chapter  8
8 General equilibrium theory and public finance
Pages 4

Walras set the major objectives of general equilibrium theory as they have remained ever since. First, it was necessary to prove in any model of general equilibrium that the equilibrium exists. Then its optimality properties should be demonstrated. Next it should be shown how the equilibrium would be attained, that is, the stability of the equilibrium and its uniqueness should be studied. Finally, it should be shown how the equilibrium will change when conditions of demand, technology, or resources are varied, the subject now called comparative statics. He contributed to all these lines of research

(1987: 510)

As a student at Cambridge in the mid-1960s, I was taught general equilibrium theory by Frank Hahn. He was then engaged in writing, with Kenneth Arrow, General Competitive Analysis, and the lectures followed closely the pattern of this classic text (Arrow and Hahn 1971). Having started as a student of mathematics, I was naturally attracted by the precision with which the propositions of general equilibrium theory were stated. But more important was the sense that the theory provided a complete account of the working of the economic system. Too often, when studying economics models, I had the feeling that closure had not been achieved: there were loose ends. In general equilibrium theory, there are no loose ends. One knows exactly what is and is not included. From Frank, I learned to see the economy through the lens of general equilibrium theory and the key Walrasian questions summarised by McKenzie. For example, after struggling through the literature on 2-sector growth models, it was a relief to be told to consider them as a miniature general equilibrium system (Hahn 1965), where a crucial issue is the existence and uniqueness of momentary equilibrium for given stocks of labour and capital. From the conditions for uniqueness of the momentary equilibrium, all the rest follows naturally.