Syllabus

This course is an introduction to general equilibrium theory and welfare economics. There is no wonderful textbook. Mas Collel Winston and Green's Microeconomic Theory, hereinafter referred to as MWG, is not bad, but sometimes it is too much about trees and not enough about forests. A Course in Microeconomic Theory by David Kreps, referred to as K below, is idiosyncratic, but has some interesting points of view. Another interesting read is Bryan Ellickson's Competitive Equilibrium: Theory and Applications, also known as E. But remember that textbooks are largely to help undergraduates survey lots of material quickly and without depth, which describes neither you nor the goal of this course. More readings come from the journal articles linked below. This course will cover parts 3 and 4 of MWG. Naturally, we begin with part 4, and then return to part 3.

There is a lot you should look at on this syllabus but solid bullets are required. They are fair game for in-class questions and exams.

The single best reading on general equilibrium theory is essay 1 of T. C. Koopmans, Three Essays on the State of Economic Science. All serious GE scholars will want this in their library. Although it is out of print, used copies are frequently available and inexpensive at Alibris, Powells, ABEbooks, and the like. Whether you buy it or not, you should read it. An important text for the specialist is Arrow and Hahn's General Competitive Analysis. The urtext, of course, is Gerard Debreu's Theory of Value (which, by the way, was his thesis).

In addition, this syllabus contains references to useful articles, with links where available. If you link from off-campus, you may need to use the library's proxy server. Access Anywhere is a bookmarklet that you can install on your computer to access library materials. Information can be found here and here.

• Background
• This material will not be covered in class, and you are not likely to have to sit an exam on it. But the scholars and intellectuals among you should want to know why we're doing what we do, and how it came to be that way.
• Why study GE?
• Here is a nice essay by (surprise!) Paul Krugman.
• Arrow, K."General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choice". American Economic Review 64, 253-272 (1974).
• History of General Equilibrium Theory
• Weintraub, E. Roy. How Economics Became a Mathematical Science. Duke U. Press, 2002.
• Weintraub, E. Roy. "On the Existence of a Competitive Equilibrium: 1930-1954". Journal of Economic Literature 21, 1-39 (1983).
• Leonard, R.J., "From Parlor Games to Social Science: von Neumann, Morgenstern, and the Creation of Game Theory 1928-1944". Journal of Economic Lit. 33, 730-761 (1995). Not strictly our subject, but your friends will think you erudite.
• Duffie, D. and H. Sonnenschein. "Arrow and General Equilibrium Theory". Journal of Economic Literature 27, 565-598 (1989).
• Debreu, G. "Economic Theory in the Mathematical Mode". American Economic Review 74, 267-278 (1984). His Nobel prize speech.
• Methodology
• It is important also to have some understanding of the methodology of modern economics. Economics is about fashion. What people like and don't like has as much to do with fashion and taste as with rigorous analytical standards. Two things we all find peachy-keen are models and methodological individualism.
  • Morgan, M. " Modelling as a Method of Enquiry". in Morgan, M. ed. The World in the Model: How Economists Work and Think. Cambridge University Press. Forthcoming.
  • Kaushik Basu, "Methodological Individualism". in The New Palgrave Dictionary of Economics, 2nd edition, edited by Steven N. Durlauf and Lawrence E. Blume, Palgrave Macmillan (Basingstoke and New York).
  • Kenneth J. Arrow, " Methodological Individualism and Social Knowledge". American Economic Review 89, 1-9 (1994).
• The relationship between theory and empirical work is not well understood. Here are two pieces worth looking at:
  • Tjalling C. Koopmans, "Measurement Without Theory". Review of Economic Statistics 29, 161-172 (1947). Tom Sargent says this is the first call for a micro-founded macroeconomics. Chuck Manski says this is the beginning of modern econometrics. It is a book review!
  • N. R.Hanson, Patterns of Discovery. The entire book is interesting, but Chapter I, on observation, is particularly so.
• Other Takes on Markets
• Economics is at its best when it discusses social systems, and this is what general equilibrium theory is about. But other notable economists have had systems models that are not inspired by the Lausanne school from which our formulation of multi-market equilibrium analysis descends. One example is the overrated F.A. Hayek. Here is something good he wrote: The Use of Knowledge in Society, American Economic Review 35, 519-30 (1945). I'm looking for something pithy by the 5ft 4in Schumpeter, but I bet he was never pithy for a moment, except perhaps for his famous comment about aspiring to be the greatest lover in Vienna; the greatest rider in Austria, and the greatest economist in the world, and having succeeded in only two out of three.

