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The Invisible Hand and Modern Welfare Economics

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  • Joseph E. Stiglitz

Abstract

This paper reviews and puts into perspective recent work reassessing the first and second Fundamental Theorems of Welfare Economics. It assesses the implications of the Greenwald-Stiglitz theorem establishing the (constrained) Pareto inefficiency of market economies with imperfect information and incomplete markets as well as recent work on endogenous technological change. The information theoretic limitations to the Second Fundamental Theorem are also discussed, including the inability to separate out issues of equity and efficiency. The final sections of the paper consider the consequences of these problems for economic organization, economic policy, and the role of ideology in the belief in the Invisible Hand.

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File URL: http://www.nber.org/papers/w3641.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3641.

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Date of creation: Mar 1991
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Publication status: published as Vines, David and Andrew A. Stevenson (eds.) Information, strategy and public policy. Oxford and Cambridge, MA: Blackwell, 1991.
Handle: RePEc:nbr:nberwo:3641
Note: PE
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  1. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
  2. Salop, Steven, 1976. "Information and Monopolistic Competition," American Economic Review, American Economic Association, vol. 66(2), pages 240-45, May.
  3. Salop, Steven & Stiglitz, Joseph E, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 493-510, October.
  4. Grossman, Sanford J, 1981. "Nash Equilibrium and the Industrial Organization of Markets with Large Fixed Costs," Econometrica, Econometric Society, vol. 49(5), pages 1149-72, September.
  5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  6. Hall, Robert E & Jorgenson, Dale W, 1969. "Tax Policy and Investment Behavior: Reply and Further Results," American Economic Review, American Economic Association, vol. 59(3), pages 388-401, June.
  7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  8. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
  10. Greenwald, Bruce & Stiglitz, Joseph E & Weiss, Andrew, 1984. "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 74(2), pages 194-99, May.
  11. David E. M. Sappington & Joseph E. Stiglitz, 1987. "Privatization, information and incentives," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(4), pages 567-585.
  12. John Vickers & George Yarrow, 1988. "Privatization: An Economic Analysis," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262720116, June.
  13. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  14. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  15. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  16. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  17. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
  18. Sonnenschein, Hugo, 1973. "Do Walras' identity and continuity characterize the class of community excess demand functions?," Journal of Economic Theory, Elsevier, vol. 6(4), pages 345-354, August.
  19. Steve Salop, 1976. "Information and monopolistic competition," Special Studies Papers 74, Board of Governors of the Federal Reserve System (U.S.).
  20. Mantel, Rolf R., 1974. "On the characterization of aggregate excess demand," Journal of Economic Theory, Elsevier, vol. 7(3), pages 348-353, March.
  21. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 541-62, November.
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Cited by:

  1. Bazhanov, Andrei, 2013. "Inefficiency and Sustainability," MPRA Paper 51815, University Library of Munich, Germany.
  2. Mariana Mazzucato & Caetano C.R. Penna, 2015. "Beyond Market Failures: The Market Creating and Shaping Roles of State Investment Banks," Economics Working Paper Archive wp_831, Levy Economics Institute.
  3. Zaman, Md Monowaruz, 2010. "An Unbiased Pareto Improvement strategy for poverty alleviation," MPRA Paper 27800, University Library of Munich, Germany.
  4. Bloise, Gaetano & Reichlin, Pietro, 2005. "Risk and intermediation in a dual financial market economy," Research in Economics, Elsevier, vol. 59(3), pages 257-279, September.
  5. Mariana Mazzucato & Cateano C.R. Penna, 2014. "Beyond market failures: The market creating and shaping roles of state investment banks," SPRU Working Paper Series 2014-21, SPRU - Science and Technology Policy Research, University of Sussex.
  6. Zaman, Md Monowaruz, 2008. "Welfare dynamics based on a new concept of inefficient equilibrium," MPRA Paper 11303, University Library of Munich, Germany.
  7. López, Ramón & Schiff, Maurice, 2013. "Interactive dynamics between natural and man-made assets: The impact of external shocks," Journal of Development Economics, Elsevier, vol. 104(C), pages 1-15.
  8. Josef Zuckerstätter & Thomas Zotter, 2012. "Die Kultur der organisierten Verantwortungslosigkeit. Oder vom Unglück, Recht zu haben," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 38(2), pages 291-297.
  9. Winfield, Mark & Dolter, Brett, 2014. "Energy, economic and environmental discourses and their policy impact: The case of Ontario׳s Green Energy and Green Economy Act," Energy Policy, Elsevier, vol. 68(C), pages 423-435.
  10. Madarász, Aladár, 2014. "A láthatatlan kéz - szemelvények egy metafora történetéből
    [The invisible hand - extracts from the history of a metaphor]    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 801-844.
  11. Luigi Zingales, 2015. "Does Finance Benefit Society?," NBER Working Papers 20894, National Bureau of Economic Research, Inc.
  12. Alkire, Sabina & Deneulin, Séverine, 1998. "Individual Motivation, its Nature, Determinants and Consequences for Within Group Behavior," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1999033, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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