Book contents
- Frontmatter
- Dedication
- Contents
- Preface
- Acknowledgements
- Prologue: Model building yesterday versus today
- Part I Theoretical Models
- 1 Microeconomic versus macroeconomic theoretical model building
- 2 On the limitations of equilibrium models in general
- 3 On building theoretical models using game theory
- 4 On the purpose and limitations of game-theoretic models
- Part II Empirical Models
- Part III Testing and Models
- Part IV Methodological Considerations
- Bibliography
- Name index
- Subject index
2 - On the limitations of equilibrium models in general
Published online by Cambridge University Press: 05 October 2014
- Frontmatter
- Dedication
- Contents
- Preface
- Acknowledgements
- Prologue: Model building yesterday versus today
- Part I Theoretical Models
- 1 Microeconomic versus macroeconomic theoretical model building
- 2 On the limitations of equilibrium models in general
- 3 On building theoretical models using game theory
- 4 On the purpose and limitations of game-theoretic models
- Part II Empirical Models
- Part III Testing and Models
- Part IV Methodological Considerations
- Bibliography
- Name index
- Subject index
Summary
[T]he direction economics, and particularly theoretical economics, took in the 20th century was to a great extent due to Walras’ influence. This was not so much the result of his own results but rather a reflection of his vision. He was convinced that economics should have ‘sound mathematical foundations’ and his concern for this is reflected in his correspondence with his contemporaries such as [Henri] Poincaré. However, his specific vision of the nature of equilibrium became the benchmark for modern economic theory and led us to the Arrow-Debreu model which is characterised by its lack of institutional features, and the lack of any proof of stability under adjustment, as later to be shown by Sonnenschein, Mantel and Debreu. Above all there is no place in this framework for out of equilibrium dynamics. Whilst Walras is to be lauded for his insistence on the interdependence of markets, we should also be aware that he set us on a path towards economic models which, while admirably internally consistent, seem to be unable to match the empirical evidence.
Alan Kirman [2010, abstract]Can we learn anything about the efficiency of real world market economies by studying the efficiency of Arrow-Debreu-style general equilibrium models?
Richard Lipsey [2012, §II]In simple terms, Walras’s general-equilibrium models are intended to explain all prices and quantities simultaneously. They would do this by positing a set of objective functions for each and every individual demander and supplier. Usually, this is a set of utility functions for the demanders and a set of production-based profit functions for the suppliers. Universal maximization subject to constraints is assumed, as well as assuming all participants in all markets are price takers. As such, there are a few logical requirements. One must just be able to deduce a singular vector of prices given all the assumptions.
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- Model Building in EconomicsIts Purposes and Limitations, pp. 46 - 66Publisher: Cambridge University PressPrint publication year: 2014