1. The leading special case involves transactions between two profit-maximizing firms. The textbook theory of the firm (Stigler) demonstrates that in the absence of credit constraints and imperfect information firms pursue the same actions independent of their wealth levels. With imperfect information, or credit constraints, this is no longer true.

It is almost never true in the case of two consumers or in the case of a firm and a consumer. Consumer decisions generally depend on their wealth. However, in the absence of credit constraint, consumers may transact like firms: i.e., they trade to maximize their wealth and use the market to arrange their consumption streams to suit their preferences.

2. Thus leading conservative economist and Nobel Laureate George Stigler writes, “Such a criterion [of a good income distribution] depends partly upon one's ethical goals, of course—whether he seeks comfort or adventure, individualism or social action. Moreover the ethical factors are complex, and only a very naive and dogmatic set of judgements will permit one quickly to decide on the kinds and extent of inequality he likes.” See Stigler, , The Theory of Price, rev. ed. (New York: MacMillan, 1952), 285.Google Scholar In a similar view, liberal economist and Nobel prize winner Paul Samuelson wrote about the new “welfare economics” designed to address the optimal distribution of income: “Without norms, normative statements are impossible. At some point welfare economics must introduce ethical welfare functions from outside economics. Which set of ends is relevant is decidedly not a scientific question of economics. This should dispel the notion that by a social welfare function is meant some one, unique, and privileged set of ends.…” See Samuelson, , “Comments on Welfare Economics,” in The Collected Papers of Paul Samuelson, ed. Stiglitz, J., 2 vols. (Boston: MIT, 1966), 2: 1102–4.Google Scholar

3. The theft of a $100 bill is a case in point. In general, an action that creates a benefit for one party will produce a loss of a different amount for the other.

4. Arrow writes, “General competitive equilibrium above all teaches the extent to which a social allocation of resources can be achieved by independent private decisions coordinated through the market. We are assured indeed that not only can an allocation be efficient, but the result is Pareto-efficient. But, as has been stressed, there is nothing in the process which guarantees that the distribution be just. Indeed, the theory teaches us that the final allocation will depend on the distribution of initial supplies and of ownership of firms. If we want to rely on the virtues of the market but also want to achieve a more just distribution, the theory suggests the strategy of changing the initial distribution rather than interfering with the allocation process at some later stage.” See Arrow, Kenneth, “General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choices,” reprinted from Les Prix Nobel en 1972 in Collected Papers of Kenneth J. Arrow, 2 vols. (Cambridge: Belknap Press for Harvard University, 1983), 2: 222–23.Google Scholar

5. In “Some Fallacies in the Interpretation of Social Cost,” Knight wrote, “That free enterprise is not a perfectly ideal system of social organization is a proposition not to be gainsaid, and nothing is further from the aims of the present writer than to set up the contention that it is. But in his opinion the weaknesses and failures of the system lie outside the field of the mechanics of exchange under the theoretical conditions of perfect competition.” Frank Knight, “Some Fallacies in the Interpretation of Social Cost,” Quarterly Journal of Economics (1924), 582.