Austrian economists argue that individuals’ preferences are relevant to resource allocation only to the extent that they are demonstrated through action. Economics is, after all, about the process by which subjective preferences are converted into objective, observable market phenomena like prices and quantities (see Joe Salerno’s comment here). The Walrasian model, by contrast, takes consumer valuations as explicit magnitudes. My “true valuation” for good X is, say, $10, regardless of my behavior in the marketplace; in principle, I could communicate this valuation to a central planner who could then allocate resources to maximize my utility (and overall social welfare). The “knowledge problem,” in this view, is not that preferences are latent and manifested only through action, but that people are unwilling to share their private valuations with the authorities. Mechanism design, according to Eric Maskin, provides a potential solution.
Nobel economics winner says market forces flawed
Mon Oct 15, 2007 4:47pm EDT
By Jon Hurdle
PRINCETON, New Jersey (Reuters) – Societies should not rely on market forces to protect the environment or provide quality health care for all citizens, a winner of the 2007 Nobel Prize for economics said on Monday.
Professor Eric Maskin, one of three American economists to receive the award, said that he “to some extent” takes issue with free-market orthodoxy championed by U.S President George W. Bush [!] and some other western leaders.
“The market doesn’t work very well when it comes to public goods,” said Maskin. . . .
In its statement with the award, the Royal Swedish Academy of Sciences said the market’s efficiency may be undermined because consumers are not perfectly informed, competition is not completely free, and “privately desirable production and consumption may generate social costs and benefits.” . . .
“How do we ensure in the case of public goods that they are provided at all, and that they are provided at the right level, taking into account citizens’ preferences?” [Maskin] said.
A clean environment, for example, is not a private good in that “my enjoyment of it doesn’t preclude yours,” he said.
“So the theory of mechanism design asks what sort of procedures or mechanisms or institutions could be put in place which allow us to choose the right level,” he said.
Those mechanisms could include taxes to allow the more efficient provision of public goods, he said.