Page 81 - Global Political Economy_Understanding The International Economic Order

CHA PTER T HREE
tions. Whereas politics tends to divide, economics is believed to unite
peoples. A liberal worldeconomy basedon openness and free trade
shouldhave a moderating influence on international politics because
it creates bonds of mutual interest and a commitment to the status
quo. However, it is important to emphasize again that although ev-
eryone will, or at least could, benefit in absolute terms under a system
of free exchange, individual relative gains will differ depending on
the marginal contribution to the social product made by those indi-
viduals. This issue of relative gains and the uneven distribution of the
wealth generatedby the market system has given rise to Marxist and
nationalist criticisms of economic liberalism.
Neoclassical economists believe that markets shouldbe left alone
by politicians. Except in rare cases of market failure, the government
shouldneither intervene in the economy nor try to influence market
outcomes. Economists use the term “market failure” to describe a
situation in which markets fail to produce either economically opti-
mal or socially desirable outcomes, and they define four principal
types of market failure. One type occurs when there are externalities
or “spillovers” of economic activities so that one actor’s economic
activities harm those of another (as in environmental pollution). In-
creasing returns anddeclining marginal costs that lead to a monopoly
constitute another type of market failure. Still another is foundin
such market imperfections as market rigidities and consumer lack of
information. Anda more controversial type is distributional inequali-
ties. While most economists acknowledge market failures, they are
far from agreement on ways to resolve such failures. There is a partic-
ularly clear difference of opinion about income inequalities.
Although there is intense controversy within the economics profes-
sion concerning market failure andwhat, if anything, should be done
about it, most economists wouldagree that the problem of govern-
ment failure—policies that distort the market and cause gross ineffi-
ciencies—constitutes a more serious problem. This laissez-faire atti-
tude holds that if the market were left alone, it would get prices (of
wages, profits, andrents) right, incentives anddisincentives would
encourage individuals to make their maximum contribution to the
economy, andthe economy would produce optimum outcomes for
society. On the other hand, economists believe that government inter-
vention in the economy invariably gets prices wrong, distorts incen-
tives, andproduces economic outcomes that are suboptimal for the
society as a whole.
Finally, commitment to Pareto optimality provides a guiding nor-

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