Going Emprical on the Price System
I was reading some of the comments from a post earlier in the week and I have a question. It may seem unserious, but it isn’t. How do we know that the price system is the best allocator of goods and services in a world in which most of the assumptions of the perfect competition model don’t hold? Is it just that the US works better than North Korea and the old USSR? But does it work as well as most Scandinavian countries? Does it work as well as it used to in the early 1960s when the highest marginal tax rates were so much higher than now and the government’s role inthe economy was so much bigger? And if not, what does that say? And the fact that it works better than places that are pretty anarchic, such as Somalia – does that say something too?
How would we test a statement like “the price system is the best allocator of goods and services?”