124, 129, 136, 141, 155, 187, 209, Swierczkowski 222
238, 239, 241, 243
Parikh, R. 224 Tarski, A. 219
Pattanaik, P. K. 169, 182 Tietz, R. 298
Peleg, B. 60, 79
Uray, H. 290
Plato, 52
Plot, Ch. R. 212
Varian, H. R. 198
Pollak, R. A. 60
Vopenka, P. 224
Pratt, J. W. 219
Raiifa, H. 5, 7, 81, 279 Weber, H. J. 298
Rao, M. R. 273, 276 Whinston, A. B. 273, 276, 277
Rapoport, A. 53, 249 Yaari, M. E. 60, 79
Rawls, S. 52, 54-56, 187, 188, 197,
202-206, 210, 212-214, 306 Zadeh, L. A. 219
Rhodes, J. 256, 257 Zagare, F. C. 297
Ricardo, D. 33, 46, 304 Zeckhauser R. 102, 133, 156
Richter, M. K. 67 Zinnes, J. 310
INDEX OF SUBJECTS
act utilitarianism 8 balloting 135-137, 140, 143, 154

agent 12f bargaining problem 292. 297, 300
agreement 289 Bayesian approach 321
limited -183 Bayesian decision theory 291
aggregation 271 behavior
anonymity 281 behavioral 61, 75, 78, 80, 239
alienation 33, 34, 48, 55 strategic -153
alternatives 156-158, 160, 206, 215 belief 321
altruism 48, 55, 57 initial- 258
antinomy best outcome 191
ethical- 56 Boolean algebra 216-219
arithmetic mean 6 Boolean valued ordering, see order
Arrowian welfare function 169, 172 Borda ranking function 275
Arrow's theorem 54, 161, 163, 215, Borda rule, see rule
216, 228, 230, 260, 278 better than 156, 163
Arrow's independence condition, see in- betweenness 276
dependence
asymmetry 104, 163 capitalism 48, 49, 305
axiom cardinal utility, see utility
Arrow's - 215, 216, 278 caste society, see society
equal difference axioms 316 categorical imperative 55, 307
equal ratio-318 causal consequences 13, 14, 16
non-equity-191-194, 196-197, 199 changes in taste 59, 60
of choice 216, 222 endogeneous-59, 61, 75, 79, 96
countable axiom of choice 222 chess 254, 261
of dependent choices 223, 224 choice function 67, 207
of determinateness 221 choice process 252, 266
of increasing income 315 choice set 67, 158
axioms of microeconomics 46 christianity 50
axioms of utility theory 47 class struggle 48
population - 315 coalition 297
Sen's weak equity-187, 190-194, coercion 62
196-197 collective preferences, see preference
strong equity-191-192, 194, 196- communism 33, 305
200 comparison of levels 56
symmetry preference - 190-194, 196, of welfare differences 56
197 competition 49
axiomatization complete 11 0
of Marx' exchange values 40 complexity 251, 252, 255-257, 259,
of Marx' labor-value theory 39 263-264, 266
of Marx' value in use 40 design - 261, 267
323
324 INDEX OF SUBJECTS
control- 261, 262 decision theory 3, 4, 51, 68

structural- 259, 266 Bayesian - 291
computational- 266, 267 demand and supply, see supply and de-
combinatorial- 274 mand
computability 251, 266, 267 dichotomous preferences, see preference
calculatedness 251, 253 dictator 54, 216, 222-224, 228, 230,
conceptualism 53, 55 233-234
condition for convenient multiples 277 random - ship 155-156
Condorcet alternative 141, 143-144, weak-163-166
147-150 dictatorial 155, 163
Condorcet principle 141, 150 difference representation 311
Condorcet winner 275, 281 distance function 272, 283
conflict of economic distribution 291, distribution of income 305
296,301 distribution problem 188, 199
connectedness 104, 122 distributive ethics, see ethics
consent 62 distributive justice, see justice
consumption levels 73, 75-76, 86 division 291-292, 294, 299
consumption plan 69, 71, 76-79, 81 dominance 282
consumption strategy 73-74,77-78
continuum hypothesis 217 effect
cooperation 49, 240 coordination - 14-16, 20
coordination 14 expectation -14, 15
correlation 283 incentive -14-15, 19
CR-rule, see rule egalitarian rule, see rule
cycle egalitarianism 187, 305
cyclic order 171-172, 174, 181, 184 income-187
cyclical balance 183 welfare-188, 198-199
egotism 48, 50-51, 55, 57
decentralized decision process, see deci- epicureism 55
siOli process epimorphism 256
decision maker 12, 259, 261, 266 equal class intervals 308
decision problem equal difference axiom, see axiom
moral decision - 12, 50 equal difference structure 310, 312
decision process, decentralized 129, l30 equal division core 298, 299
decision schemes 101-102 equal ratio axiom, see axiom
anonymous-103, 105, 108-109, 112 equality 34, 38, 52-53, 54, 202
constant-110-111 equality, see principle of equality
localized - 11 0 equilibrium 207, 209, 315
neutral-103, 105, 108, 112-113 ethical- 55, 228
non-perverse -110, 115 Nash - 81, 286
point voting - 102, 108 equilibrium point 237, 239
strategy proof - 103-104, 106, 109- equitable cost distribution 295
112, 116 equity, see principle
supporting size-102-103, 107-108, equivalence class 255, 309, 310
115 equivalent function 280
unilateral- 109-110 ER, see rule
x,y-duple component-110 ethical 239, 240, 248
ethical conflict 42-43, 51-52, 56 Gibbard's theorem 109-111, 115, 121-

