Sunday, January 09, 2011

Canonical Statements Of Current Mainstream Price Theory?

I find puzzling where contemporary mainstream economists would point for good statements of a theory to explain prices in, say, the United States economy. I can think of a couple of possibilities.

The first would be General Equilibrium models in which a complete set of spot and future markets exist and in which goods are distinguished by location, date of delivery, and contingent events. Canonical statements of such a theory include:
  • Gerard Debreu (1959). Theory of Value: An Axiomatic Analysis of Economic Equilbrium, Cowles Foundation Monograph.
  • Kenneth J. Arrow and Frank Hahn (1971). General Competitive Analysis, Holden-Day.
But is this the current theory? Even though more textbooks have been written, the references would seem old to most young economists. The Sonnenschein-Mantel-Debreu results show that dynamic equilibrium paths are not limited by the theory. The theory does not allow for the existence of money to have any effect. Since the quantities of initial endowments are givens of the theory and any groping out of equilibrium, particularly with production going on, would change the data defining the equilibria, any time to reach equilibrium is too long. I think many mainstream economists would tell me General Equilibrium theory was abandoned in the 1980s.

Another possibility is models of temporary equilibrium. I look at the following as canonical statements of this theory
  • J. R. Hicks (1946). Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory, 2nd edition, Oxford University Press.
  • J. M. Grandmont (1977). "Temporary General Equilibrium Theory", Econometrica, V. 45, N. 3 (Apr.): pp. 535-572.
In this theory, only spot markets and maybe future markets for the numeraire commodity clear in equilibrium. The plans of different agents for future activities are not brought into agreement in equilibrium. Maybe this approach is related to Samuelson's model of overlapping generations. In addition to all the problems of General Equilibrium Theory, this approach has the difficulty of modeling how expectations alter, something that hardly seems observable or easy to model in a mechanical fashion.

Maybe game theory is the foundation of contemporary mainstream price theory. But cannot a game be found to rationalize almost any observed behavior? Is it not more a bag of tricks than a theory? Nevertheless, I have heard mainstream economists say good things about the following text:
  • David M. Kreps (1990). A Course in Microeconomic Theory, Princeton University Press.

As I understand it, the dominant introductory graduate textbooks in mainstream microeconomics remain:
  • Andreu Mas Colell, Michael D. Whinston, and Jerry R. Green (1995). Microeconomic Theory, Oxford University Press.
  • Hal R. Varian (1992). Microeconomic Analysis, 3rd edition, W. W. Norton.
When I have perused these, I have found them to be more a collection of mathematics than a clear presentation of price theories. And I have found them very unclear on why the student should accept anything in them as applicable to actually existing capitalism.


Patch said...

Hi Rob,

I would say that in quasi-microfounded macroeconomics, the Dixit-Stiglitz-model is dominant.

Dixit, Avinash K. und Stiglitz, Joseph E.; Monopolistic Competition and Optimum Product Diversity, American Economic Review 67 (1977), 297-308.

It allows for price-setting, is based on product diversity and monopolistic competition.


Robert Vienneau said...

Good answer. I have not Dixit and Stiglitz, but I have seen that article frequently referenced. New growth theory models are incoherent mush, as Man-Seop Park, among others, has shown. And I don't think much of DSGE models either. I suppose I might still look up that article someday.

Regina Chris said...

A copy of the Dixit/Stiglitz article is available here:

Chris Pepin
Regina, SK

Regina Chris said...

Oops! The link in my previous E-mail did not copy completely. Hopefully this will work:


Patch said...

I can't find the article by Man-Seop Park. As I understand it, growth theory using capital goods is not inconsistent, it only has the shortcoming that it's about very special kinds of economies.

Robert Vienneau said...

Man-Seop Park has written a number of articles criticizing new growth theory. One is "Homogeneity masquerading as variety: the case of horizontal innovation models" (Cambridge Journal of Economics, V. 31, iss. 3 (2007): pp. 379-392.) Another is a chapter in Economic Theory and Economic Thought: Essays in Honour of Ian Steedman (Routledge, 2010).