CHAPTER VIITHE development of the theory of optimum by the marginal
utility economists can be best appreciated by recapitulating
where the classical economists had left off in their analysis of the
competitive equilibrium. We have seen that the central problem
of the classical economists was the problem of economic expansion
and not the problem of allocative efficiency but that nevertheless
they also possessed a rough workable theory of the competitive
optimum (cf. Chap. IV above).The locus classicus of this is Chapters VII and X in Book I
of the Wealth of Nations. There Smith had established two general
propositions. Firstly, that free competition in the consumers'
market would equate the price of each commodity to its cost of
production and that this would ensure that the "right" quantity
of each commodity was produced. Secondly, that free competition
in the producers' market would equalise the Net Advantages of
the factors of production in all industries and that this would ensure
that the "right" amount of resources was allocated to each industry. These two conditions were quite sufficient for the classical
economists' purpose of considering the problem of allocative
efficiency as a subsidiary problem. When, however, we want to
consider the problem of allocative efficiency as the central problem
a more stringent formulation of the optimum becomes necessary;
for the classical formulation leaves at least three main gaps to be
THE THEORY OF THE GENERAL OPTIMUM
|i. || Smith had shown how the "right" total quantities of
different commodities would be produced, but he had not shown
how these "right" total quantities would be parcelled out in
"right" amounts and in "right" combinations among each of
the individual consumers.|
|ii. ||Similarly, Smith had shown how the "right" total quantities
of resources would be allocated to different industries, but he had
not shown how the different factors of production would be
combined in "right" proportions and how each of the individual
producers would be producing the "right" output. Here, however,
the gap left behind by the classical economists is not so clear-cut since
they had always implicitly assumed that each producer would be|
Questia, a part of Gale, Cengage Learning. www.questia.com
Book title: Theories of Welfare Economics.
Contributors: Hla Myint - Author.
Publisher: Harvard University Press.
Place of publication: Cambridge, MA.
Publication year: 1948.
Page number: 94.
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