Chapter 2: Innovation, equilibrium and welfare
G.B. Richardson INTRODUCTION I should perhaps begin by justifying my choice of title. The aim of this chapter is to provide, on the basis of assumptions more realistic than those normally made, a summary analysis of the process of resource allocation within free enterprise systems. As it takes into explicit account the fact that products and processes are subject to continuous development, the chapter deals with innovation. It seeks also to adapt the notion of equilibrium, which economists have long since found indispensable in what has been called ‘Economic Statics’,1 to a context of which innovation is a feature. I turn ﬁnally to consider whether the outcome of the process of resource allocation under consideration will exhibit allocative rationality, of the kind studied in the economics of welfare. All this, it may strike the reader, is a very tall order. It may be urged that we have been able to develop a theory of the determination of prices and outputs in competitive markets on the basis of simplifying assumptions, such as that of a ﬁxed list of goods between which consumers have given preferences. This theory has enabled us to identify equilibrium conﬁgurations towards which the actual conﬁgurations produced by the system would tend to move. Surely, it may be said, some coherent theory is better than none at all; all theories involve abstraction, but may nevertheless, like Newtonian physics, be exceedingly powerful. I believe that we must reject this line of reasoning. The theory in question,...
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