General equilibrium illusions

3 Mar, 2021 at 18:34 | Posted in Economics | 7 Comments

what ifWhen I read in the 70s the publications of Sonnenschein, Mantel and Debreu I was deeply concerned. Up to the
time I had the naive illusion that the microeconomic foundation of the GE model, which I had admired so much,
does not only allow us to prove that the model and the concept of equilibrium are logically consistent (that
equilibrium exists), but also allow us to show that the equilibrium is well determined (unique and stable). This
illusion, or should I rather say, this hope, was destroyed, once and for all. I was tempted to repress this insight and continue to find satisfaction in proving existence of equilibrium for more general models under still weaker assumptions. However, I did not succeed in repressing the newly gained insight because I believe that a theory of economic equilibrium is incomplete if the equilibrium is not well determined.

Werner Hildenbrand

And so what? Why should we care about Sonnenschein-Mantel-Debreu?

Because  Sonnenschein-Mantel-Debreu ultimately explains why New Classical, Real Business Cycles, Dynamic Stochastic General Equilibrium (DSGE) and New Keynesian microfounded macromodels are such bad substitutes for real macroeconomic analysis!

These models try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality. And — worse still — something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972),​ Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equilibrium​ solution. A century and a half after Léon Walras founded neoclassical general equilibrium theory, modern mainstream economics hasn’t been able to show that markets move economies to equilibria. This if anything shows that the whole Bourbaki-Debreu project of axiomatizing​ economics was nothing but a delusion.

Opting for cloned representative agents that are all identical is of course not a real solution to the fallacy of composition that the Sonnenschein-Mantel-Debreu theorem points to. Representative agent models are — as I have argued at length in my On the use and misuse of theories and models in mainstream economics — rather an evasion whereby issues of distribution, coordination, heterogeneity — everything that really defines macroeconomics — are swept under the rug.

Of course, most macroeconomists know that to use a representative agent is a flagrantly illegitimate method of ignoring real aggregation issues. They keep on with their business, nevertheless, just because it significantly simplifies what they are doing. It reminds — not so little — of the drunkard who has lost his keys in some dark place and deliberately chooses to look for them under a neighbouring street light just because it is easier to see there …


  1. “issues of distribution, coordination, heterogeneity — everything that really defines macroeconomics — are swept under the rug.”
    The same applies to price stability and full employment goals. CPI and the unemployment rate are frightfully ergodic.
    Macroeconomists do more harm than good by assuming a representative agent who experiences the CPI and unemployment figures: I don’t eat meat so meat inflation is a good thing to this microfoundation. My brother was a microfoundation who, I claim, killed himself despite having a good corporate job. Macroeconomists who support full employment and price stability goals ignore my brother and me, pretending we don’t exist because they have a single representative agent in mind who benefits from price stability and employment. How could it be otherwise? Just ban all voices that contradict the theory, then you can pretend everyone is better off when prices are stable and they have a job … but the stable price of my labor is arbitrarily administered at $0 (like van Gogh’s before his suicide).
    What am I supposed to do if ergodic macroeconomic goals of maximum employment and price stability hurt me? Just shut up and put up with what my superiors have ordained for me?

    • To clarify: I claim my brother killed himself because he had a good job, despite economists’ assumption that having a job is good for the representative agent my brother was supposed to conform his individual personality to. My brother and other friends of mine who have died by suicide and overdoses are silent casualties of harmful macroeconomic goals fetishizing employment and price stability. I am trying to represent their silenced voices, but I keep getting post-throttled and banned by economists …

      • Your use of death to advance your ideological preferences is an intellectual crime.

        • Your disregard of death caused by bad public policy is a moral abomination.
          The least you could do is legalize suicide, because many of us cannot stand this world your policies trap us in.

          • I don’t confuse anecdotal with facts and then you have the cheek to talk about public policy anything during the neoliberal era.

          • Gotta ask considering my long observation of you and your expletives about others that don’t share your views … have you or any of those that you offer, as victims, ever been psychology diagnosed for hereditary traits or environmental experiences which could better explain the outcomes you attribute to the monolith of economics you ascribe all ills too …


            Have you considered that some peoples myopic world view when not unfolding has dire psychological ramifications E.g. the study of cults comes to mind and the expectations[tm] of a future that becomes more remote in possibility creates a self reinforcing dynamic and some people would rather end it all than admit they were wrong – ???? – and you extenuate that dilemma on economists that don’t ascribe to you or yours world views …


            Then now were all entertained by your antics about – your – circumstances in a pandemic acerbated by decades of lack of public [commons] investment because some advanced EMH …

  2. And this PI mumbo jumbo actually was a major reason that Milton Friedman got his “Nobel-Price award”! And as Lars mention, this pseudo-scientific idea, has been debunked so many times,allready in the early 1980-tees. A scandal in my opinion!

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