Cooperative Microeconomics: A Game-Theoretic Introduction.

• Author: Diamantaras, Dimitrios

By Herve Moulin.

Princeton, NJ: Princeton University Press, 1995. Pp. ix, 454. $49.50.

The one and only normative notion explicitly retained in new welfare economics analysis is that expressed by the Pareto efficiency criterion. In that literature, statements abound of the sort that the economist should only tell people how to approach Pareto efficiency while unspecified others should select from the wide range of Pareto efficient allocations. We may wish to note that the very point of departure of this argument is an explicit value judgment. Normative judgments are unavoidable in economics as we know it.

The proponents of this strategy succeeded in introducing a healthy injection of rigor into welfare economics. The cost has been an impoverishment of welfare economics discourse, a development that should not be congenial to anyone who claims to be an intellectual descendant of Adam Smith, who, we remember, wrote The Theory of Moral Sentiments before The Wealth of Nations.

A problem with the avoidance of explicitly normative analysis becomes apparent when reading applied microeconomics papers. Often in that literature, specific normative principles are simplistically employed in evaluating the effects of the various policies analyzed, and the main reason for the use of such principles seems to be analytical tractability. A good example is the common practice of adding up consumer and producer surplus and using this sum as a social welfare function. This practice is hardly ever accompanied by a consideration of alternative social welfare functions or even of the implicit normative axioms that could be shown to justify it.

This is not an attack on rigor or practicality in applied economics; quite the opposite. I am firmly convinced that mathematically expressed rigorous analysis is a gift of the highest order to the economist. I also believe that it can be made to produce deep insights when dealing with issues of justice and cooperation, insights that mainstream textbooks often relegate to a few short chapter sections (some books are better than others in this respect, most notably Mas-Colell, Whinston, and Green [1995]). The publication of Herve Moulin's Cooperative Microeconomics by Princeton University Press came as very welcome news to me, given my concerns expressed above, and I propose to convince you to share my view in the rest of this review. Moulin has written a number of books, including another one on these issues (Moulin 1988), but Cooperative Microeconomics is explicitly written as a graduate microeconomics textbook, for the first time filling this niche with a book centered on welfare economics.

Moulin takes a broad view of cooperation between selfish economic agents. He organizes the book around three modes of cooperation: (i) cooperation by direct agreements, (ii) cooperation in...