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The Limits of the MarketThe Pendulum Between Government and Market$
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Paul De Grauwe

Print publication date: 2017

Print ISBN-13: 9780198784289

Published to Oxford Scholarship Online: January 2017

DOI: 10.1093/acprof:oso/9780198784289.001.0001

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The Limits of Capitalism

The Limits of Capitalism

(p.11) Chapter 2 The Limits of Capitalism
The Limits of the Market

Paul De Grauwe

Oxford University Press

The market system is an extraordinarily effective mechanism for creating material prosperity. Countries which have renounced the market system, as in the case of many previously communist regimes, have learned the hard way that it leads to stagnation and collective poverty. Capitalism, by contrast, is successful thanks to its decentralized character, whereby everyone strives for his or her own interests. The market system, however, also comes up against its limits, which arise because individual and collective rationality do not coincide. Firms which pollute the air and water may maximize their individual profit, but not the prosperity of society as a whole. The market system also awakens the cold, calculating System II in individuals, without taking into account our emotional side, System I, thus leading to internal conflict in individuals.

Keywords:   collective rationality, individual rationality, externalities, System I, System II

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