Benefits and Defects of Capitalism from the Perspective of Keynes

Lemons Theorem and the Efficiency of Market System

Economist George Akerlof developed a theory of “Markets for Lemons”. In this theory in the market must have asymmetric information regarding quality of products and the seller must know better than the buyer and the buyer have uncertainty of the product regarding the quality of product before purchasing. In such a market condition the bad quality products tends to drive out the good quality products because the sellers of good products tend to withdraw their products from the market as the buyers tend to revise the average quality of products in the market and there fore may not pay the price sufficient for good quality products. In reality most markets are not lemon markets because if that is the case markets will exist. However, there is a tendency for any market to become a lemon market. That is without government protection of quality of products in the market and protects customers from sellers selling poor quality products as good quality products the market may become lemon market and the normal supply and demand may not become applicable. In summary, demand and supply laws are applicable to most markets and most markets are efficient in allocating scare resources. However, it is also a possibility they may become lemon markets if there is no consumer protection for consumers where there is asymmetrical information and there exists quality uncertainty in the market and there is no consumer protective laws in these markets.

That is some markets if such conditions exists the market efficiency will suffer without government regulation and government intervention in the market.

Hobson and Neoclassical Theory

Hobson criticised Ricardo’s classical theory and anticipated the marginal productivity of labour. The neoclassical economist also rejected Ricardo rent theory. In this context Hobson and neoclassical economist agree. That is they agreed the capital and land as well as labour as factors of production will not earn more than the market prices and will not be earning a rent in a competitive market. As well, Hobson preferred capitalist reformation than communist revolution where the neo classical economist agrees with him.

An Economic Policy Impact on Relative Prices and Pareto Optimality

Pareto optimality means in an economic context that all economic agents benefit without at the same time some agents looses. That is if an economic outcome where some wins at the expense of some loose then it is Pareto optimality.Say a market economy is very competitive in most of the market and say the market prices reflect and adjust flexibly upwards and downwards and there is no externalities

then the market equilibrium and Pareto optimisation is it and any policy which distorts the market will make some economic agents loose and some benefit and at equilibrium it will not be Pareto optimum. However say in a market there exist many monopolies and monopoly pricing is widespread in most of the markets. In this market condition at market equilibrium The relative prices are away from competitive prices. There fore any policy, which makes the market competitive and reduce monopoly power will move the equilibrium towards Pareto optimum. There fore policy impact on relative prices depends on the structure of the market and the competitiveness of the market.