• Introduction
• The good and the bad of theory
• Jorge Luis Borges, On Exactitude in Science.
• Jean Baudrillard, Simulacra and Simulations (exerpt).
• Examples
• Linear Economic Models
• Blume, L. Notes on Linear Programming.
• Koopmans, T. Activity Analysis of Production and Allocation. Cowles Commission for Research in Economics, Monograph 13. Wiley, 1951, Chapt. 3 (for the set-up of the model, not so much for the convex analysis).
• Gale, D., The Theory of Linear Economic Models. McGraw-Hill, 1960, Chapter 7
• Chandar, P., "A Simple Proof of the Non-substitution Theorem". Quarterly Journal of Economics , 198--201 (1974).
• Timmer, M. et al. 2015. &lquo;An illustrated user guide to the World Input-Output Database: The case of global automotive production&rquo;. Review of International Economics 23(3), 575--605. IO models are useful in international trade. Here is an intro to an important tool, illustrated by a case study application.
• The WIOD. Here is the tool.
• OECD Input-Output Tables, a more up-to-date but perhaps less useful tool.
• And finally, the International Input-Output Association, with more links to data sets and technical material.
• De Martino et. al.,""Von Neumann's Growth Model: Statistical Mechanics and Biological Applications""
• The Ricardian Model
Of Ricardo's Principles, Keynes wrote:

It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.


J. M. Keynes, General Theory p.32.

All of this is true, and yet it is among the most important books in the history of economics. The first edition was putlished in 1817. The definitive reference is Piero Sraffa's edition, found here.
• Stigler, G. "The Ricardian theory of value and distribution". Journal of Political Economy 60(3), 187--207 (1952).
An earlier, simpler version of Ricardo's ideas on rent is in
• Ricardo, D. An Essay on the Influence of a low Price of Corn on the Profits of Stock;… 1815.
Ricardo is perhaps most famous for his principal of comparative advantage. Chipman is also a great discussion of duality in cost and production.
• Chipman, J. "A Survey of the Theory of International Trade: Part I, The Classical Theory". Econometrica 33, 477--519 (1965).
• MWG 15.D
• The Ricardian model is having something of a revival in international trade. See J. Eaton and S. Kortum, Putting Ricardo to Work, Journal of Economic Perspectives 26, 65--89 (2012).
• The continuum-goods version of this model has been important. See Matsuyama, K., "Ricardian Trade Theory" in The New Palgrave Dictionary of Economics, 2nd edition, edited by Steven N. Durlauf and Lawrence E. Blume, Palgrave Macmillan (Basingstoke and New York).
• Samuelson, P. "Theoretical Notes on Trade Problems". Review of Economic Studies 46, 145--54 (1964).
• A recent empirical application: Kondo, I. " Trade-induced displacements and local labor market adjustments in the U.S." Journal of International Economics 114, 180-202 (2018).
• The 2×2×2 Model
• Jones, R., "Hecksher-Ohlin Trade Theory" in The New Palgrave Dictionary of Economic, 2nd edition, edited by Steven N. Durlauf and Lawrence E. Blume, Palgrave Macmillan (Basingstoke and New York).
• Chipman, J. "A Survey of the Theory of International Trade: Part II, The Neo-Classical Theory". Econometrica 33, 686--760 (1965)
• Mussa, M. "The Two-Sector Model in Terms of Its Dual: A Geometric Exposition". Journal of International Economics 9, 513--26 (1979).
• Leamer, E. The Hecksher-Ohlin Model in Theory and Practice. Princeton Studies in International Finance Nr. 77 (1995).
• Davis, D., Weinstein, D., Bradford, S. and Shimpo, K. "The Hecksher-Ohlin-Vanek Model of Trade: Why Does it Fail? When Does It Work?." American Economic Review 67, (1977).
• A recent empirical application: Arezki, A., Fetzer, T. and Pisch,F. "On the comparative advantage of U.S. manufacturing: Evidence from the shale gas revolution." Journal of International Economics 107, 34-59 (2017).
• Pure Exchange
• MWG 15.B
• Ellickson 1.2
• Kreps 6.1
• Humphrey, T., "The Early History of the Box Diagram." Federal Reserve Bank of Richmond Economic Quartery 82(1): 37-75.
• Bator, F., "The Simple Analytics of Welfare Maximization." American Economic Review 47, 22--59 (1957).

