A Re-Appraisal of the Principles of Resource Allocation

Abstract

A rejection of the theories of welfare economics carries with it the judgment that there is at present no rule or method by which we may judge of the relative efficiency of alternative forms of economic organization; indeed, that any conceivable set of production plans or any conceivable set of prices, no matter how arbitrary, are-in our present state of knowledgeto be considered as good as any others. Few economists, even among those who are wont to treat welfare economics with extreme scepticism, will go as far as this to avoid courting the subject while economists of the liberal school who talk of a presumption in favour of the market mechanisms must, if they are to rationalize this presumption, invoke some theory of welfare. Put at its bluntest then it is in pursuit of an answer to the question, by what lights are we to distinguish between a good allocation and a chaotic one, that we are led willy-nilly into the domain of welfare economics. Notwithstanding the logic of this conclusion a great deal continues to be written concerning economic efficiency which deliberately eschews the language of welfare economics, relying instead on apparently more acceptable criteria-for instance, the ' common sense' rule that total receipts should be able to cover total costs supplemented, perhaps, by rules about marginal equalities. For the abiding impression seems to be that by confining oneself to the traditional rules governing the allocation of resources one somehow circumvents the tenuous concepts and fine paradoxes of welfare economics. After all, there are critiques and counter-critiques of welfare economics and in the process a great deal of smoke and subtlety is generated. But the principles of resource allocation are of more solid stuff. They are ever with us and in continual application. This view, however, does not bear close examination. A by-product of this paper will be the demonstration that certain familiar welfare criteria and the so-called optimum conditions of resource allocation are raised on the same foundation: they stand or fall together. In fact the relationship is so close it is almost inevitable that allocative criteria