Misinterpretations of the Second Fundamental Theorem of Welfare Economics: Barriers to Better Economic Education

The approach of ecological economics

“…It does not say that any Pareto outcome can be obtained through the market. It is well known that competitive equilibrium is rarely unique and frequently unstable, thus the Second Welfare Theorem does not provide a justification for many of the 'free market' approaches advocated by economists (Bryant, 1994) 2 The most complete discussion of the existence of general equilibrium was that of Arrow and Debreu (1954) who based their proof on Kakutani's fixed point theorem. The Arrow-Debreu model is individualistic, assumes rational expectations, all agents are price-takers, there is no asymptotic information, and money does not appear in the model.…”

Notes

“…Worse, the desired equilibrium may be unstable, or at least less stable than an undesirable one. These issues are discussed in Bryant (1994) -see also Samuelson (1974).…”

“…This is partly for the negative reason that their provision absorbs a good deal 7 The much higher percentage which is usually quoted for public expenditure includes many items such as social security payments and debt servicing which are really transfer payments rather than public goods. Indeed, according to the Economic Report of the President, February 1995, in 1994 the U.S. annual gross domestic product was $6.737 trillion (see p. 274), of which total expenditure of the economy's total resources, but also for the positive reason that public goods are an essential feature of any modern economy with their own intrinsic value.…”

Islamic economics and a third fundamental theorem of welfare economics

“…F I G U R E 6 Multiple Walrasian equilibria (adopted from Bryant, 1994) [Colour figure can be viewed at wileyonlinelibrary.com] 14 In our analysis above, we only considered inequity advantageous to the rich only. Following Fehr and Schmidt (1999), Khan and Ahmed (2014) model the disadvantageous inequity which has a similar impact in that the agent derives disutility from disadvantageous inequity as well.…”

“…Furthermore, Fisher () asserts that the two fundamental theorems are the single most important set of ideas that economists have to convey to lay people. Bryant (, p. 75) argues that this is so because these theorems “are at the heart of the debate between those who advocate market‐driven economies and those who argue for various forms of interference with market outcomes” and “they make a contribution to the always politically relevant debate over equity versus efficiency.” The debate among interventionists and non‐interventionists is mainly from the point of view of a “liberal dictator” who is not a part of the market per se but has the ability to manipulate the market. The dictator (call this person a “social” or a “benevolent” dictator) is assumed to have social preferences and is someone who cares about equitability, whereas citizens are assumed to have self‐regarding selfish preferences.…”