ABSTRACT
For eighty years the Walrasian theory of general equilibrium suffered from a serious deficiency. It lacked an existence proposition. That deficiency was removed fifty years ago by the appearance of two remarkable papers, Arrow and Debreu (1954) and McKenzie (1954), and on those two papers most of us have since relied in our ventures into general equilibrium.2 Nowadays, however, the Arrow-Debreu and McKenzie papers are thought by some to be passé, mainly because of their assumption (inherited from Walras [1874]) of non-strategic price taking behaviour on the part of households and firms. On the other hand, it is not entirely clear why that assumption might now be unacceptable. The pioneering authors (Walras, Arrow, Debreu and McKenzie) simply assumed price taking, without justification or apology. Modern texts do address the issue, but without complete clarity. For example, Mas-Colell et al. (1995: 315) content themselves with the vague observations that ‘. . . if market participants’ desired trades are small relative to the size of the market, then they will have little incentive to depart from market prices. Thus, in a suitably defined equilibrium, they will act approximately like price takers’ (italics added). Each sentence lacks precision and proof.
