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"Behind the free market ideology there is a model, often attributed to Adam Smith, which argues that market forces--the profit motive--drive the economy to efficient outcomes as if by an invisible hand. One of the great achievements of modern economics is to show the sense in which, and the conditions under which, Smith's conclusion is correct. It turns out that these conditions are highly restrictive. Indeed, more recent advances in economic theory --ironically occurring precisely during the period of the most relentless pursuit of the Washington Consensus policies--have shown that whenever information is imperfect and markets incomplete, which is to say always, and especially in developing countries, then the invisible hand works most imperfectly. Significantly, there are desirable government interventions which, in principle, can improve upon the efficiency of the market.....

2007-10-15 16:41:11 · 7 answers · asked by Anonymous in Politics & Government Other - Politics & Government

These restrictions on the conditions under which markets result in efficiency are important--many of the key activities of government can be understood as responses to the resulting market failures."

2007-10-15 16:41:38 · update #1

7 answers

Basically, the quote refers indirectly to the Coase Theorem. The Coase Theorem basically states that in a world of perfect information (that is one in which no one has a bargaining advantage based on superior knowledge), the market would reach the efficient result regardless of how rights were originally distributed. However, the Coase Theorem is expressly conditioned on that situation of perfect information. Once information costs are added into the system, the Coase theorem acknowledges that the market is imperfect and not entirely efficient.

It should be understood that in theory there is also a perfect socialist economy with its own conditions required for perfect efficiency.

The reality is that the conditions do not exist for either a perfect capitalist or a perfect socialist economy. In the absence of such conditions, we do the best that we can to achieve the optimum economy by mixing the two. It should be noted that the optimum economy is not necessarily the one with the greatest over-all wealth but rather one in which the desire for wealth is balanced with the desire for a fair income distribution.

2007-10-15 19:54:21 · answer #1 · answered by Tmess2 7 · 0 0

The base comment that the requirement for perfect information is unrealistic is quite correct. The problem is that the corrections for this are most often incorrect. Clearly, the best example of this would be the experience of the communist bloc countries which sought to replace the market system with a planned economy. The resulting failure of those countries to keep pace with the market economies of western Europe, let alone the US and Pacific Rim points out the failure of government intervention on more than an issue by issue basis.

The Communist countries proved capable of making great strides in focused arenas (e.g. steel production, etc.) but proved incapable of a general economic growth even commensurate with the growth in the market economies.

So, in conclusion, while the statement is correct in its premise, the proposed solution, significant governmental intervention into the planning of the economy has shown that the visible hand is not capable of managing an economy even as well as the invisible hand, no matter how hampered it is by a lack of perfect information.

2007-10-15 19:00:08 · answer #2 · answered by Matt W 6 · 0 0

The Nobel Laureates are certainly wiser than I am, but I wonder if thinking for an indefinite term instead of 5, 10, 50 or even 100 years, would ultimately work better and then you must also consider what is good or efficient. Perhaps subsidizing non-productivity actually, in the long run, creates less efficiencies. Darwinism took millions of years, but it can't be doubted as successful for successful species.

2007-10-15 16:54:18 · answer #3 · answered by Dan S 2 · 1 0

wow i just learned this in school about two weeks ago.....in monetary policy & environmental economic classes. i couldn't agree more with this quote....information is never complete therefore almost 100 percent of the time all the theories are just theories and are never implemented. however even though theories don't work.....they help the economist come to a viable result.

Few individual do determine the faith of the entire economy.....specially the 12 heads at fed, the president and few selected committee members. They make people feel more comfortable....if people panic and stop spending.....its game over.

in lame terms.....economy is pretty much 'mob control'

2007-10-15 16:57:41 · answer #4 · answered by Pro Bush 5 · 1 0

In fact the Government whether con or lib, Dem or repub need to stay the hell out of business. You show me a business the govt got involved in and I'll show you a mess.
Airlines, health insurance all the way down the line FUBARed

2007-10-15 16:58:05 · answer #5 · answered by CFB 5 · 0 1

The market, sans monopolies, is absolute in its ability to serve society as a whole.

2007-10-15 16:54:18 · answer #6 · answered by Anonymous · 1 0

you choose,
the wealthy elite in power over our lives
or a government
i prefer a government that is elected by the people and of the middle class.... never the elite....

2007-10-15 16:46:24 · answer #7 · answered by Anonymous · 1 0

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