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Chapter 1
self-optimization. Therefore, in line with the previous statement, other-regarding preferences serve as the mechanism allowing for an analysis of the benevolent attitude while adhering to the conventional economic theory principles.
1.7. Social preferences or social norms? The modern social choice theory was developed under the shield of the neoclassical research program. The dominating principle of methodological individualism naturally shapes the way in which collective choice is addressed by orthodox economics. The collective choice is viewed as the simple aggregation of the individual preferences while neglecting the interaction effects (or assuming that all the interaction effects are perfectly deterministic). Exogenous social preferences (or other-regarding preferences) are the only possible way to account for the existence of social sentiment and its role in shaping the social exchange dynamics while preserving the fundamental principles of neoclassical economics. From this perspective, any act of pro-social behaviour is the result of deliberate self-optimization. In effect, it implies replacing the strong form of ontological reductionism with a weak one, following Silberstein’s and McGeever’s (1999) terminology. The key argument addressed in this chapter is not related to whether social preferences are indeed rational (i.e., consistent), general suitability of methodological individualism (reductionism) in the field of analysing a social interaction, or the application of the optimization approach towards formulating social policy. Instead, the aim is to examine the policy biases resulting from the dominance of methodological individualism towards formulating social policy. Assuming exogenous social preferences (and assuming that the notion of social preferences can roughly account for the entire scope of values, beliefs, principles, and norms), we must give up on any attempt to conceptualize the process of social change (or the long-run social exchange dynamics). Under the mainstream approach, the interaction between the agents is depicted through the prism of the conventional game theory, when perfectly rational agents deliberately maximize their pay-off under the perfect information (i.e., under the absence of radical uncertainty). Consequently, the role of the public authorities in shaping the long-run social exchange dynamics is limited to ensuring credibility and contract reinforcement, pretty much in line with North’s (1990) ideas of good institutions. Properly formulated public policy (or a properly designed set of formal institutions) can help to achieve the Pareto-efficient outcome. Nevertheless, it cannot (and is not expected to) change the entire game setting.
