ABSTRACT
One of the cornerstones of economic theory is the proposition, consisting of what is now known as the two ‘fundamental theorems of welfare economics’, that under certain well-defined conditions, every competitive equilibrium is Pareto-optimal, that is, has the property that it is impossible by departing from it to make one person better off without making some other person worse off, and conversely, that any such Pareto optimum can be brought about (with suitable – and costless – income transfers) by means of a competitive equilibrium. This proposition, first made explicit by Pareto (1909), of course has its roots in Adam Smith's doctrine (1776) whereby economic agents, all acting in their own interest, are led by an ‘invisible hand’ to an optimum which was not in their conscious design. What are the roots of Smith's doctrine?
