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The Theory of the Market Economy and the Social Foundations of Innovative Enterprise

University of Massachusefts Lowell and INSEAD (The European Institute of Business Administration)

The author argues that the theory of the market economy propounded by western economists is more a hindrance than a help in understanding the difficult economic problems that nations, both rich and poor, now face. The fundamental problem is that western economists who propound the theory of the market economy - including those who recognize that markets often work `imperfectly' or `faill'-lack a theory of economic development that can explain the successful growth of the wealthy economies. The author argues further that a theory of economic development must be rooted in a theory of innov,ative enterprise. Lacking such a theory, `market' economists tend to see developed markets in labour, capital and products as cauuses rather than consequences of economic development. The 'market economy' is, of course, a very real phenomenon with great economic and political advantages if it can be achieved and controlled. But, in reality, well-functioning markets are much more the consequences than the causes of economic development. To reap the advantages of a 'market economy', a society must first put in place the organizations and institutions that generate the innovative capabilities that underpin economic development and that make possible the emergence of wellfunctioning markets in capital, labour and products. With these capabilities and markets in place, a society can then turn to the ongoing tasks of promoting the innovation process and controlling the operation of markets to achieve stable and equitable economic growth. Understanding the social foundations of innovative enterprise is, the author argues, critical to the formulation of policies to achieve this end.

Key Words: economic development • economic theory • innovative enterprise • institutions • market failure • market imperfections • organizations

Economic and Industrial Democracy, Vol. 24, No. 1, 9-44 (2003)
DOI: 10.1177/0143831X03024001598


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