Beyond General Economic Equilibrium Theory: Modeling Dynamic Price Adjustments

Paola Tubaro

P.H.A.R.E., Université Paris 10 - Nanterre, 200 avenue de la République, Nanterre, France

The basic model underlying most modern economic analysis is the General Equilibrium model. It addresses the question of how social order comes out of the decentralized decisions of many individuals in a private ownership economy. The price mechanism, produced by the interaction of all agents, is supposed to ensure this result. The General Equilibrium theory has been successful in proving the existence of a price vector which guarantees the coherence of an economic system, but cannot prove its uniqueness and stability, unless extremely restrictive assumptions are introduced. The problem is that this theory focuses on equilibrium states, whereas the more fundamental question of how interaction among individuals generates prices, whether in equilibrium or in non-equilibrium situations, is yet to be answered. It is argued that, in order to improve knowledge of the price mechanism, more weight should be put on a dynamic interpretation of a market economy, seen as an evolving, open-ended system. Furthermore, the problem of aggregation has to be more effectively addressed, in that there is no simple and direct connection between micro and macro behavior.