The Flawed Foundations of General Equilibrium
February 01, 2009 01:51PM
Frank Ackerman and Alejandro Nadal, "Underneath the Flawed Foundations," The Flawed Foundations of General Equilibrium, 2004.
Almost two hundred years after Smith, his point about the invisible hand and its desirable results was apparently proved by Kenneth Arrow and Gerard Debreu, in the imposingly abstract mathematics of general equilibrium theory. ...
The "proof of existence" of a general equilibrium by Arrow and Debreu in 1954 was hailed as a scientific demonstration of the optimal results attained by competitive markets. ...
The market system proposed in Wealth of Nations has, as this book shows, led to fundamental and unresolved problems. However, Smith offered an earlier version of invisible hand processes in his Theory of Moral Sentiments; in this account, the invisible hand is crucial to the evolution of public morality and social justice. While the details of Smith's theory are entangled in the issues and vocabulary of eighteenth-century philosophy, the general point is a hopeful one: under the right circumstances, unplanned coordination of individuals may emerge from a variety of social systems. Could this apply to democratic political processes, and perhaps even the evolution of better economic systems? In any case, the need for better economic theories is clear, as the chapters of this book establish that the dominant school of economics is built on flawed foundations.
