and status symbols to internalize social priorities in the price system may have to be ruled out, because these involve interpersonal utility comparisons and value judgements. Such taxes also violate the condition of Pareto optimality by making the rich worse off through the payment of more than the market-determined price for such goods; something that they would prefer not to do as ‘free’ individuals.
Likewise, one could argue that preventing the pollution of a country’s rivers is in the interest of social well-being. The market paradigm, however, leads one to argue that pollution is primarily a consequence of the misallocation of resources that results from the failure of the market brought about by the divergence between private and social costs. However, any measure to internalize the externality (making the social cost of pollution enter private costs) not only requires value judgements but also violates the condition of Pareto optimality by making the consumers and producers of that product worse off through a higher price and lower profit even though it makes society as a whole better off. If social costs were to be entered into private costs in this case by means of government intervention, then why should not the social costs resulting from lack of need-fulfilment, unemployment, inequitable distribution, and economic instability also be taken into account?
Satisfaction of condition (b), the equal distribution of income and wealth, gives all consumers an equal weight in influencing the decision-making process of the market. Producers, assumed as passive suppliers, automatically fall into line. Thus, given that everyone would give priority to need-fulfilment, there would be no distortion in resource allocation against need-fulfilment.29 However, since there are substantial inequalities in income and wealth, and since the rich enjoy far greater access to credit, they have the ability to buy whatever they wish at the prevailing prices. Primary reliance on prices does not automatically create any significant dent in their demand for status symbols and other inessential and unproductive goods and services. They may divert scarce national resources, by the sheer weight of their votes, into products which tend to command lower priority on a social preference scale.
The value-neutral price system is not even concerned with how many votes an individual has and how he uses them. It evaluates the urgency of wants of different consumers on the basis of their ability to pay the price. However, although the urgency for milk may be the same for all children, irrespective of whether they are poor or rich, the number of dollar votes that a poor family is able to cast for milk is not the same as those that a rich family is able to cast for luxuries and status symbols. If the ability to pay prices does not necessarily reflect the urgency of wants, condition (c) remains unsatisfied. Hence Arthur Okun has rightly observed that markets tend to “award prizes that allow the big winners to feed their pets better than the losers can feed their children.”30 Such a result may be acceptable within the social Darwinist principle of ‘might is right’, but it is certainly not tolerable within the framework of humanitarian goals.
Coming now to condition (d), it is well-recognized that even though perfectly competitive markets31 are a theoretical construct of great analytical value, they constitute an unrealized dream in the real world, and are likely to remain so in the future. The innumerable imperfections that exist in the market thwart the efficient operation of market forces and produce deviations from ideally competitive marginal cost pricing, thus leading to prices that do not reflect real costs or benefits. Hence, while prices may not, by themselves, be capable of bringing about a socially-desired allocation and distribution of resources, they may be less capable of doing so if they do not even reflect real costs and benefits.
Since no real world market is likely to satisfy the background conditions even approximately,32 there is a considerable distortion in the expression of priorities in the market place.33 This introduces a built-in bias against the realization of both efficiency and equity, as defined earlier in terms of normative goals, if reliance is placed primarily on prices for the allocation and distribution of resources.
THE INCOMPLETE SCIENTIFIC REVOLUTION
One may argue that there must be something wrong in the above logic of built-in bias because the normative goals have been actualized, at least partially, in a number of societies where conventional economics rules the roost. This for a number of reasons. Firstly, disillusionment with the Church in Western societies did not necessarily lead to the abandonment of moral values. These have survived, as indicated earlier, and ensured a certain degree of moral integrity. Without such integrity the market system may well not have worked – property rights may not have been enforced, justice may not have been realized, and cooperation and mutually profitable exchange between members of society could have been adversely affected, thus frustrating development.34 Secondly, conventional economics has, in reality, never been truly positive. It has also been normative. Economists have made value judgements as well as policy recommendations in spite of the supposedly value-neutral stance of their discipline. This possibly because, as Koopmans has put it, “scratch an economist and you will find a moralist underneath”.35 In other words, it is not possible for economists to uphold humanitarian values in their personal lives while being unaffected by them in their professional lives. Thirdly, individuals have not always resorted to self-interested behaviour, they have also been altruistic. Even though Western societies have gradually moved towards greater hedonism, the transformation has not been complete. Moral values and social taboos have continued to some extent to temper the hedonistic drive and may perhaps continue to do so even in the future. Fourthly, because of democracy, there has been pressure on governments to remove inequities and to promote social interest. They have, therefore, formulated laws to protect property rights, to ensure justice and fair play, to provide a social security net, and to improve labour conditions. Such laws and policies could not have been possible without a concept of what is right and, therefore, what is desirable.
Conventional economics has, nevertheless, continued to cling to its value-neutral stance. This has, besides exposing economists to a position of conflict between their personal and professional paradigms, introduced an inconsistency between its two major branches – microeconomics and macroeconomics. There is, on the one hand, excessive emphasis in microeconomics on the maximization of wealth, bodily gratifications and sensual pleasures, individual freedom, and value neutrality, in keeping with its secularist worldview. While this emphasis has led to the treatment of choice through the market as the only acceptable strategy for the allocation and distribution of resources, it has also led to the assumption that the market invariably acts to harmonize the interests of all human beings. Hence, every competitive equilibrium is considered to be a Pareto optimum and is accepted as both ‘efficient’ and ‘equitable’. There is, on the other hand, discussion of the humanitarian goals, the acceptance of which automatically establishes social priorities. Goals may not be realized unless scarce resources are used in harmony with these priorities. The microeconomic principles of the unhindered pursuit of self-interest, unlimited individual freedom of choice, and value neutrality may not necessarily be consistent with such priorities.
This implies that the “scientific revolution”, using Kuhn’s terminology,36 brought about by the shift from a religious to a secularist paradigm was not complete. While the shift was attained in microeconomics through the assertion of value-neutrality and unlimited individual freedom to pursue material self-interest, the shift did not take place in macroeconomics. It was not possible to give up allegiance to the humanitarian goals of the religious paradigm in favour of the social Darwinist goals of the secularist paradigm in a Christian or any other religious society committed to moral values and the well-being of all. This conflict did not become clear until the development of macroeconomics took place as a result of the Keynesian revolution.
This incomplete scientific revolution has led to the absence of a clear link between microeconomics and macroeconomics. Howitt has, therefore, rightly remarked that “the lack of a clear link between macroeconomics and microeconomics has long been a source of discontent among economists ... Countless students and practitioners alike have complained of the schizophrenic nature of a discipline whose two major branches project such radically different views of the world.”37 Lucas and Sargent have likewise pointed out that “since its inception, macroeconomics has been criticized for its lack of