Arrow on microfoundational reductionism

21 February, 2016 at 09:20 | Posted in Economics | Leave a comment

???????????????????????????????????????????????????????????????????????????????????????????????????????????????The economy is irreducible … in the sense that no matter how the households are divided into two groups, an increase in the initial assets held by the members of one group can be used to make feasible an allocation which will make no one worse off and at least one individual in the second group better off.

It is perhaps interesting to observe that “atomistic” assumptions concerning individual households and firms are not sufficient to establish the existence of equilibrium; “global” assumptions … are also needed (though they are surely unexceptionable). Thus, a limit is set to the tendency implicit in price theory, particularly in its mathematical versions, to deduce all properties of aggregate behavior from assumptions about individual economic agents.

Kenneth Arrow


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