This paper presents some new ways of looking at economic systems and organizations. Individuals' judgments entail errors; they sometimes reject good projects and accept bad projects (or ideas). The architecture of an economic system (i.e., how the decision-making units are organized together within a system, who gathers what information, and who communicates what with whom) affects the errors made by individuals within the system, as well as how those errors are aggregated.

This paper presents a simple, general framework for analyzing externalities in economies with incomplete markets and imperfect information. By identifying the pecuniary effects of these externalities that net out, the paper simplifies the problem of determining when tax interventions are Pareto improving. The approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained Pareto optima. It can also lead to simple tests, based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection, signaling, moral hazard, incomplete contingent claims markets, and queue rationing equilibria.

The question of how the funds required for the capital accumulation associated with industrialization are to be raised has a long history. Since the industrial sector is relatively small in the early stages of industrialization, there has been a presumption that funds must primarily come from the agricultural sector. A simple model of a closed socialist economy in which the instruments at the disposal of the government are the terms of trade and the industrial wage, sheds some light on these questions, particularly in the context of the Soviet industrialization debate. In an economy facing binding constraints in external trade, a lowering of the price of the rural good, which reduces the supply of rural surplus available to the urban sector, must be accompanied by a lowering of the urban wage to reduce the demand for the rural good, and hence to balance the supply and demand of the rural good. A virtue of developing a general theoretical framework is that it enables one to isolate those features of the economy which are critical for the issues at hand.