The Miracle of General Equilibrium

Philip Pilkington in Inference Review:

GENERAL EQUILIBRIUM THEORY, or GET, is the metatheory on which all of mainstream economics rests; it remains very abstract, and it has been carefully studied by only a small number of economists. Invented by the French economist Leon Walras in 1899, GET was neglected for half a century as economists dealt with the intensifying business cycle, the emergence of central banks, and the Great Depression. The economists who began to take notice of it in the 1950s tended to be applied mathematicians, or, at least, economists with strongly analytical gifts.1 In the 1960s, a debate arose between John Maynard Keynes’s students at Cambridge University and mathematical economists at MIT. Known as the Cambridge capital controversies, the debate called into question the presumption that aggregation functions defined over microeconomic models could coherently yield a macroeconomic model of the economy.2

Controversy and critique led economists to micro-founded models in which micro and macroeconomic theories were, at least, presumptively consistent. The standard micro-founded economic model, used by many central banks and presented to graduate students, is the dynamic stochastic general equilibrium model.

More here.

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