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The Problem of the Second Best: Conceptual Issues

  • Juha Räikkä (a1)

In this article I shall undertake a preliminary exploration of the notion of second best. I shall follow a three-step strategy. First, I shall introduce some applications of the theorem of the second best in different fields of philosophy and social sciences. Secondly, I shall make several conceptual distinctions related to the theorem. I aim to show that there are certain theoretical results that are similar but not identical to the theorem of the second best, and that the notion of second best is often used quite loosely. Finally, I shall try to shed some light on the question of how the theorem is description-sensitive. The overall aim of the paper is to pay attention to the generality of the problem of the second best and stress the importance of the theorem in political theory in particular.

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1 The theorem of the second best is often called ‘the general theory of second best’. The theorem was first formalized by Lipsey R. G. and Lancaster K. J. in ‘The General Theory of Second Best’, Review of Economic Studies, xxv (1956).

2 Cf. Boadway Robin, ‘The Role of Second-Best Theory in Public Economies’, EPRU Working Papers, 1995 (Copenhagen).

3 See e.g. Guesnerie Roger, ‘General Statements on Second Best Pareto Optimality’, Journal of Mathematical Economics, x (1979); Kemp Murray C. and Wan Henry Y. Jr, ‘The Comparison of Second-Best Equilibria: The Case of Customs Unions’, Journal of Economics, Suppl. Vol. v (1986); Blackorby Charles, ‘Economic Policy in a Second Best Environment’, Canadian Journal of Economics, XXIII (1990); Blackorby Charles, Davidson Russell and Schworm William, ‘The Validity of Piecemeal Second-Best Policy’, Journal of Public Economics, xlvi (1991); Bovenberg A. Lans and van der Ploeg Frederick, Environmental Policy, Public Finance and the Labour Market in a Second-Best World, Milan, 1993; Lahiri Sajal and Raimondes Pascalis, Quotas, Partial Rent Retention and The Second Best, Aarhus, 1993; Beetsma Roel and Bovenberg A. Lans, ‘Designing Fiscal and Monetary Institutions in a Second-Best World’, Discussion Paper Series (1995), Tilburg; Orosel Gerhard O. and Schoeb Ronnie, ‘Internalizing Externalities in Second-Best Tax Systems’, CES Working Papers (1995), Munich; Baranzini Andrea, Second-Best Environmental Policy and Nonconvexities, Geneva, 1996; Gaynor Martin, Haas-Wilson Deborah and Vogt William B., ‘Are Invisible Hands Good Hands? Moral Hazard, Competition and the Second Best in Health Care’, NBER Working Papers (1998), Cambridge; Aizerman Joshua, ‘Capital Mobility in a Second Best World’, NBER Working Papers (1998), Cambridge; Goulder Lawrence H. et al. , ‘The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second Best Setting’, NBER Working Papers (1998), Cambridge.

4 Margalit Avishai, ‘Ideals and Second Best’, Philosophy for Education, ed. Fox S., Jerusalem, 1983, esp. p. 77. See also Seymour Fox, ‘Theory into Practice (In Education)’, Philosophy for Education.

5 For a discussion on character traits and virtues, see e.g. Foot Philippa, Virtues and Vices, Oxford, 1978, ch. 1.

6 More and more scholars are actively engaged in studying areas where legal and economic concerns interface, and the leading law schools have at least one full-time economist as a member of the law faculty. For a discussion, see e.g. Hirsch Werner Z., Law and Economics: An Introductory Analysis, New York, 1979; Oliver John MacDonald, Law and Economics, London, 1980; Samuels Warren J. and Schmid A. Allan (ed.), Law and Economics: An Institutional Perspective The Hague, 1981; Jones Kelvin, Law and Economy: The Legal Regulation of Corporate Capital, London, 1982; Posner Richard A., Economic Analysis of Law, 3rd edn., Boston, 1986; Cooter Robert and Ulen Thomas, Law and Economics, Glenview, 1988; Mercudo Nicholas (ed.), Law and Economics, Dordrecht, 1989.

7 Harrison Jeffrey L., Law and Economics in a Nutshell, St Paul, 1995, pp. 53–5. See also Markovits Richard S., ‘A Basic Structure for Microeconomic Policy Analysis in Our Worse-than-Second-Best World’, Wisconsin Law Review (1975); Guesnerie Roger and Roberts K., ‘Minimum Wage Legislation as a Second Best Policy’, European Economic Review, xxxi (1987); Gollier Christian and Schlesinger Harris, ‘Second-Best Insurance Contract Design in an Incomplete Market’, CORE Discussion Papers (1992), Louvainla-Neuve; Monahan George E. and Vemuri Vijay, ‘Monotone Second-Best Optimal Contracts’, Research Working Papers (1994), Urbana-Champaign; Ishiguro Shingo, ‘Incomplete Contracts and Breach Remedies’, Journal of Institutional and Theoretical Economics, c1v (1999).

