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SEQUENCING OF MACRO-ECONOMIC REFORM: An Institutional Perspective
, Sanjeev Sabhlok
Published in
Abstract

The neo-classical theory clearly shows that a liberalized (free market) economy is more efficient than the controlled economy, except when there are major externalities, incomplete markets, distorted market structures, or issues relating to the provision of public goods, in which case certain taxes or other forms of government intervention are recommended. The neo-classical theory gives us the welfare theorems, the complete market (Arrow-Debreau) theorems, the comparative advantage theorems, and others of this nature which need to be modified to incorporate aspects of reality. Most attempts to incorporate imperfections are at the partial equilibrium level, and even where some form of external intervention is indicated, the comparative static results do not indicate the path of adjustment. In other words, the neo-classical model is not easily capable of leading us to an understanding of the steps needed to reach the free market state.

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