The neoclassical paradigm, through its incorrect characterization of the market economies and the central… — Joseph E. Stiglitz
The neoclassical paradigm, through its incorrect characterization of the market economies and the central problems of resource allocation, provides a false sense of belief in the ability of market socialism to solve those resource allocation problems. To put it another way, if the neoclassical paradigm had provided a good description of the resource allocation problem and the market mechanism, then market socialism might well have been a success. The very criticisms of market socialism are themselves, to a large extent, criticisms of the neoclassical paradigm.
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The central economic issues go beyond the traditional three questions posed at the beginning of every introductory text: What is to be produced? How is it to be produced? And for whom is it to be produced? Among the broader set of questions are: How should these resource allocation decisions be made? Who should make these decisions? How can those who are responsible for making these decisions be induced to make the right decisions? How are they to know what and how much information to acquire before making the decisions? How can the separate decisions of the millions of actors decision makers in the economy be coordinated?
By changing the locus of caring and responsibility from the individual to the government not only for the needy, but for oneself, one's parents, one's children we change society and we change ourselves. Here again we see a certain irony: Attempts to improve society by having the government undertake a greater role in redistribution, may ultimately through their effects on individuals and the nature of the social contract have more ambiguous consequences.
Advocates of the Austrian tradition often defend the lack of formal modeling and the corresponding absence of formal efficiency theorems: The market economy is an organic process, too complicated to be reduced to the simplistic formal models. The job of the economists is to describe this organic process and to see the kinds of impediments that the absence of a legal structure, on the one hand, or excessive government intervention, on the other, might impose for it. But while they may not resort to, or even like, the standard welfare criterion of Pareto optimality, there are strong normative overtones in their discussions. Darwin may have thought that he was simply describing the evolutionary process when he asserted that it resulted in the survival of the fittest, but such statements require a definition of the "fittest" and an analysis of the general equilibrium, dynamic properties of the system. Today we recognize that evolutionary processes, under a wide variety of circumstances, may not possess "efficiency" properties.
