9 - Strategy and social value
Published online by Cambridge University Press: 05 June 2012
Summary
Markets and social value
Markets are a very powerful mechanism to achieve greater overall allocative efficiency, that is, the most efficient allocation of productive resources to those uses that create most value for society. The benefits and limitations of the market economy to promote social welfare have been analyzed by political economists for over two centuries. The positive effects of markets on social value were already identified in the famous passage about the invisible hand from Adam Smith's Wealth of Nations:
Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.
(Smith, 1776)Welfare economics studies the allocative efficiency of an economy and its income distribution. Following Pareto, an economy can be regarded as efficient when it is impossible to alter the allocation of resources so that a change could make at least one individual better off without hurting another individual. It can be shown that a perfectly competitive market system (i.e., a Walrasian general equilibrium model) results in a Pareto-efficient allocation of resources in an economy.
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- Theory of the Firm for Strategic ManagementEconomic Value Analysis, pp. 216 - 245Publisher: Cambridge University PressPrint publication year: 2009