Conclusion
It would hardly be appropriate to end a discussion of general equilibrium theory without assessing its status today and its future. Many still believe that the Walrasian model is still the basic foundation on which we should build our economic theory.
They argue that by introducing imperfections or frictions we can recover the Keynesian or other features which are absent from the basic model. They argue against trying to develop alternative models with a non-degenerate distribution of characteristics and where agents acting on simple rules generate the sort of aggregate phenomena that we observe. This, they claim, leads us into the “wilderness of bounded rationality”. Thus studying agent-based models such as those proposed by Stiglitz and Gallegati (2011) or Colander et al. (2008) is condemned as being “ad hoc” and “non scientific”, that is, as John Moore once remarked, we should stick as closely to Walras as we can. Yet when you look more closely at the favourite macroeconomic model of our day, the “dynamic stochastic general equilibrium” model, it typically makes many “ad hoc” assumptions on the technologies of firms or the utility functions of individuals. These are deemed acceptable mainly because we are familiar with them. The assumption of homogeneous production functions or concave utility functions are not based on meticulous observation of individuals and firms, but on the introspection of economic theorists. What we have done, in trying to stay on the path that Walras set us on, is to succumb to the temptation that Solow (2006: 234) has convincingly described, when he said: “Maybe there is in human nature a deep-seated perverse pleasure in adopting and defending a wholly counterintuitive doctrine that leaves the uninitiated peasant wondering what planet he or she is on”.On the one hand, the assumptions made have become more and more restrictive and the models more mathematically sophisticated.
On the other, the modifications made to be able to calibrate the models with some success lead us very far from the scientific foundations claimed for the models. For example, building a general equilibrium model and then including a large number of individuals who each period simply spend all that they have and never save or borrow seems totally artificial and not in the spirit of the overall theory that Walras and his successors wished to develop. If we adhere to the basic tenet of the general equilibrium model that macro or aggregate behaviour must be derived from underlying rational microfoundations, then we have to explain how the characteristics of the aggregate are determined by those of the individuals. It is here that the general equilibrium model has let us down, because, as the SMD results showed, we can say very little about aggregate behaviour in that model. Holding rigidly to the very specific axioms underlying the model of the “rational” individual and ignoring the problems of aggregation and interaction has led us into a cul-de-sac.However, if we are prepared to move forward and to argue that there is more interaction between individuals than that foreseen in the general equilibrium approach, then we have to take account of the interaction between the individuals and how this is organized. Looking at the economy as a complex interactive system (see Kirman 2010) opens new horizons but deviates in an essential way from the path that those, who claim to have inherited the general equilibrium tradition, have followed.
In my view, we came to the end of the Walrasian general equilibrium road in the 1970s and since then have persisted with that structure more out of a desire to protect our human capital than out of a genuine desire to use the model to give a satisfactory explanation of the economic phenomena that we actually observe. More importantly, to adequately explain the movements of economic variables we need to envisage a nonequilibrium process and its evolution. Those who think of themselves as the rightful successors to Walras seem to have strayed far from the sort of model he had in mind and might rightly be thought of as heretics who have left the pure Walrasian church. The structure that they have constructed in a desire to remain relevant lacks the beauty and generality of the Walras-Arrow-Debreu model. Those who think that economic theory must be built on new foundations have not, as yet, constructed an edifice as impressive or beautiful as that which Hildenbrand (1983, 29) described as the “cathedral” of general equilibrium theory of which Walras was the architect and Debreu the master builder. However, that monument is now, at best, filled with admiring tourists and very few true believers.
Alan Kirman