Normative Microeconomics and the Social Contract

More than thirty years ago, the advancing mathematical economics and the emerging game theory joined forces to attack an ambitious program of social engineering in the microeconomic scale often known "mechanism design", but more accurately described as "normative economics." It combines the tools of normative/axiomatic and strategic/equilibrium analysis to address, inter alia, the design of auctions and other trading mechanisms, the provision of public goods, the fair division of costs or manna--e.g., inheritance and bankruptcy settlements--, the rationing of overdemanded commodities and the scheduling of tasks. My goal in this lecture is to explore the methodological and ideological premises of normative microeconomics. I submit that this approach falls squarely in the three centuries old tradition in political philosophy known as the social contract doctrine, and provides powerful arguments against its intellectual nemesis, the minimal state doctrine. This controversial strand explains some of the resistance to the normative approach within the academic economic profession, and is likely to shape its development for the foreseeable future.