Credible Liberalization: Beyond the three theorems of neoclassical welfare economics

The world economy is undergoing startling change. Almost every country has been moving toward freer markets and extensions of the private enterprise capitalist system. Of late the process has been most marked, I suppose, in China during the early 80’s and more recently in the amazing transformation of the formerly Communist nations of Eastern Europe. But nations belonging to the Organization of Economic Cooperation and Development have also privatized state-owned industries, de-regulated private industry, freed international trade and capital movements, and seem intent on further liberalizations. Meanwhile, the aid, loans, and debt relief to developing countries provided by the World Bank, the International Monetary Fund, or other lending agencies appear to be tied more and more to schemes that extend the influence of competition in world markets upon each nation’s economic system. This drive toward global economic liberalization is not without its good features. The world economy probably has much to gain from the increased efficiency that is being brought about. Yet there are important limits to what market systems can achieve on their own. By themselves they do not guarantee distributive justice, and can even exacerbate extreme poverty. By themselves market systems will not protect us from any adverse effects of global warming, industrial pollution, or other ecological hazards. It is far from clear that market systems by themselves will provide future generations with good economic prospects, or even ensure adequate old-age pensions for many of those currently alive. And in the United States, which still clings to the myth of a free market for the provision of medical care and