[Date Prev][Date Next][Thread Prev][Thread Next][Date Index][Thread Index]
One last thing:
Was glancing thro the printed documents sent in by Prof. Lal (the disk
versions are being converted into HTML by Nikhil): found some
interesting things. Need to communicate it since it is relevant with
regard to the Amartya Sen panel discussion in Hyderabad.
This is from Prof. Lal's Shenoy Memorial Lecture of 1996 delivered at
Ahmedabad. I think this will dispel (well at least in the minds of some)
the meaningless of the word "competitive equilibrium" as understood in
the Arrow-Debreau sense. Note that the key quote is from Blaug,
indisputably the greatest student of economic thought that ever was.
When Blaug thinks so, then we must all agree.
I had known for sure that A-D economies do not exist, but that even
then, competition is good. That is what Hayek said, in words which
preceded Sen-Arrow-Debreau, and received his Nobel Prize well before
Sen. I like Prof. Lal's argument of this case. Please take note of this
argument, those who still mistake market failure as a direct cause to
intervene through utterly useless (ill-qualified, ill-trained, and often
corrupt) bureaucrats.
Actually, the full lecture will soon be on the web at IPI's web site.
Let me therefore revert to the summary that was published by the Cato
institute at
http://www.cato.org/pubs/journal/cj17n2-6.html
and quote from it in order to save my fingers.
[For those who are not quite aware of it, Prof. Deepak Lal is also the
Founder Vice President of the International Indian Economic Association
that was started as an idea-offshoot of IPI three months ago. Prof.
Amartya Sen has been invited to be our first president and hopefully he
will accept. Those of you who are economists but have not yet joined
IIEA (www.iiea.org), please write to me; there is a lot of work to be
done on IIEA too].
Prof Deepak Lal's views:
-------------------------
Shifting Notions of Competition
The common intellectual basis for the justifications provided for
planning and regulation is linked to a subtle but important shift in
economists' notion of competition--from the classics, spanning Adam
Smith to J.S. Mill, to modern mainstream economics. The latter's
intellectual moorings are provided by the so-called Arrow-Debreu theory
of general equilibrium, which it is asserted gives precision to the
claims of the classics on the virtues of the market (see Arrow and Hahn
1971: vi-vii). But as Blaug (1987: 443) points out, one needs to note
the subtle but nevertheless unmistakable difference in the conception of
``competition'' before and after the ``marginal revolution.'' The modern
concept of perfect competition, conceived as a market structure in which
all producers are price-takers and face perfectly elastic sales curves
for their outputs, was born with Cournot in 1838 and is foreign to the
classical conception of competition as a process of rivalry in the
search for unrealized profit opportunities, whose outcome is uniformity
in both the rate of return on capital invested and the prices of
identical goods and services but not because producers are incapable of
making prices. In other words, despite a steady tendency throughout the
history of economic thought to place the accent on the end-state of
competitive equilibrium rather than the process of disequilibrium
adjustments leading up to it, this emphasis became remorseless after
1870 or thereabouts, whereas the much looser conception of ``free
competition'' with free but not instantaneous entry to industries is in
evidence in the work of Smith, Ricardo, Mill, Marx and of course
Marshall and modern Austrians. For that reason, if for no other, it can
be misleading to label classical economics as a species of general
equilibrium theory except in the innocuous sense of an awareness that
``everything depends on everything else.''
It is equally surprising that the ``Chicago school,'' as Kirzner (1994:
103) has noted, ``maintains that the competitive market economy displays
systematic regularities only to the extent that it can be reasonably
fitted into the perfectly competitive mold. Subsequent [to Frank Knight]
generations of Chicago theorists would maintain that as a matter of fact
the real world competitive market can so be fitted.'' Thus,
self-proclaimed mainstream theorists on both sides of the
market-dirigiste divide now use the Arrow-Debreu model as their
paradigm.
>From this theoretical perspective, the two fundamental theorems of
welfare economics are derived, which theorists assert provides the
justification for the superiority of a market economy (see Dasgupta
1980, Hahn 1984, Sen 1983). While if one or the other conditions for the
existence of the utopian state of perfect competition are not met, there
is ``market failure'' and thence a prima facie case for government
intervention. This justification for dirigisme is bizarre (Lal 1983,
1987). To compare competition in any actual market economy with an
unattainable ideal, is, to use Demsetz's (1969) useful phrase, a form of
``nirvana economics.'' For it is child's play to show that because of
incomplete markets, external effects, and the existence of public goods,
``market failure'' defined as deviations from the perfectly competitive
norm is ubiquitous, but the corollary that this then requires massive
corrective public action is highly dubious.
But ``market failure'' was the intellectual basis of the planning
syndrome. As emerged in the famous debate between Lange, Lerner, von
Mises and Hayek in the 1930s, the planners (Lange and Lerner) argued
that (a) because of the ubiquitous imperfections in most markets, no
market economy could ever in practice attain the utopian norm of perfect
competition, and (b) through computations simulating the outcome of a
perfectly competitive economy, the planners could compel the production
of the resulting quantities of inputs and outputs (or legislate their
optimal relative prices). A planned economy could, thus, achieve
nirvana. Hayek and Mises pointed out that, though such a form of
planning might be theoretically feasible in a world where information
about resources, technology, and the myriad actual and possible
production processes and tastes of consumers could be costlessly
acquired by the central planning authority, in the real world it would
be impossible. The market-based price mechanism is essential because it
makes use of the division of knowledge which is unavoidable in any real
world economy (see Hayek 1935). The failures of centralized
planning--not least in India--are now well known, with the events of
1989 having hopefully buried the planning syndrome. For even mainstream
theorists accept that imperfect information leads to incomplete markets
(see Greenwald and Stiglitz 1986, Dasgupta 1980, and Stiglitz 1994),
which cause problems of what is called ``incentive
compatibility''--exactly the point made by Hayek and von Mises in the
1930s. Thus, a command economy on Lange-Lerner market-socialist lines is
ruled out.
----------------------------------------------------------------------------
This is a posting to India_Policy Discussion list: debate@indiapolicy.org
Rules, Procedures, Archives: http://www.indiapolicy.org/debate/
---------------------------------------------------------------------------