Monday, September 03, 2007

Insight from Blaug's History

Mark Blaug, in "The Fundamental Theorems of Modern Welfare Economics, Historically Contemplated" (History of Political Economy, V. 39, N. 2 (2007): 185-203), offers some ideas relevant to comments on other economic blogs.

Blaug considers the widely repeated claim that the first fundamental theorem of welfare economics formalizes Adam Smith's notion of the "invisible hand". And he finds this claim mistaken. Blaug cites Gavin Kennedy favorably.

Dani Rodrik recently kicked off a discussion of two policy stances - "first best" and "second best" economists. And Rodrik organized this discussion around the two fundamental theorems. As I understand it, first best economists, according to Rodrik, think the general equilibrium world in which these theorems follow is close enough to, say, the United States economy to justify a bias against government intervention. Second best economists, according to Rodrik, think that the deviations of actual economies from the ideal general equilibrium model justify a bias towards intelligent government intervention. In either case, a static efficiency ideal is what we should be aiming at. (I admit to a bias - towards suspicion of dualistic thinking.)

Blaug considers whether the first and second fundamental theorems can provide policy guidance. And he concludes that static ineffiency is not very relevant to the "real-world dynamic performance of a competitive economy", which is what we should be interested in. This is just one more paper Blaug has produced over the years attacking the Arrow-Debreu formalism.


YouNotSneaky! said...

Well, if static inefficiency is not what we should care about, then, in the set of related phenomenon (i.e. we're not talking about inequality or injustice here but stuff related to economic output and efficiency) what is it that we should care about?
Dynamic efficiency presumably. So ... maximizing the sum of intertemporal utilities or at least growth rate of output. But that doesn't really go that far beyond the first two welfare theorems. Maybe that government should subsidize research and development to internalize knowledge externalities.

Robert Vienneau said...

Blaug wants more qualitative and economic history, less theorem-proving. He includes Sraffa (1960) in his list of formalist works that he's against.