Conclusion

Neoclassical economics is a theory of voluntary exchange and efficient allo­cation of resources. Its analytical starting point is the self-interested individ­ual, operating in an environment where many potential objects of satisfaction are in commodity form, and where, in Macpherson’s words, the aim of action is “the competitive maximization of utilities” (1973:5).

Clearly, market exchange and efficient allocation are central to neoclassical economics. Once this view of the world is in place, it invites a particular way of thinking about political economy. It highlights the contractual arrange­ments that individuals and firms make to improve their lots. For the con­sumer, the relevant question is how to dispose of resources so as to maximize utility. For the producer, the question is how to utilize endowments so as to maximize output and profit. Thus economics, as Schelling puts it, has become the science of superior trades, the “something better” approach (1984:15).

The neoclassical idea of political economy is subsidiary to the central focus of efficient exchange within markets. Once individual welfare is at the center, and this welfare is equated with fulfillment of preferences, politics becomes an alternative instrument to achieve what cannot be efficiently achieved by the market. This makes market failure the master idea of neoclassical political economy. Markets may fail in the ways w^re have discussed. They do not define and institute property rights; they cannot put into place their own preconditions. They may involve significant externalities, problems of public good production and loss of competition through industrial concentration.

We have explored the idea of linking political economy to market failure.

“Voluntary,” in this context, means absence of coercion by another person. It does not require that any specific set of options actually be available to the individual. The less wealth we own at the outset, the fewer the options the market affords, the less well off we are likely to be as the result of exchange. The market does not redistribute property in the interests of equality of life chances or of removing goods from those that have a surfeit and giving them to those having little.

Thus, it is important to bear in mind that neoclassical propositions re­garding the virtues of the free market are all limited in this way. Such a limitation does not in itself make those propositions uninteresting or irrele­vant. It does, however, better identify their meaning and significance. In certain contexts (of poverty, acute inequalities, severe limitation of life chances), the neoclassical propositions carry less weight and capture our attention less than they might in others.

If neoclassical political economy is based on the idea of market failure, it is appropriate to evaluate this conception. Our comments center on the special competence of markets and conceptions of the political that are different from the neoclassical idea.

Some theories of political economy concern the way we draw the line between outcomes left to the market and those determined by state action. At issue is a general method or approach rather than specific outcomes (em­ployment, pollution, military expenditures, and others). Neoclassical political economy attacks the question of how to draw a line via the notion of market failure. The line is drawn by reference to a specific conception of the com­petence of markets - what the market does when it functions well - and the circumstances under which that competence breaks down.

The notion of (Pareto) optimality best expresses the neoclassical vision of the special competence of markets and their overall mission. So, the success or failure of the market can be judged by the optimality of its outcomes. These, in turn, are not evaluated first in empirical terms, but in relation to a theoretical claim: that perfectly competitive markets will be Pareto optimal and that restrictions on competition will lead to nonoptimal outcomes. Ex­ternalities and public goods imply market failure by this criterion.

However interesting and important the notion of optimal allocation, it is only one of several visions of the special competence of markets. Its limitations were vividly depicted by Schumpeter in a well-known comment:

A system - any system, economic or other - that at every point of time fully utilizes its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point of time, because the latter’s failure to do so may be a condition for the level or speed of long run performance. (1942:83 italics in original)

Schumpeter echoes the classical idea that markets are about dynamics of accumulation, innovation, and economic development rather than about the static problem of resource allocation and optimization. From the standpoint of this distinct judgment about the social purpose of the market (see Levine, 198Lch. 7), the question of when the market succeeds and when it fails must appear quite differently. With this difference must follow differences in judg­ment of the limits of the market and the line separating market outcomes from those determined by state action.

A second limitation of the neoclassical approach is that it understands the state primarily as an instrument to correct market failures. In doing so, this understanding furthers the idea of efficiency. If the market fails to respond efficiently, the state steps in.

Empirically, the state may be involved in more than market failures and justifications, for state action may extend beyond efficiency. Justice and rights are in the state sphere not because they can be performed more efficiently there, but because the state rather than the market can best enforce equal protection and treatment. Justice can be a slow, cumbersome, and inefficient process.

If justice highlights the normative aspect of state activity, conceptions of power based on winners and losers highlight an empirical aspect of states not captured by market failure. Much of politics concerns the ways in which the political process and the state are used to enforce the desires of some over others. We have seen how the focus on voluntary exchange and Pareto op­timality removes this avenue for neoclassical political economy. Situations in which the improvement of some worsens the position of others are difficult for the neoclassical method to grasp. Markets imply voluntary choice and choice implies freedom to leave, to “exit.” One may be dissatisfied within markets, but one should never be worse off because of the choices of others. The state as agent of some over others differs from the state as an instrument of mutual improvement. The neoclassical state empowers agents to achieve goods otherwise unobtainable. But the state is also an agent that empowers some to achieve goods at the expense of others.