Must Development Economists Watch Hamlet without the Prince? (Presidential Address)

Development economics, according to the non-believers, has changed hands in the last 30 years of its existence from the visible hand of the State to the invisible hand of the market – and, a fortiori, from being to nothingness. Correspopdingly, the vision of an economic universe beset by all-pervading market failures seems to have been replaced by one of total government failure. In this revised vision, government intervention only spoils the utility/profit-maximizing show by giving rise to various activities of a rent-seeking type [Krueger (1974)]. The development experience of the last four decades – especially of the “Gang of Four”, i.e., South Korea, Singapore, Taiwan, and Hong Kong – has been cited to establish the superiority of the market-based solutions to the dirigiste solutions of the development problem. Notwithstanding the Hume’s Law – which prohibits deducing ‘prescriptive’ statements from factual statements alone – the agnostics have used these reallife happenings to prove the central point that (neo-classical) economists have made all along: optimal allocative efficiency is (best) guaranteed by following faithfully the first-best rules of competitive efficiency, which free markets alone are believed to satisfy. Citing the (glaring) contrast between free markets and centrally-planned economies, and the recent disavowal of the socialist economic philosophy by Eastern Europe, Haberler concludes: “I still maintain my early belief in the validity of classical or neo-classical theory and in the superiority of relying largely on competitive markets and private enterprise.”