8 Coram Bruce Talbot, ‘Second Best Theories and the Implications for Institutional Design’, The Theory of Institutional Design, ed. Goodin R., New York, 1996. See also Goodin Robert, ‘Political Ideals and Political Practice’, British Journal of Political Science, xxv (1995). For a discussion on the role of ideals in institutional design, see e.g. van der Burg Wibren, ‘The Morality of Aspiration’, Rediscovering Fuller: Essays on Implicit Law and Institutional Design, ed. Witteveen W. J. and van der Burg W., Amsterdam, 1999.

9 This is Goodin's example; ibid., 53.

10 Among others, Beitz Charles evaluates the argument in his ‘Democracy in Developing Societies’, Boundaries: National Autonomy and its Limits, ed. Brown P. G. and Shue H., Totowa, 1981.

11 See e.g. Brink David, ‘Moral Conflict and its Structure’, Philosophical Review, ciii (1994).

12 Pietroski Paul M., ‘Executing the Second Best Option’, Analysis, liv (1994). See also Goldman Holly S., ‘Doing the Best One Can’, Values and Morals, ed. Goldman A. I. and Kim J., Dordrecht, 1978; Jackson Frank and Pargetter Robert, ‘Oughts, Options, and Actualism’, Philosophical Review, xcv (1986).

13 Bohman James, ‘The Coming Age of Deliberative Democracy’, Journal of Political Philosophy, vi (1998), esp. 417.

14 Ackerman Bruce A., ‘What Is Neutral about Neutrality?’, Ethics, xciii (1983), esp. 385.

15 Streissler Erich and Neudeck Werner, ‘Are there Intellectual Precursors to the Idea of Second Best Optimization?’, Journal of Economics, suppl. vol., v (1986), esp. 227. For a history of the second best, see also Guesnerie Roger, ‘The Genealogy of Modern Theoretical Public Economics: From First Best to Second Best’, DELTA Working Papers (1994), Paris; cf. Boadway.

16 See e.g. Margalit, 77.

17 Here I take it as self-evident that weakness of will is possible.

18 Føllesdal Andreas, Contractualism and Bargaining, Oslo. 1993, p. 81. Cf. Margalit, 77 f.

19 Sher George, Approximate Justice: Studies in Non-Ideal Theory, Lanham, 1997, p. 1.

20 Rawls John A Theory of Justice, Oxford, 1972, p. 245 (italics added). Cf. Feinberg Joel, ‘Duty and Obligation in the Non-Ideal World’, in his Rights, Justice, and the Bounds of Liberty, Princeton, 1980, esp. pp. 256 f.

21 See e.g. Mishan E. J., ‘Second Thoughts on Second Best’, Oxford Economic Papers, new series, xiv (1962).

22 For such proof, see e.g. Rowley Charles K. and Peacock Alan T., Welfare Economics: A Liberal Restatement, London, 1975; Ng Yew-Kwang, Welfare Economics, London, 1979, ch. 9.

23 Cf. Goodin, ‘Political Ideals and Political Practice’, 53n.

24 If an agent thinks that the most effective way to reach social justice is to promote civil liberties and construct a welfare safety net, then it does not matter whether we ask the agent to ‘promote civil liberties and construct a welfare safety net’ or to ‘promote social justice in the most effective way’.

25 Yes, there are people who think that socialism may have value in and for itself.

26 Certain theoretical models (in decision theory) deny all interaction effects and interdependence between the various strategies and ideals that different agents happen to hold. However, while these models may have certain mathematical advantages in comparison to models that allow for dependence, perhaps they must nonetheless be rejected, since representations based on them seem to be substantively misleading. Again, cf. Goodin, ‘Political Ideals and Political Practice’, 52. For an account of ‘multiple objectives’, see Keeney Ralph L. and Raiffa Howard, Decisions with Multiple Objectives: Preferences and Value Tradeoffs, Cambridge, 1993.

27 See e.g. Sen Amartya, On Ethics & Economics, Oxford, 1987, esp. ch. 2; Kleindorfer Paul R., Kunreuther Howard C. and Schoemaker Paul J. H., Decision Sciences: An Integrative Perspective, Cambridge, 1993; Larmore Charles E., Patterns of Moral Complexity, Cambridge, 1987, esp. ch. 6.

28 See e.g. Cohen L. Jonathan, ‘Verisimilitude and Legisimilitude’, What is Closer-tothe-Truth?, ed. Kuipers T. A. F., Amsterdam, 1987.

29 Rawls, pp. 8 f.

30 For a discussion, see Burg Wibren van der, ‘The Importance of Ideals’, Journal of Value Inquiry, xxxi (1997).

31 I would like to thank Charlotte Beauchamp, Wibren van der Burg, Robert E. Goodin, Bo Pettersson, Mikko Wennberg and the editor of Utilitas and a referee for helpful discussion and written comments on an earlier version of this article, and I am grateful to the European University Institute (TMR Programme) for giving me financial support during my stay in Florence where this article was written.

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