21. Markets as Systems

In the first few chapters of this book we presented the fundamental question modern economics was created to answer: can the awesome power unleashed by the industrial revolution be left to the push and pull of the marketplace, or does it need to be steered by the conscious intervention of government or some other institution acting on behalf of society? Adam Smith thought that markets could do most of the job on their own, and subsequent generations of economists have struggled to identify the precise conditions under which Smith’s Invisible Hand could be expected to function. Much of what they discovered has been summarized in the Market Welfare Model and the many adjustments and caveats we have examined in our tour of microeconomics.