An Economic Theory, Second Edition
Chapter 5: Partial Coordination: The Case of Innovation
5.1 INTRODUCTION The preceding chapters have been concerned with very fundamental issues. Much of the discussion has been highly abstract. The main formal model employed was based upon an economy comprising just two people and two goods. To generate practical testable hypotheses it is necessary to recognize that the real world is much more complicated than this. In practice, entrepreneurship involves many millions of people interacting with each other, and for this purpose a range of institutions, such as ﬁrms, and trading mechanisms, such as markets, must be employed. These mechanisms and institutions emerge as a means of addressing the problems created by the complexity of real-world phenomena. This chapter examines some of the basic issues raised by the fact that many different entrepreneurs are at work in a particular economy at any given point in time. In a market economy, individual entrepreneurs do not formulate proposals to reallocate all the resources in the economy as part of a single plan. They formulate partial proposals concerned with reallocation in some small sector: forming a new production plant, arbitraging between two segments of a market, and so on. The reason why proposals are partial is not difﬁcult to see. To formulate a partial proposal the entrepreneur requires only very limited information which may be quite close to hand. A more wide-ranging proposal requires a great deal of extra information, much of which may only be obtainable from distant and diverse sources. Thus, as the scale of the proposal increases, the...
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