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  • Print publication year: 2010
  • Online publication date: November 2010

11 - General Equilibrium

Summary

Economics and mathematics have become increasingly intertwined during the past few decades, a development that has been encouraged and rewarded by the Nobel Prize in economics. As a consequence it is sometimes difficult to identify a true economic idea among the accomplishments honored by the Nobel committee. Are these really economic insights or merely exercises in applied mathematics? Nowhere is this more evident than in the development of general equilibrium theory. What started with Adam Smith's description of market mechanisms has evolved into abstract proofs that are more likely to be described as elegant or robust than relevant.

Economics and mathematics are different in many ways. Mathematicians value abstract problems and solutions, while economics is ultimately about the real world. A good economic theory can explain and forecast economic events and contribute to better economic policies. But as economics evolved into more of a mathematical discipline, this practical purpose has faded. An early generation of economists translated economic theory into equations while the next generation formulated increasingly complex problems and solutions. The final result is sometimes barely recognizable as economics.

General equilibrium theory followed this evolutionary path. From Adam Smith and the classical economists to Nobel laureates Kenneth J. Arrow and Gerard Debreu, the description of a market economy has evolved from text to topology. Sir John R. Hicks played an important role in this evolution, as did Maurice F. Allais, a Nobel Prize winner who pioneered mathematical economics in France and was belatedly discovered by other economists and the Nobel Prize committee.

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