The Price System and Morals

Abstract

An economist can best be characterized as someone who favours the use of the price system over alternative decision making mechanisms. The reason for this clear preference for the market over social choices by political, administrative, bargaining or traditional procedures is due to its efficiency properties. In general equilibrium theory, the “invisible hand theorem” establishes that the ideal price system leads to Pareto-optimality. In this efficient state, the best possible situation is achieved in the sense that the welfare of no person can be improved without harming some other person. In other words, the means available to a society are used in such a way that no unused possibilities remain unexploited, and that there is no waste (so-called optimal allocation of resources). Over the last few years it has been increasingly stressed in microeconomics that the use of prices automatically produces the required incentives so that individuals behave in a socially desirable way.