Chapter 3: Managing Contracts: A Means to Social Welfare
3. Managing contracts: a means to social welfare INTRODUCTION Contemporary economics entertains a number of notions of ‘competition.’ Those dealing with small numbers competition have developed a theoretical underpinning to models containing underlying assumptions about conjectural behavior. Many of these models – generally called ‘game theory’ – have also led to empirical testing and new areas of ‘experimental economics’ and neuroeconomics. Alongside these developments there has been a continuance of the traditional textbook notion of competition. For example, the basic approach emphasizes competition as a model wherein there are many sellers, many buyers, homogeneous products, low or no transactions costs, free entry and exit, and a litany of characteristics producing an ‘efficient’ equilibrium. This familiar model and its static extensions into ‘imperfect’ competition, extant from around the time of Richard Cantillon in the early eighteenth century, was developed through several centuries of orthodoxy from Adam Smith to John Stuart Mill to Alfred Marshall to E.H. Chamberlin, J.R. Hicks, and Paul Samuelson. As noted, it survives today in the basic textbooks on the science of economics. It was also the prevailing notion of competition when Chadwick was seeking social reform in the nineteenth century. Chadwick was undoubtedly aware of the Smithian theory of competition. Based on natural law and decentralized property rights, Adam Smith had argued that price-cost margins would be narrowed by entry and exit processes with social welfare being maximized by the ‘invisible hand.’ This notion, so familiar since the nineteenth century, was not accepted by Chadwick as necessarily efficient. Chadwick,...
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