CHAPTER 5 - The Market and Administration

Abstract

This chapter discusses the relationship between market and administration. Markets direct economic activity through the interaction of the avowedly self-interested activity of economic agents. If in an economy the quantity and ownership of the various productive resources, technical knowledge and exchange opportunities through foreign trade, as well as the preferences (tastes) of the economic agents are given, it is possible to envisage a unique allocation of resources—how much of which resource is to be used to produce or to obtain how much of which good or service—which satisfies the aggregated preferences of the economic agents to the highest attainable extent. A most important choice arises concerning the allocation of income between present consumption on the one hand and saving to finance investment on the other hand, which represents provision for future consumption. To achieve a pattern of resource allocation that can be regarded as optimal taking into account all relevant externalities, the principle was enunciated in which every economic decision should be reached at a level of centralization high enough for all externalities which it is capable of generating to be internalized, that is, to become costs and benefits considered by the decision-making unit as relevant to its own interests. This is the level at which all economic agents who might be affected by these externalities are represented.