ABSTRACT
A basic tenet of what we might call ‘conventional’ economics — economics based on the neoclassical tradition and which still dominates teaching in both developed and less developed countries — is that the prices of goods and services are ‘signals’ reflecting consumer desires. The free interplay of market forces should therefore allocate resources to goods and goods to people in such a way as to secure the maximum welfare of society, where ‘welfare’ is equated with the satisfaction of wants. No modern economist seriously believes that any real world economy operates in such a way as to maximise welfare. Rather, the idea that there exists some configuration of prices which will achieve this optimum is used as a yardstick against which to measure the degree of imperfection in an economy and hence the extent to which policies should be directed towards correcting those deviations.