• Equilibrium and Welfare
• The Welfare Theorems
• Arrow, K. J."An extension of the basic theorems of classical welfare economics". in Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability, ed. J. Neyman, Berkeley: University of California Press, 507-32 (1951)
• Bator, F., "The Simple Analytics of Welfare Maximization." American Economic Review 47, 22--59 (1957).
• Debreu, G. "The coefficient of resource utilization." Econometrica 19, 273-92 (1951).
• Koopmans, T. Three Essays on the State of Economic Science, essay 1.
• Lange, O. "The foundations of welfare economics". Econometrica 10, 215--228 (1942).
• Radner, R. "A note on the theory of cost-benefit analysis in the small". in Capital, Investment and Development: Essays in Memory of Sukhamoy Chakravarty, ed. K. Basu, T. Mitra and M. Majumdar, Oxford: Blackwell. 1983.
• Samuelson, P. "The pure theory of public expenditure". Review of Economics and Statistics 36(4), 387--89 (1954).
• The Right and Wrong of Welfare Economics
• Sen, A."Utilitarianism and Welfarism." Journal of Philosophy 76:9 463-89 (1979).
• Mongin, P. "Spurious Unanimity and the Pareto principle." Economics and Philosophy 32:3, 511-532 (2016).
• BLume, L. and D. Easley, "If you're so smart, why aren't you rich? Belief selection in complete and incomplete markets." Econometrica 74(4), 929-66.
• Blume, L., T. Cogley, D. Easley, T. Sargent and V. Tsyrrenikov. "A case for incomplete markets." Journal of Economic Theory 178, 191-221 (2018).
• Existence and Comparative Statics
• Behavioral GE
• MWG 17.B,C
• Preference-based GE - for self-study, not lecture material
• MWG 17 appendix B
• This is where you should read Theory of Value if you are interested in classical GE. This means you, macroeconomists and financiers.
• Regular Economies, Local Uniqueness and Comparative Statics
• *MWG 17.D,G
• Debreu, G. "Regular Differentiable Economies". American Economic Review 66, 280-87 (1976).

• Matching
• General Reference
• Roth, A. and M. Oliviera Sotomayor. Two-Sided Matching: A study in game-theoretic modeling and analysis. Cambridge U. Press. 1990.
• One-Sided Matching
• Koopmans, T. C> and M. Beckmann. "Assignment Problems and the Location of Economic Activities". in Econometrica 25,1 53--76 (1957).
• Transferable Utility
• Shapley, L. and D. Shubik. "The Assignment Game I: The Core". in International Journal of Game Theory 1, 111-130 (1972).
• Hurlbert, Glenn. "A Short Proof of the Birkhoff-von Neuman Theorem". Unpublished, Arizona State University (2009).
• Matching Without Exchange
• Gale, D. and L. Shapley. "College Admissions and the Stability of Marriage". in American Mathematical Monthly 69, 9--15 (1962).
• Abdulkadiroğlu, A., P. Pathak, A. Roth and T. Sönmez. "The Boston Public School Match". American Economic Review 95,2 368--71.
• Matching with Non-Transferable Utility
• Kelso, A. and V. Crawford. "Job Matching, Coalition Formation, and Gross Substitutes". Econometrica 50,6 1483--1504 (1982).
• Applications
• Becker, G. "A Theory of Marriage: Part I". Journal of Political Economy 81, 813-46 (1973).
• Browning, M., Chiappori, P.-A. and Weiss. Y., The Economics of the Family. Cambridge UK, Cambridge University Press. 2014. Chapters 7 and 8 are concerned with applications of the transferable-utility matching model.
• Pathak, P. "The Mechanism Design Approach to Student Assignment". Annual Review of Economics 3 (2011).
• Roth, Al, "What Have We Learned From Market Design". NBER Working Paper 13530 (2007).