ethical equivalence 40, 44 123, 127, 286
ethical explanation 292 gifts 95
ethical fault 89 Gini coefficient 313-320
ethical foundation goods 39, 44-46
of economics 49-51 primary goods 213
of labor values 37 Gotha Program 37, 191, 199
of Marxian Macroeconomics 43-45 group decision making 154-155
of microeconomics 33-34
ethical justification of labor 34 hedonism 5, 7, 55
ethical neutrality 45 hierarchical order 305
ethical norms 248 Hurwics rule, see rule
ethical paradigm 52, 53
ethical pessimism 50 impartial 6, 54, 55
ethical preference 54 imperatives
ethical principles, see principles hypothetical- 4, 56
ethical significance 162 categorical- 55, 307
ethical standard 36 impossibility theorem 54, 129, 161, 163,
ethical tautologies 52 201, 215, 216, 228, 230, 260, 280
ethical theory 3 income 305, 309, 312-313
ethical value theory 36 income difference model 314-316
ethics 50, 52 income ratio model 314, 317
distributive - 187 independence condition of Arrow 135,
exchange economy 64, 81, 89, 90-91, 160, 209, 216, 227, 280-281
93,95 independence of preferences 160
exchange model 63 indifference 41, 47, 260, 278, 288, 310
simple-63 individuals 51, 204, 215
exchange values, see values inequality 197, 202, 305, 308-309, 313
exhaustiveness 297 input-output 43-45
expected utility 6, 47, 213, 246 institution 201, 204, 207-208, 213, 239,
experiments 292-293 248
reward allocation - 292, 293 insurance 244-246
Friedman's duopoly - 293 intake 86, 87
ex post Pareto optimality, see Pareto interpersonal comparison, see values
principle interpersonal comparison of utility 162
extremal restriction 182 interval utility scale 47
intervention, regulative 88, 93
Fishburn's theorem 216 intransitivity 129, 289
free market 45 irrationality 82
freedom 54 irreflexive 221
fuzzyness, see orderings
justice 52, 201, 203
distributive - 196, 305, 308
game 48-49, 207, 261, 264 distributive labor - 42
game theory 3, 4, 45-46, 50, 207 principles of - 202-203
general equity principle, see principle
Gibbard Satterthwaite theorem 227, 228 Kemeny model 275-277, 281-283
labor 34-35, 39-45 monopoly 49, 93

