¶ … Economic Policy for an Imperfect World" by Karen I. Vaughn published in "Southern Economic Journal," Vol. 62, Issue 4, 1996
After the collapse of the Soviet Union it has become evident that market economies are necessary for producing wealth. However, the case for "free markets" is far from settled as those looking for an alternative to central planning usually consider "regulated market economy" as the solution. Hence the debate about how much "free market" or government regulation is appropriate, still rages. The ways in which contemporary economic theory contributes to the debate about the right mix of free market and government regulation is the theme of this article.
In the 1980s, a notable economist opined that government guidance was necessary for the 'invisible hand' to succeed. Some time later, another pointed out the lack of scientific evidence about the success of free markets. Other economists have even challenged some of the key assumptions of apparently settled economic theories.
It is clear that while enhancing efficiency is the goal of all economic policies, the "perfect' market models used by economists to predict the behavior of markets cannot explain the behavior of the markets in the real world.
Theories for Economic Policy Formation:
The related models of "perfect competition" and "general equilibrium" dominated economic theory in the 20th century. According to the perfect competition model,...
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