Consummation, Consecration, and Destruction of the Invisible Hand: Neoclassical Welfare Economics - Part 4

This was a particularly critical assumption because the three pillars of the neoclassical ideological defense of free market capitalism were the marginal productivity theory of distribution (which will be discussed further in Chapter 16), the invisible-hand argument, and the belief, held purely on faith, that the free market forces of supply and demand automatically and efficaciously take the economy to a full-employment equilibrium (although, as we will see, one branch of neoclassical economic theory, in response to the ideas of Keynes, at least partially abandoned this third point). None of these three ideological props for capitalism could be defended if the market did not automatically create equilibrium prices. Therefore, the third useful fiction of the crier was as important as the first two.

Before we proceed with a summary of neoclassical welfare economics — which is the final and most elaborate apotheosis of Adam Smith's invisible-hand argument — three comments must be made about the difference in style between this chapter and the preceding chapters, as well as the place of neoclassical welfare economics within the context of the entire neoclassical school. First, in this chapter we will rarely refer to the writings of any significant economic theorist. This is because neoclassical welfare economics is essentially an elaboration, with relatively minor modifications, of the analysis of Walras, and no particular theorist added so significantly to Walras's version of the theory as to merit individual treatment. If we were to make an exception to this statement, it would be for the refinements added by Walras's disciple, Vilfredo Pareto (1848–1923). Some economists have considered Pareto's contribution so significant that they refer to neoclassical welfare economics as “Paretian” welfare economics. Pareto's main achievement, however, was to recast Walras's ideas in terms of “indifference curves,” which had first been developed by the Englishman Francis Y. Edgeworth (1845–1926).

In our explication of neoclassical welfare economics, we will follow Pareto (and most modern textbook presentations) and use indifference curves — and their analogue in neoclassical production theory, “isoquants” — to illustrate the concepts. We agree, however, with the statement made by the eminent historian of economic ideas Joseph A. Schumpeter, who wrote that “as pure theory, Pareto's is Walrasian — in groundwork as well as in most details.”1 Thus, Pareto, as well as all other subsequent theorists who refined Walras's version of the invisible-hand argument, were merely refiners and elaborators and will not be given separate treatment because of limited space.

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