A cooperative game approach to optimal saving theory: Toward a constitution for savings

Abstract

1. Two years ago, after a "post Nobel" conference at the University of Turin, James Buchanan told me that he was working, on pure allocational grounds, on the economic foundations of two ethical principles, defined as "Victorian principles" or "virtues" and comprised the ethics of work and the ethics of savings.1 He reasoned that the allocational foundation of the ethics of work should mainly be found in the external economies of increasing returns related to the increase in labour supply. As for the allocational foundations of the ethics of savings, the arguments where those previously used in the extensive discussion of the failures of the Keynesian "democracy in deficit" and of the "reasons" of (constitutional) fiscal rules (see Brennan and Buchanan, 1985; Buchanan and Wagner, 1977). The foundations of these "virtues", therefore, are intended to be strictly Paretian or rather, (taking Buchanan's contractarian constitutional point of view) "Wicksellian". Encouraged by Buchanan's lead, I aim in this paper to find rules relating to "optimal saving" in terms of an "ideal game" equilibrium which results both in Pareto efficiency and fairness to the parties involved who are the individuals living in the various periods of time in a given country (or society). "Fair" here means a distribution according to rules of "justice as impartiality" or "mutual advantage" i.e. when the players do not exert any threat or pressure arising from their different bargaining power.2 My approach although analogous to that of Buchanan does differ because rests on rules of justice consistent with Pareto improvements which due to these characters might have a salience as "stable conventions".3