John E. Roemer
An Anti-Hayekian Manifesto
Whither Socialism? poses as an attack on the possibility of market socialism. [*] Joseph Stiglitz, Whither Socialism?, MIT Press, London 1994, £26.95. I thank Fred Block for his comments on an earlier draft of this review. But that pose is superficial. The central object of Stiglitz’s attack is the conventional general equilibrium model of twentieth-century economic theory, fathered by the French economist Léon Walras in the late nineteenth century, and brought to term by Kenneth Arrow and Gérard Debreu, with their proof of the existence of a ‘Walrasian equilibrium’ in an abstract mathematical model of a private-ownership economy, in 1954. The Arrow– Debreu model provides a rigorous foundation for three important views regarding capitalist economies (ones where ownership of resources and firms is private, and economic activity is market-directed): first, that it is possible for markets to engender a general economic equilibrium, a set of trades between economic actors in which every firm demands resources and labour and sells outputs in a profit-maximizing fashion, subject to its technological constraints, and every consumer purchases goods and supplies labour and other resources to firms in that way which maximizes her utility, subject to her budget constraint—that she purchase goods whose value, at market prices, does not exceed the value of the resources and labour she is willing to sell. This set of trades is an equilibrium in the sense that no demand (by a firm or consumer) goes unfulfilled and no supply (of a resource or commodity) goes unpurchased. The second claim, known as the First Welfare Theorem (fwt), is that such equilibria provide Pareto-optimal allocations, which means that there exists no alternative allocation of resources and goods in the economy, given its technological knowledge and the preferences of its members, that would make every individual better off (in terms of the preferences that define the utility that he maximizes in the equilibrium). Pareto optimality is blind to issues of distribution; it is a weak requirement of social welfare in the sense that the test for an allocation’s Pareto optimality is whether another allocation exists which makes everyone better off—even those who are rich in the allocation in question. Consequently, someone concerned with eliminating poverty, or with some degree of equality of outcome, must also ask about the market’s potential for redistribution. The third claim, known as the Second Welfare Theorem (swt), is that any Pareto-optimal outcome for an economic environment can be achieved as a market equilibrium with respect to some initial private distribution of resources and firm ownership. The popular corollary of the swt is that capitalism should not be the enemy of the egalitarian, for any desirable final allocation of resources and commodities requires ‘only’ a redistribution of private ownership rights in the means of production (including, possibly, rights in the income from labour).
Subscribe for just £45 and get free access to the archive
Please login on the left to read more or buy the article for £3