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Stiglitz Invisible Hand

Stiglitz Invisible Hand

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A Nobel prize winner demostrates that the so called Invisible Hand, a basic concept of modern economics, does not exit!!!

A Nobel prize winner demostrates that the so called Invisible Hand, a basic concept of modern economics, does not exit!!!

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Published by: sraffiano on Feb 11, 2009
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09/17/2013

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NBER WORKING PAPERS SERIESTHE INVISIBLE HAND AND MODERN WELFARE ECONOMICSJoseph E. StiglitzWorking Paper No. 3641NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue
Cambridge, MA 02138
March 1991This paper is part of NBER's research program in Taxation.
Any
opinions expressed are those of the author and not those of theNational Bureau of Economic Research.
 
NBER Working Paper 43641March 1991THE INVISIBLE HAND AND MODERN WELFARE ECONOMICS
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 fheorem establishing the (constrained) Paretoinefficiency of market economies with imperfect information andincomplete 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 theseproblems for economic organization, economic policy, and the roleof ideology in the belief in the Invisible Hand.
Joseph E. SciglitzDepartment of Economics
Encina Hall
Stanford University
Stanford, CA 94305-6072
 
The Invisible Hand and Modern Welfare Economics1
J. E. Stiglitz
Somewhat more than two centuries ago, Adam Smith delivered at this
University a set of lectures, later written down
in
his monumental work, The
Wealth of Nations, which perhaps had more influence on the development of
our discipline than any other work in the history of the subject. And among
the ideas presented there, perhaps none has held such sway, not only over
professional economics, but also over all those who concerned about how best
to organize society to promote the General Welfare than his concept of the
invisible hand: this, in spite of the fact that he explicitly used the term
only once in The Wealth of Nations.
Smith argued not only that individuals were led in the pursuit of their
self interest by an invisible hand to pursue the Nation's interest, but
also that this pursuit of self interest was a far more reliable way to
ensure that the Public Interest would be served than any alternative- -surely
better than relying on some government leader, as well-intentioned as that
leader might be.
Much of the subsequent history of our discipline has been a search tounderstand the sense and conditions under which Smith's essential insights
are valid. His perspective has provided the intellectual basis for a theory
of economic organization- -competitive markets provide an efficient way of
organizing economic activity- -and economic policy- -
to
ensure that efficiency
1
This
is a substantially revised version of a lecture originally
presented at Glasgow University in December, 1988.
This paper is based on
research supported in part by the Olin Foundation, the National Science
Foundation, and the Hoover Institution. Many of the ideas presented in this
paper are based on joint work with Richard Arnott, Bruce Greenwald, Raaj
Sah, and Andrew Weiss.
1

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