• Introduction to Asymmetric Information
• Key Papers
• Akerlof, G. "The market for 'lemons': quality uncertainty and the market mechanism". Quarterly Journal of Economics 84(3): 488--500 (1970).
• Arrow, K. "Uncertainty and the welfare economics of medical care". American Economic Review 53(5): 941--73 (1963).
• Rothschild, M. and J. Stiglitz. "Equilibrium in competitive insurance markets: An essay on the economics of imperfect information". Quarterly Journal of Economics 90(4): 629-649 (1976).
• Spence, M."Job market signalling". Quarterly Journal of Economics 87(3): 355-374 (1973).
• Theory of the Firm
• Bowles, S. "Marx and Modern Economics". CEPR, 21 April 2018.
• Coase, R. 1937. "The nature of the firm". Economica 4(16): 386--405.
• Williamson, O. Markets and Hierarchies: Analysis and Antitrust Implications: A Study in the Economics of Internal Organization. The Free Press. 1975.

• Further Applications
• Uncertainty
• Arrow, K. J. "The Role of Securities in the Optimal Allocation of Risk-Bearing". Review of Economic Studies 31, 91-96 (1964).
• Radner, R. "Existence of Equilibrium of Plans, Prices and Price Expectations in a Sequence of Markets". Econometrica 1972, 289--303.
• Hart, O. "On the Optimality of Equilibrium when the Market Structure is Incomplete". Journal of Economic Theory 1975, 418--443.
• Hansen, L., J. Heaton, J. Lee and N. Roussanov. "Intertemporal Substitution and Risk Aversion". in Handbook of Econometrics vol. 6, eds. J. Heckman and E. Leamer, 3967--4056 (2007).
• Polemarchakis, H. "The allocation of risk in an incomplete market". The Geneva Papers on Risk and Insurance Theory 15(1), 5--16 (1990).
• Economic Growth
• Cass, D. "Optimum Growth in an Aggregative Model of Capital Accumulation". Review of Economic Studies 32(3) 233-40 (1965).
• Koopmans, T. "On the Concept of Optimal Economic Growth". Cowles Foundation Discussion Paper No. 163 (1963).
• Ramsey, F., "A Mathematical Theory of Saving". Economic Journal 38, 543--559 (1928). This is the urtext for modern growth theory.
• Weitzman, M. L., "Duality Theory for Infinite Horizon Convex Models". Management Science 19, 783--9 (1973)
• Malinvaud, E., "Capital Accumulation and Efficient Allocation of Resources". Econometrica 21, 233--268 (1953).
• Malinvaud, E., "Efficient Capital Accumulation: A Corrigendum". Econometrica 49, 570--573 (1962).
• Overlapping Generations
• John Geanakoplos, Overlapping Generations Model of General Equilibrium, in The New Palgrave Dictionary of Economics,, 2nd edition, edited by Steven N. Durlauf and Lawrence E. Blume, Palgrave Macmillan (Basingstoke and New York).
• David Gale, Pure Exchange Equilibrium of Dynamic Economic Models. Journal of Economic Theory 6, 12--36 (1973).

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