Monday, November 26, 2012

New Institutional Economics: Eleven Commandments to Free the Market

The First Fundamental Theorem of Welfare Economics states that any competitive (or Walrasian) equilibrium leads to a Pareto-efficient (or Pareto-optimal) allocation of resources. The following is a list of eleven rules – with added explanations written in the format of the Ten Commandments – regarding how to sustain a competitive equilibrium.
  1. Enlightened Rational Consent. Thou Shalt Not Participate in Markets - Nor Associate with Market Actors - Unless and Until Thou Art Sufficiently Well-Informed and Rational – That is, Self-Interested (and Assumed to Sell Where Marginal Costs Meet Marginal Revenue So As to Maximize the Generation of Profit) and Utilitarian (Although Not Necessarily – and Preferably Not – Selfish or Amoral) – to Legitimately and Verifiably Consent to Agree to Be Subject to the Obligations and Consequences of Doing So, and Unless and Until Thou Shalt Assume That All Consumers and Producers Have Perfect Knowledge of Price, Utility, Quality, and Production Methods of Products.
  2. Relief of Suffering. Thou Shalt Act to Relieve the Causes and Symptoms of Scarcities, Dissatisfaction, and Desire, and to Temper and Moderate One's Own Dissatisfactions and Desires.
  3. Property Rights and Lack of Malice. Thou Shalt Not Cause Intentional Nor Malicious Diminution of the Utility of the Property of Non-Consenting and / or Unaware Third-Party Others Which is Justly Acquired and Protected in a Well-Defined System of Property Rights with Special Attention to Buyers' Rights.
  4. No Information Hoarding. Thou Shalt Not Wield Disproportionately Asymmetric Amounts - Nor Varieties - of Information.
  5. No Values Suppression or Entry or Exit Barriers. Thou Shalt Act to Ensure That Market Participants Are Free to Be Price-Takers Which Are Uninhibited from Ranking Their Preferences and Comparing Values, Thou Shalt Act to Provide for the Freedom of an Infinite Number of Consumers and Producers Willing and Able to Purchase and Supply Products at Certain Prices, and Thou Shalt Act to Ensure That There Are No Barriers to Entry Into Nor Exit From Markets.
  6. No Retardation of Price Adjustment. Thou Shalt Act to Promote the Instantaneity of the Adjustment of Market Prices.
  7. No Concentration of Influence. Thou Shalt Act to Oppose Unnatural Monopolistic and Oligarchical Actors Which Wield Disproportionate Influence on the Share of Trade Volume, Thereby Disproportionately Influencing Prices, Supply, and Demand, and Come to Effectively or Literally Set Prices, or to Influence Prices at All.
  8. No Accidental Harm. Thou Shalt Not Cause Unintentional Nor Negligent Diminution of the Utility of Non-Consenting and / or Unaware Third-Party Others, Nor Shalt Thou Cause Moral-Hazard Nor Social-Cost Problems.
  9. No Accidental Benefit. Thou Shalt Not Cause Unintentional Nor Negligent Increase of the Utility of Non-Consenting and / or Unaware Third-Party Others, Nor Shalt Thou Cause Free-Rider Problems.
  10. No Usury Nor Transaction Costs. Thou Shalt Not Speculate with Less Than Full Assets, Nor Shalt Thou Impose Transaction Costs Which Are Not Negligible, Nor Shalt Thou Calculate Profit Improperly, and Thou Shalt Act to Ensure That Buyers and Sellers Do Not Incur Costs in Making an Exchange of Goods.
  11. Mobility of and Access to Factors of Production. Thou Shalt Act to Ensure That Market Participants Have Equal Access to the Factors of Production, That the Factors of Production Are Perfectly Mobile So As to Wield to Adjusting Market Conditions, and that Qualities and Characteristics of Goods and Services Do Not Vary Between Suppliers.
At a later date, I will add a few points about the Coase Theorem; the Jevons Paradox; the theory of the second best; and the lack of increasing returns to economies of scale.

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