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Discussion Paper No. 1124
Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science, Evanston, IL
The standard practice in economic theory is to assume that all the relevant variables (e.g., the space of all the goods of potential economic value) and all the relevant constraints are known to the policymaker or to the designer of an economic system. This often unstated assumption (or the belief implictly embodied in it) inadvertently creates an illusion about our ability to design an economic system and control the process of resource allocation. In this paper, a series of examples is developed to illustrate that this modelling approach has the danger of misdirecting our attention when evaluating alternative forms of economic system. Some implications for reforms in the former socialist economies are also drawn.
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