3 - Market decentralization

Summary

We found, in the previous chapter, that methods of political decision making are severely limited in their applicability. Tractability requires that the number of alternatives considered by any one political agency be relatively small. However, when we prune the set of alternatives either directly or through political decentralization, biases are likely to emerge in the resulting choices.

Of course, the market offers an alternative method of allocation and one that appears to require little in the way of administrative and/or coordination costs. Indeed, several of the troublesome examples in Chapter 2 appeared to yield to “market-type” solutions. Market decentralization through the “invisible hand” has at least as many information-conserving benefits as does political decentralization, but does it have any corresponding costs?

Much of the controversy in political economy during the past century has centered on whether we should allow the invisible hand to allocate resources. Many of the proponents of market decentralization have based their argument on the so-called two theorems of welfare economics, the one saying that a competitive equilibrium is Pareto efficient and the other saying that every Pareto-efficient allocation can be supported as a competitive equilibrium with an appropriate distribution of income. When the hypotheses of these theorems hold, market decentralization involves no costs. The opposition has challenged both the assumptions underlying competitive behavior and the supposition that income distribution will be made “appropriate.” Although some of their arguments are quite telling, this group has been noticeably on the defensive.