To sum up, we expect a free enterprise economy to underinvest in invention and research (as compared with an ideal) because it is risky, because the … - Kenneth Arrow

The government may be regarded as a decision-making entity. Among the decisions it makes are the formation of economic policy and the collection of economic-statistical information. In all modern nations the economic policies of the government are significant activities, if for no other reason than the high proportion of national income which passes through the Treasury; but of course in many countries much more ambitious economic planning is aimed at, though not necessarily achieved. Economic statistics, on the other hand, if one is to judge by expenditures, form only an insignificant proportion of a government's activities and are the least developed precisely in those underdeveloped countries which have the greatest felt needs for economic plans.

The forces of competition and the tendency to profit-maximization operate to mitigate these differences. However, the basic fact of a personnel investment prevents these counteracting tendencies from working with full force. In the end, we remain with wage differences coupled with tendencies to segregation.

While economic theory in general may be defined as the theory of how an economic condition or an economic development is determined within an institutional framework, the deals with how to judge whether one condition can be said to be better in some way than another and whether it is possible, by altering the institutional framework, to achieve a better condition than the present one.