To the Defence of the Practical Use of Neoclassical Economics

In political-economy fields, the issue of states and (or versus) markets is widely debated. Some argue that markets should be left alone without governments distorting their functioning, thinking which is often connected to authors such as Adam SmithMilton Friedman and Friedrich Hayek; others emphasise the role of the state and the failures of the market, linked to authors as different as Karl Marx and Joseph Stiglitz. In this debate it has now been acknowledged that the original, strict divide between markets and states is useless: markets and states are strongly interrelated and both necessary. In a world without some sort of state, property rights cannot be assured and enforced, which is why markets will not flourish. In a world without markets (unless we speak of an extremely simple, static, and thus predictable world), standards of living cannot rise in a durable manner. This is showcased by the inevitable demise of communism, where innovation was largely ruled out, and all necessary information could not be collected and centralised. But even if it could have been, it could then not have been processed, thus posing insurmountable allocation problems. It has been recognised that markets can lead to higher standards of living for society as a whole on the longer term, when the state is there to ensure property rights, to smoothen its hardships and to step in when it fails too badly. This implies a combination of roles for markets and states. Continue reading

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