Economic Action as Imperfect Cooperation
Chapter 9: Macroeconomics
The previous chapter explored the hypothesis that the entire population of a territory might form a cooperative grand coalition. In a world of costly information, such a coalition might rely on less costly non-cooperative decision-making for many of its routine decisions. In the ideal case this might mean a market system. But this ideal case, in which markets are incentive-compatible, can be realized only if information is costless so that in practice the market decision-making can only be approximately incentive-compatible. At the same time, recognizing the role of organization in conserving costly information, the grand coalition would undoubtedly establish an organization, that is, a state. The chapter then explored some of the ways the state and the market mechanism might jointly better approximate a cooperative solution for the grand coalition than either might do separately. In the course of this exploration, a large part of twentieth-century welfare economics based on neoclassical approaches could be recovered. However, one set of issues was left for this chapter: the issues that arise if a failure of coordination among the many non-cooperative decision-makers in the economy results in a situation of deficient aggregate demand. While there will be little explicit reference to the hypothesis that government functions as an agent of the grand coalition of the whole population, this hypothesis is in the background throughout the chapter.
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