Resource Allocation Mechanisms

In the previous chapter we presented some concepts of equilibrium which had a certain appeal from the normative point of view. However they were not totally satisfactory as a positive description of how an economy works for two reasons. Firstly, we needed an auctioneer to announce the price schedule. Unless this auctioneer was perfectly informed (which is in some sense self-defeating) we need to assume that people behave truthfully. Secondly, we only considered market mechanisms. While the first reason points out a possible inconsistency of the model, the second refers to a wider question: since Plato, various authors have imagined alternative societies to the one based on the market that were reputed to be optimal from the point of view of some ethical criterion (the name utopia echoes the title of the famous book by Sir Thomas More). In general, the advocates of such societies were not excessively worried about the human behavior being selfish and maximizing (in tune with Hobbes’s sentence ‘man is a wolf for man’) and consequently they did not deal with the problem of the agents having incentives to follow the rules of such societies. The adjective ‘utopic’ therefore came to have a pejorative connotation, indicating that such forms of social organization were destined to fail, at least as long as men behaved in accordance with the assumptions of the ‘homo economicus’.