The Invisible Hand and Modern Welfare Economics

50 Pages Posted: 16 Jul 2004 Last revised: 31 Mar 2010

See all articles by Joseph E. Stiglitz

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: March 1991

Abstract

This paper reviews and puts into perspective recent work reassessing the first and second Fundamental Theorems of Welfare Economics. It assesses the implications of the Greenwald-Stiglitz theorem establishing the (constrained) Pareto inefficiency of market economies with imperfect information and incomplete markets as well as recent work on endogenous technological change. The information theoretic limitations to the Second Fundamental Theorem are also discussed, including the inability to separate out issues of equity and efficiency. The final sections of the paper consider the consequences of these problems for economic organization, economic policy, and the role of ideology in the belief in the Invisible Hand.

Suggested Citation

Stiglitz, Joseph E., The Invisible Hand and Modern Welfare Economics (March 1991). NBER Working Paper No. w3641. Available at SSRN: https://ssrn.com/abstract=227430

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