IssueNo.76-Block-Boyes_001

IssueNo.76-Block-Boyes_001 - Briefing Notes in Economics...

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Is A Positive Attitude Toward Free Markets An Inferior Good? Michael K. Block* and William J. Boyes**, * Emeritus Professor of Economics, Department of Economics, University of Arizona, McClelland Hall 401, PO Box 210108, Tucson, AZ 85721-0108, USA. ** Department of Economics, W.P. Carey School of Business, Arizona State University, Main Campus, PO Box 873806, Tempe AZ 85287-3806, USA. First version received on 21 st September 2005 Final version received on 8 th September 2006 Just over fifty years ago Arrow and Debreu showed that under appropriate assumptions a perfectly competitive economy would reach a Pareto Optimal general equilibrium. Since their demonstration, a great deal of time and effort has been devoted to establishing exceptions to this theoretical demonstration that free markets result in Pareto Optimality and to the proposition that free markets result in an inequitable distribution of income. While the theoretical attacks seem to have led many in and out of academia to conclude that the free market can not be trusted to allocate goods and services, there are still respectable intellectual arguments for favoring unfettered markets. In the split over the desirability of free markets the opponents appear to be disproportionately composed of those who have benefited the most from free market. Indeed, wealthy nations and upper income groups in most societies, typically attempt to control the free market in their attempts to reduce poverty rather than promoting free markets as a solution to poverty. This suggests that one’s attitude toward free markets depends on one’s income and the empirical analysis reported in this paper confirms that indeed, a favorable attitude toward market allocation is an inferior good. JEL: A2, D10. The authors appreciate comments of an anonymous referee. Briefing Notes in Economics ‘Helping to de-mystify economics since 1992’ Indexed with the Journal of Economic Literature Issue No. 76, March/April 2008 http://www.richmond.ac.uk/bne ISSN 0968-7017
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Briefing Notes in Economics – Issue No. 76, March/April 2008 Michael K. Block and William J. Boyes 2 In its simplest form, economic theory suggests that society can not do better than the outcome of unfettered markets. Arrow and Debreu (1954) showed that under conditions of perfect competition, with preferences and choices independent, and under appropriate assumptions of convexity, an economy would reach a Pareto Optimal general equilibrium. The Arrow-Debreu model resulted in the fundamental theorems of welfare economics: (1) every competitive equilibrium is Pareto efficient; (2) any allocation of scarce resources that is Pareto efficient can be achieved by a competitive equilibrium. The analysis was powerful – for the first time, what Hayek and others had known was true, was mathematically demonstrated. Yet, since then, more resources have been devoted to finding fault with the result than with finding support for it. First were externalities and other so-
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This note was uploaded on 11/27/2011 for the course ECON 101 taught by Professor Robert during the Fall '08 term at Montgomery College.

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IssueNo.76-Block-Boyes_001 - Briefing Notes in Economics...

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