Is economic theory inherently pro-market?

An interesting question asked by rauparaha over at TVHE. The answer is, unfortunately, no. To put it simply, as was pointed out in the socialist calculation debate, if you accept the basic general equilibrium model and replace the auctioneer with a central planner, socialism works very nicely thank you.

Rauparaha goes on to say,

So when I was reading an article in the JPE today it was refreshing to come across this:

The question whether – and why – markets may perform better than governments has fascinated economists for a long time, at least since the work of Hayek (1945). However, despite the importance of this question for economics and beyond, it is still hard to find formal arguments for why markets may be able to outperform a benevolent government. Instead, the benchmark result is still provided by standard welfare theorems according to which a benevolent government can always replicate the market outcome, or even improve upon it if the market is affected by failures such as adverse selection or externalities.

A point worth making here is that the "standard welfare theorems" assume complete contracts. But as Oliver Hart has noted,

[...] if the only imperfections are those arising from moral hazard or asymmetric information, organisational form – including ownership and firm boundaries – does not matter: an owner has no special power or rights since everything is specified in an initial contract (at least among the things that can ever be specified). In contrast, ownership does matter when contracts are incomplete: the owner of an asset or firm can then make all decisions concerning the asset or firm that are not included in an initial contract (the owner has ‘residual control rights’).

So under complete contracts any organisational form can mimic any other organisational form so that the fact that the government can do as well as the private sector under these conditions is no great surprise. To show that private and government ownership differ in their outcomes requires an incomplete contracts framework. This is, of course, why the formal theory of things like privatisation and the theory of PPPs now works from within an incomplete contracts model.

Thus for rauparaha to get "formal arguments for why markets may be able to outperform a benevolent government" it will be necessary to think about the welfare theorems under incomplete contracts, and I don't know if anyone as moved GE in this direction yet.