Consider "the fundamental equation":
preferences (x) institutions or procedures => outcomes
This is not mathematical, but it is an organizing device for social institutions.

Preferences
For the time we will consider preferences as given and fixed, that is "exogenous." Examples.

Procedures
As you recall from the inverted tree on back of the syllabus, markets are one type of social institution, and government is another.

Majority rule is a basic institutional procedure for democratic (and republican?) government and politics, and is based on the simple principle that more votes should outweigh fewer votes.

Voluntary exchange is a basic institutional procedure for markets, and is based on the simple principle that people should agree unanimously on market exchanges.

Majority rule is "well-behaved" when there are only two options. (Note possibility of ties.)
But majority rule is problematic when there are more than two.
Getting started with group choice:

A group of three (Andrew, Bonnie and Chuck) with three choices for spending a fall afternoon (the Museum of Fine Arts, Walden Pond, or the Red Sox).

Result of a series of paired comparisons between Andrew, Bonnie and Chuck: WP>RS>MFA, a complete and transitive group preference derived from individual preferences.

But replace Chuck with Charles, whose second and third choices are reversed, and the result is a preference cycle: MFA>WP>RS>MFA. The group preference is not transitive. It is incoherent.

Agenda power

Markets are "well-behaved" when there are not market failures.
In our experiments, there was no central authority. The markets were decentralized, and the price emerged from the trades, rather from some central planner who used knowledge or authority to set prices..

Traders had little information, knowing only their buyer value or seller cost.

Trades took place by voluntary exchange: each trader can veto a deal. This is equivalent to unanimous agreement.

Traders were self-interested, out to maximize their own profit.

Competitive Equilibrium Theory, (or the theory of supply and demand) predicts price and quantity at competitive equilibrium, which is where the supply and demand curves cross.

This prediction was 93% correct for the market I participated in, which was 93% efficient..

At Competitive Equilibrium, markets are Pareto optimal.

Inefficient markets are Pareto inferior, meaning that there are possiblities for Pareto improvements.

Suppose your market is efficient, in that it achieves Pareto optimality at a competitive equilibrium, and does not suffer from market failures 1 thorugh 4 (see Topic One).

But suppose that it is inequitable, in that the distribution of income between three equally sized income classes is as in distribution #1, in spite of equal intelligence and effort.

Majority rule on the results of markets.

Imagine that the following distribution #1, is a result of market exchange, and that it is a Competitive Equilibrium.
 

Distribution #	Rich	Middle class	Poor	Total
1	300	100	0	400
2	133	133	133	400
3	200	0	200	400
4	300	100	0	400

Distribution 1 can be overturned by distribution 2 under majority rule. Distribution 2 can be overturned by distribution 3, and so on.

This is an example of a "divide the dollar" game.

"Distributive politics is inherently cyclical in majoritarian settings" (Shepsle and Bonchek, p. 59, ch.4)

Methods of majority rule
For more than two choices, there are several methods of aggregating preferences. The most important are:

    Plurality (FPTP): candidate with more votes than any other single candidate wins
Procedure: each voter casts a single vote, and the candidate with the most votes wins

    Plurality with runoff: candidate with more votes than all others combined win.
Procedure: each voter casts a single vote. If no candidate has more votes than all others combined, there is a runoff between the top two vote-getters.

    Borda count: candidate with the most points wins.
Procedure: each voter awards points to each candidate: n-1 points for the first choice, n-2 points for second choice, n-3 points for third choice ….. n-n (zero) points for the last choice. Points for each candidate are summed.

    Approval voting: candidate with the highest total vote wins.
Procedure: each voter cases a single vote for each candidate she approves of. Votes for each candidate are summed.

    Condorcet procedure: winner of each of a series of paired comparisons wins (though there may not be such a winner).
Procedure: each candidate is paired with each other candidate. If there is a single winner of all such pairings, that is the Condorcet winner.

See Shepsle and Bonchek, ch. 7 for discussion and detail.

You will be asked to apply these methods to preference profiles such as the following:

Group	I	II	II
Number in group	(11)	(9)	(5)
First choice	A	B	D
Second choice	B	C	C
Third choice	C	D	B
Fourth choice	D	A	A

Lehrer NewsHour type question (as opposed to "Whowantstobeamillionaire" type question): What does this treatment of majority rule imply for statements about "the public will"?

What does it imply for definitions of "the public interest" as defined by public preferences?

Outcomes
Standards for evaluation of outcomes.

These standards might be considered ways to define "the public interest" that are independent of procedures or institutions. (Think again in terms of the fundamental equation.)

Suppose you were a benevolent dictator. What kind of standard would you impose?

Pareto: definition above in Topic One. This does not hurt anyone relative to the status quo. Indeed, this is its very basis: changes that are worse than the status quo for anyone, rich or poor are ruled out. Very unfair or unequal situations are acceptable under the Pareto standard.

Marx: from each according to their ability, to each according to their need.

Rawls: a thought experiment based on an "original position" behind a "veil of ignorance."
(First principle: Each person is to have an equal right to the most extensive total system of basic liberties compatible with a similar system of liberties for all.)
Second principle; Social and economic inequalities are to be arranged so that they are to the greatest benefit to the least advantaged.
Rawls would prefer distribution 3 to distribution 2, even though distribution two is better for everyone other than the least advantaged.
 

						Sum
1 Equality	10	10	10	10	10	50
2 Inequality	10	15	15	15	50	105
3 Rawls	12	12	12	12	22	70
4 Utilitarian	10	30	40	50	100	230

Utilitarian: a utilitarian standard would maximize the sum of utility, without regard to distribution. Maximizing national income (Gross Domestic Product) is an example of a utilitarian goal.

Nozick: history matters. "a distribution is just if it arises from another (just) distribution by legitimate means."
Wilt Chamberlain, Michael Jordan or Tiger Woods examples.

Suppose you were a benevolent dictator. Which standard would you use for distribution of the social product?