The General Theory of Second Best

Abstract

There is an important basic similarity underlying a number of recent works in apparently widely separated fields of economic theory. Upon examination, it would appear that the authors have been rediscovering, in some of the many guises given it by various specific problems, a single general theorem. This theorem forms the core of what may be called The General Theory of Second Best. Although the main principles of the theory of second best have undoubtedly gained wide acceptance, no general statement of them seems to exist. Furthermore, the principles often seem to be forgotten in the context of specific problems and, when they are rediscovered and stated in the form pertinent to some problem, this seems to evoke expressions of surprise and doubt rather than of immediate agreement and satisfaction at the discovery of yet another application of the already accepted generalizations.

The authors are indebted to Professor Harry G. Johnson for a number of helpful suggestions relating to this paper. The appelation, “Theory of Second Best,” is derived from the writings of Professor Meade; See Meade, J. E., Trade and Welfare, London, Oxford University Press, 1955. Meade has given, in Trade and Welfare, what seems to be the only attempt to date to deal systematically with a number of problems in the theory of second best. His treatment, however, is concerned with the detailed case study of several problems, rather than with the development of a general theory of second best.