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  • Print publication year: 2004
  • Online publication date: January 2010

3 - Absence of Invisibility: Market Failures

Summary

How does economic thinking differ today from fifty years ago? There are at least three main differences. In the last twenty years, strategic interactions play a much greater role, with the application of game theory to virtually every aspect of economics. During the decades prior to the 1980s, economists focused on general-equilibrium analysis, which undoubtedly represented the most important development in economics during the last century. If the interest in strategic interactions continues to hold sway over the profession, then strategy-based theories are apt to represent the greatest achievement of economics in the current century. Ironically, the earlier fixation on general, and often competitive, equilibriums eliminated interest in strategic interactions, insofar as any individual's actions are inconsequential in light of those of everyone else in aggregation. second key difference is today's recognition of market failures and their prevalence. These market failures are often, but not always, associated with collective action failures. A third essential difference is the importance of information and the realization that information may be incomplete or costly to acquire. As such, information may also result in market failures sometimes in the form of missing markets that may necessitate the need for collective action. These differences are behind the growing need for collective action within and among nations.

Adam Smith's invisible hand, mentioned in Chapter 1, indicates that well-functioning and complete markets (that is, a price for every transaction of value) will result in a social optimum from which no one can be helped without causing harm to someone.

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