## 4 -1-2 Dynamic Market Mechanism

## (1) Perfect Forecast

In addition to perfect information, a stronger prerequisite, perfect forecast, is required for efficient dynamic resource allocation. For catch-up economies it is easier to have a somewhat clear perspective of future development because there are several reference cases to learn from. However it is still difficult for individual economic actors to get exact forecasts on economic development and to behave rationally, based on it.

## (2) Capital Mobility

The role of the financial sector is quite important for the efficient allocation of resources among different points in time, since the efficient dynamic resource allocation is achieved in the financial market as an equilibrium between present and future consumption. It is necessary that capital flows smoothly according to the information from the market, i.e., according to interest rates (the relative price of present goods to future goods).

However, in Vietnam, it is difficult to conclude that the financial market is functioning well. Unskilled banking staff cannot accurately assess loan projects. There is constant pressure from the authorities to provide subsidiary credit to unprofitable state enterprises, while the private sector has difficult access to credit. In such a situation, interest rates do not reflect market conditions and there is no way for the financial market to realize its proper function.

## 4 -1-3 Incentive Mechanism

In addition to the merit of efficient resource allocation, the market economy has another important merit: it motivates people economically (the “incentive mechanism”). The market economy gives people profit incentives and encourages economically rational behavior in people. Some argue that the “incentive mechanism” is a more substantial merit of the market economy than the “market mechanism”. $ ^{23} $

In the world of the typical neo-classical school, where there is no innovation at all, people are motivated toward “normal profit.” In other words, they are motivated to maximize their profit/utility under fixed production/utility functions and under the market prices. As explained previously, with such economically motivated people (“homo-economics”) and “perfect competition,” the “market mechaism” guarantees efficient resource allocation.

However the story does not stop there. If you introduce “innovation,” or the changes of production/utility functions, into the world, the meaning of “competition” totally changes (the world of Schumpeter). In this world, people are motivated to compete with each other towards innovation and acquire “entrepreneur’s profit.” The “entrepreneur’s profit” is a kind of excess profit (not “normal profit”), which can be acquired by only a few entrepreneurs who achieved innovation earlier than the others. It is generated in a dynamic process in which the economy is not on equilibrium (which the neo-classical theory presumes) but on the process of the movement from one equilibrium to another. Thus, Schumpeter style competition has the character of dynamic and oligopolistic competition among a few innovators and followers. This Schumpeter style competition is essentially different from neo-classical “perfect competition” by its nature. We will call this kind of competition “innovation competition” in the following pages. We cannot expect the efficiency of resource allocation