ethical justification of - 34, 44 monotonicity 46, 279-280
principle of-34, 45, 55,199 MR, see rule
socially necessary - 43, 365 music 95
function 40-45
paradigm 34-36 Nash equilibrium 81, 286
values, see values NEA, see axiom
least advantaged 205, 209-210, 213 neutrality 45, 281
Lebesque measurable 222 Nicomachean Ethics 321
level comparability 56 nominalism 53, 55
level of well-being 205-206 non-cooperative 239
lexicographical maximin rule, see rule non-dictatorship 54, 167, 280
lexicographical order 188-189, 192, 197 non-equity axiom, see axiom
of principles 202 normative 50, 51, 291, 306
libertarian principle, see under principle
liberty 89, 203-204 oligarchic 233, 234
live and let live 237 optimal 7, 279
LMR, see rule optimality 163-166, 279
Lorenz curve 313-315,317 optimization 262, 273, 276, 287
lottery 101, 106, 133-134, 136, 140, order
150,213 Boolean valued- 217
equilibrium - 136 fuzzy-216,221
even chance - 147 strict - 170-173, 185
Pareto - 136, 141, 144-147 weak-170, 172, 174, 184,215,218
social choice-133-137, 139 organization 205
original position 209
machine, sequential 255, 257, 259, 262
macroeconomics 43-45 paradigm 33, 34, 36, 52, 53, 55
majority decision rule, see rule ethical paradigm 52-55
majority vector 170, 171, 181 impersonality - 54
majority vote 134 trader Indian - 56, 64, 66, 84
manipulability 106, 136, 228, 230, 284 utilitarian - 56
market 35, 46, 49, 258 paradox
Marxian value theory 39-45 Arrow's - see Arrow's theorem
maximes 51, 53, 55, 56 Gibbard's - 127
maximin 206, 208, 213 liberal- 124
maximin rule, see rule of voting 141
means of production 44 Sen's-127
measure 105, 222 Pareto dominated 81, 82, 87, 93, 129
median problem 276-277 Pareto efficient 81-82, 198, 206, 216
merit 37-38, 44, 309 Pareto optimality 294, 306; see also
merit system 37, 38, 44, 305 principle
meritocracy 37, 38, 44, 305 paternalism 64
meritorious standard 37, 44 payoff configuration 299
microeconomics 46 permutation 105, 113, 114, 276
minimax principle 202 model 219, 280
money 40 pleasure 5, 7
population axiom, see axiom solving 251

power 291,296, 297, 301 well-structured - 253, 259
preference 5, 7, 34-36, 54, 59, 67, 70, production 34
75, 85, 101, 155, 160, 202, 204, profile 157, 215
211, 220, 232-233, 252, 259, 273, belief -159
288 n-person utility-158, 162
admissible - 204 preference-169,171
collective - 170 pure strategy-157
configuration 119, 125 profit 46, 48, 243
consumers - 59, 60 programming model 280, 282
cyclically mixed-169, 175-179, 185 pseudo-asymmetry 221
dichotomous - 183 pseudo-transitivity 221
false- 284
true - 284, 186 quasi order 40, 47
ethical-54 quota cartels 296
independence of - 160
individual-182, 207, 217, 220, 273
order 170-174 random 134
pairwise - 160 ranking 275
profile 169, 171, 174-178, 182-183, n-tuple 105, 112
221 ratio income model 312
social- 169, 178-18~, 273 ratio representation 311
structure 169-170, 174-175 rational behavior 61, 75, 78, 80, 152
unit - 67, 69-70 rationality 61, 67,75, 82, 239, 251
primary goods 202-204, 209, 213 global-251
principle 51, 57 limited - 252, 254-255, 266
altruistic - 42, 53-57 rationalization 50-51
Condorcet-141, 150 Rawls difference principle 187
egalitarian -139, 140, 147 reduced structure 169, 177
equity-291, 295-297, 299, 301 reduction 175-177, 185
ethical- 51-57 reflexive 119, 209
general equality - 294 rejection 115
libertarian - 64, 90, 93 representation theorem 47
of balanced aspiration levels 300, 301 revolution 33
of equality 89, 139 reward allocation experiment 292-295
of freedom 54, 139, 140 right 120-128, 130,202,203
of justice 201-203 absolute - 124
of liberty 89 assignment of rights 122-123, 128-
Pareto - (optimality) 54-55, 81, 95, 130
11~ 121, 124, 12~ 13~ 141, 155, k-right 120-121
209, 238, 239, 241, 243, 281 weak-120,129
Rawls principles - 202-204 weak* right 120, 129-130
prisoner's dilemma 237-238 2-right 121-122
probability mixture 101, 103, 108, 110, risk 47, 243
115, 155 rule
problem Borda-154
ill structured - 253, 259 compatible sodal decision - 262
conservative maximax - 188, 192, SPA, see axiom

