It is a commonplace that economics is about markets. Among markets the stock exchange has a mythical role as representing the epitome of the operation of perfect competition. Recently, it has also taken on a mythical role as a necessary condition of economic development. Here I attempt to inject some realism into these myths by starting with the idea that Leon Walras, normally vilified as having completely ignored institutions and the evolution of economic systems, should in fact be classified as an institutional economist.

The argument starts by challenging the idea that Walrasian general equilibrium theory is an abstract aberration of a mad French intellectual with no application to the real world. This is just not so, with respect to Walras's original theory, and also with respect to its extensions by Arrow and Debreu. Despite criticisms from post-Keynesians and institutional economists that the theory is devoid of real-world content, and the claims of applied general equilibrists that it can be applied independently of any real- world institutions, the theory of price formation of the Elements (1954) is a rather accurate rendition of operations of a particular institution, the Paris Bourse. If it can be criticized it is because it has little applicability outside of the historical context and particular conditions it describes. It is ‘institution-bounded’.

But if the theory is institution-bounded this also calls into question the generally accepted proposition that competitive Walrasian markets allocate resources efficiently and thus promote growth by channelling resources to their most productive uses.