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Abstract

Kornai (1971) was the first scientific work providing a comprehensive critique of general equilibrium theory as represented by Debreu’s theory of price and the Arrow-Debreu (1954) model. In my previous paper (Móczár, 2006), I explored why Kornai failed to make as significant an impact as his critique may have deserved. Frank Hahn’s (1973) response to the critique was the most severe and contributed to this perceived failure. In this paper, I scrutinize the Arrow-Debreu model and its background by deploying an evaluation of the neoclassical equilibrium theories and models. I explore the role of general equilibrium in economics, relying on a deeper analysis of the Arrow-Debreu model, Debreu’s mathematical ground work for a potential proof of the existence of equilibrium, the stability property of the Lyapunov function, and the intellectual atmosphere of the Cowles Commission. Constructive deployment of my previous equilibrium theories (Móczár, 1992, 1995, 1997) with respect to convexity, turnpike and von Neumann models, equilibrium in the labour market, etc. helped me evaluate neoclassical equilibrium theories and models in depth. I conclude that neoclassical theories and models, including the Arrow-Debreu model, are a modern mathematical formulation of earlier classical models (Cournot, Walras, Cassel, Wald) with a consistent logical structure. These classical models formulated the general equilibrium as a function of prices alone, which neither Kornai nor Hahn noticed in their debate. As this paper demonstrates, recent theories have not always supported Hahn’s objections. Thus the Arrow-Debreu (1954) model can only play a very small, mostly indirect role in the analysis of today’s complex socio-economic issues, necessitating a paradigm shift to non-equilibrium economics.