196-197,200 space
decision - 258, 261 sequential choice - 265
deterministic - 108 standard
egalitarian-188, 190, 192, 195, 196, -form 181, 184
198, 199 of distribution 295, 296
Hurwics - 189 strategy behavior, see behavior
lexicographic maximin-188-189, strategy voting, see voting
192-193, 198-199 strategy proofness 155-156, 227, 229,
majority decision -169, 178-179 230-231, 274, 281, 286
maximin-188-189, 192, 194, 197- strength of a player 298-299
199 strict order, see" order
moral-4, 12, 50 strong equity axiom, see axiom
of choice 188 supply and demand 35, 46, 48
stable - 261-262, 267 symmetry preference axiom, see axiom
utilitarianism, see utilitarianism system of interaction 157
utilitarian-188-190, 192-193, 197,
200 taste 59, 67-69, 96
traders-Indian paradigm 64-66, 80
trader's problem 83-84
scale invariance 47, 160-162, 164 transitivity 40, 104, 119, 163, 169, 170,
schemes, see decision scheme 179, 180, 182, 203, 209, 220, 221,
SEA, see axiom 272,278
semi-group 255-257, 263-265
semi-order 253 ultrafilter 216, 218, 122
seniority 305, 307, 313 unanimity 164-166, 231
share 300, 302 weak-115
equal- 300, 302 uncertainty 47, 254, 286
simulation 83 undecidability 260
small community 50 unilateral 155
social choice 101, 133-135, 155, 252 univerlizability 53
barely liberal- 123-124, 158-160 UR, see rule
rational-120, 122-123, 158-160,227 utilitarian rule, see rule
social choice problem 254 utilitarianism 3, 5, 10, 11, 15, 52, 56
social conscience 54 act-13, 14, 18-19, 20, 22, 25
social contract 54 ideal-7, 187, 196
social decision 101, 155 preference - 5, 7, 9
social decision problem 207 rule - 8, 11, 14, 17-20, 22-23, 25, 45,
social preferences, see preferences 49
social ranking function 280 utility 85
social state 203 cardinal- 47
social welfare function, see welfare func- expected-47, 106
tion function 13, 47, 72, 252
socialism 38 social- 5, 13
society 33. 50. 169. 174 scale 47. 107
caste-305 theory 47
ideal- 25 utopian solution 40, 42
value wages versus profit 49, 241

abstract labor - 34-45 Walden II 38, 42
exchange - 34-37 WEA, see axiom
Interpersonal comparison of labor- weak equity axiom, see axiom
37, 38 weal order, see order
labor - 34-45 wealth 244
free 83 welfare 56
judgement 6 individual- 189
equiprobability model of moral - 6 economics 213
Marxian value theory 34-45 . function 96
moral value judgement 6 social-162-163, 169, 266
restriction 183
voting 258, 288 Zermelo-Fraenkel set theory 222
strategy - 154 Zorn's lemma 216
system of - 157
THEORY AND DECISION LIBRARY
An International Series in the Philosophy and Methodology

of the Social and Behavioral Sciences
Editors:
Gerald Eberlein, University of Technology, Munich
Werner Leinfellner, University of Nebraska
1. Giinther Menges (ed.),Information, Inference, and Decision. 1974, viii + 195 pp.
2. Anatol Rapoport (ed.), Game Theory as a Theory ofCon/lict Resolution. 1974,
v + 283 pp.
3. Mario Bunge (ed.), The Methodological Unity of Science. 1973, viii + 264 pp.
4. Colin Cherry (ed.), Pragmatic Aspects of Human Communication. 1974, ix + 178 pp.
5. Friedrich Rapp (ed.), Contributions to a Philosophy of Technology. Studies in the
Structure of Thinking in the Technological Sciences. 1974, xv + 228 pp.
6. Werner Leinfellner and Eckehart Kohler (eds.), Developments in the Methodology of
Social Science. 1974, x + 430 pp.
7. Jacob Marschak, Economic Information, Decision and Prediction. Selected Essays.
1974, three volumes, xviii + 389 pp.; xii + 362 pp.; x + 399 pp.
8. Carl-Axel S. Stael von Holstein (ed.), The Concept of Probability in Psychological
Experiments. 1974, xi + 153 pp.
9. Heinz J. Skala, Non-Archimedean Utility Theory. 1975, xii + 138 pp.
10. Karin D. Knorr, Hermann Strasser, and Hans Georg Zilian (eds.), Determinants and
Controls of Scientific Developments. 1975, ix + 460 pp.
11. Dirk Wendt, and Charles V1ek (eds.), Utility, Probability, and Human Decision Making.
Selected Proceedings of an Interdisciplinary Research Conference, Rome, 3-6
September, 1973.1975, viii + 418 pp.
12. John C. Harsanyi, Essays on Ethics, Social Behavior, and Scientific Explanation.
1976, xvi + 262 pp.
13. Gerhard SchwOdiauer (ed.), Equilibrium and Disequilibrium in Economic Theory.
Proceedings of a Conference Organized by the Institute for Advanced Studies,
Vienna, Austria, July 3-5,1974. 1978,1+ 736 pp.
14. V. V. Kolbin, Stochastic Programming. 1977, xii + 195 pp.
15. R. Mattessich, Instrumental Reasoning and Systems Methodology. 1978, xxii + 396 pp.
16 H. Jungermann and G. de Zeeuw (eds.), Decision Making and Change in Human
Affairs. 1977, xv + 526 pp.
18.A. Rapoport, W. E. Stein, and G. J. Burkheimer,Response Models for Detection of
Change. 1978 (forthcoming)
19. H. J. Johnson, J. J. Leach, and R. G. Miih1mann (eds.), Revolutions, Systems, and
Theories; Essays in Political Philosophy. 1978 (forthcoming).
20. S. Gale and G. Olsson (eds.), Philosophy in Geography. 1978 (forthcoming).

