Document Type

Article

Publication Date

1974

Center/Program

Center for Law and Economic Studies

Center/Program

Center for Contract and Economic Organization

Abstract

The fundamental principle of economics is that people will pursue their own self-interest within a given institutional framework. The economist's basic policy premise is that (so long as certain "market failures" do not arise) this self-interest will, like an Invisible Hand, guide resources to their proper usage; when market failures arise the usual policy prescription is to amend the rules (for example, by breaking up monopolies, placing an "optimal" tax on pollution, or redefining property rights) to make the marginal private costs and benefits equal to the marginal social costs and benefits so that the free play on self-interest will again achieve desirable results.' But this picture imposes an arbitrary demarcation on the boundaries of self-interest: not only will people pursue their self-interest within the rules; they will also allocate resources toward changing the rules to their own benefit. When the full implications of this seemingly modest extension are understood, normative economics enters an Alice-in-Wonderland world in which policies that are desirable in the truncated model lose much of their appeal.

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