Chapter 10: Establishing government failure or success: a dynamic welfare perspective
In Chapter 17 of his Capitalism, Socialism and Democracy Schumpeter (1943: 190) introduced some fundaments for a dynamic welfare economics. One passage is especially worth noting: we shall call that system relatively more efficient which we see reason to expect would in the long run produce the larger stream of consumers’ goods per equal unit of time.This chapter will start from the perspective that the newly emerging reality of our economies today is that they are knowledge economies (OECD 1996). Baumol (2002), for instance, claims that over 60 per cent of the labor force in the United States are knowledge workers. This is recognized in diverse strands of thought in the economics discipline after the puzzling findings in the growth accounting literature (for example, Denison 1967). Romer (1987, 1993) has been developing ideas about how knowledge impacts on economic growth, better known as the New Growth Theory. The work of Baumol (2002) relates to this. Studying a dynamic, knowledge-based economy requires that a conceptual understanding of knowledge and its role in society is developed and used in economics. The first section discusses this in some measure, arguing that welfare economics for the knowledge-based economy requires different, partly additional concepts that would allow one to evaluate developments in society or government policy. The second section gives a brief and admittedly incomplete outline of the welfare economic perspective that is now mostly adhered to, following Pareto.
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