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DECISION THEORY AND SOCIAL ETHICS

THEORY AND DECISION LIBRARY

IN THE PHILOSOPHY AND METHODOLOGY OF THE

SOCIAL AND BEHAVIORAL SCIENCES

GERALD EBERLEIN, University of Technology, Munich

Editorial Advisory Board:

K. BORCH, Norwegian School of Economics

D . REIDEL PUBLISHING COMPANY

International Symposium on Decision Theory and Social Ethics, Schloss

(Theory and decision library ; v. 17)

Published by D. Reidel Publishing Company,

All Rights Reserved

No part of the material protected by this copyright notice may be reproduced or

LIST OF PARTICIPANTS xxi

PART 1/ PHILOSOPHY AND ETHICAL PRINCIPLES

JOHN C. HARSANYI/ Rule Utilitarianism and Decision Theory 3

PART 2/ SOCIAL AND COLLECTIVE CHOICE THEORY

SALVADOR BARBERA / Nice Decision Schemes 101

PART 3/ SPECIAL TOPICS IN SOCIAL CHOICE

KARL BORCH / Ethics, Institutions and Optimality 237

INDEX OF NAMES 321

Ethics, as one of the most respectable disciplines of philosophy, has

choice showed, at least according to Sen's interpretation, that the

various disciplines have been involved: philosophy, economics, sociol-

renewed attraction in the modern discussion on ethical values:

and perpetuates the power structure of the most successful without

we have to teach them that they are disadvantaged? How do we

in a different residence-according to one's like-and this right re-

tained on the basis of an arbitrary genetic lottery, the antithesis to

outcomes it therefore escapes undesirable implications of AU that

other alternatives) to every other alternative, and the case of Pareto

essentially due to A. Gibbard and M. Satterthwaite, where the assump-

BARBERA, SALVADOR-Universidad Autonoma de Madrid, Depar-

SONNENSCHEIN, HUGo-Department of Economics, Princeton Univer-

PHILOSOPHY AND ETHICAL PRINCIPLES

RULE UTILITARIANISM AND DECISION THEORY

In recent years there has been a good deal of controversy in the

problems of ethics: how it can help us in modelling moral decisions in an

2. THE PROBLEM OF DEFINING 'SOCIAL UTILITY'

In any utilitarian theory, maximization of 'social utility' (or of the total

sum, of individual utilities. Actually, the two definitions are mathemati-

3. SOME QUALIFICATIONS TO PREFERENCE UTILITARIANISM

Common sense distinguishes between sensible preferences (sensible

conditions' and, in particular, after careful reflection and in possession of

At Jeast on the face of it, utilitarianism is a very attractive ethical theory

their propensity to obey customary moral rules. But this argument is

Two distinguished philosophers, Brandt (1963) and Lyons (1965),

5. A MODEL FOR THE UTILITARIAN MORAL DECISION

By a moral decision problem I mean the problem of deciding what actions

by application of the appropriate utilitarian criteria; whereas the ll!ttet

6. AN EXAMPLE TO ILLUSTRATE THE EXPECTATION AND THE

7. THREE EXAMPLES TO ILLUSTRATE THE

To illustrate the coordination effect, I will now consider to what extent we

I will describe any given outcome as an equilibrium outcome if:

different outcomes in this class as there are ways of selecting 40,000

of act utilitarian criteria. These two effects enable rule utilitarianism to

some well-defined mathematical facts. (Does rule utilitarianism pose a

moral implications as act utilitarianism has is not one of them. This

1. The purpose of this Note is to describe the structure of the decision

because, according to rule utilitarian theory, he must choose a specific

(B) Maximize U = U{S1> ... , Sj, ... , sn),

2. In the rule utilitarian case, the maximization problem described

consecutively, we will obtain a system of simultaneous equations which

(B') Maximize U= U(SI>"" S;"'" Sn, Sn+I>"" sn+m),