A Solution to Arrow's General Possibility Theorem : Contracting Through Negotiations

This paper is comprised of the greater part of Chapter 2 of my doctoral thesis at SMC University. It approaches Social Choice Theory as a distinctively different way of examining economic activity, one that more closely corresponds to the way in which economic actors organize activity in the pursuit of their ends. Unlike neo-classical economics, Social Choice Theory assumes from the beginning that human action is driven by a desire to achieve social orderings consistent with each person’s personal subjective preferences. When numerous individuals, all inhabitants of the same societal order, attempt this, the theory states that all cannot achieve their preferred orderings simultaneously. This is the content of Arrow’s (1963) well known General Possibility Theorem. Inevitably, there must be compromise. This paper investigates the condition under which these compromises can be made. A particularly difficult question arises in the handling of Arrow’s assumption of the independence of irrelevant alternatives. These are interpreted as the result of risk and uncertainty in determining their impact on social ordering. Their irrelevance therefore cannot be precisely known. Parties to any transaction will differ as to their expectations. Negotiations over risk and in the context of uncertainty are part of any economic transaction. A particularly generalizing manner of handling this issue is through a process originating in a what Rawls called the veil of ignorance where risk and uncertainty are essentially total. Rawls concludes his analysis by advocating lexical principles of justice and a distribution governed by the difference principle. Modified, and somewhat less absolutizing, versions of this theory are found in Harsanyi’s similarity postulate, and in Buchanan’s analysis of the social role of a constitution