CHAPTER 5

GENERAL EQUILIBRIUM

Many scholars trace the birth of economics to the publication of Adam Smiths The Wealth
of Nations (1776). Behind the superficial chaos of countless interdependent market actions
by selfish agents, Smith saw a harmonising force serving society. This Invisible Hand
guides the market system to an equilibrium that Smith believed possessed certain socially
desirable characteristics.
One can ask many questions about competitive market systems. A fundamental one
arises immediately: is Smiths vision of a smoothly functioning system composed of many
self-interested individuals buying and selling on impersonal markets with no regard for
anything but their personal gain a logically coherent vision at all? If so, is there one
particular state towards which such a system will tend, or are there many such states? Are
these fragile things that can be easily disrupted or are they robust?
These are questions of existence, uniqueness, and stability of general competitive
equilibrium. All are deep and important, but we will only address the first.
In many ways, existence is the most fundamental question and so merits our closest
attention. What is at issue is the logical coherence of the very notion of a competi-
tive market system. The question is usually framed, however, as one of the existence
of prices at which demand and supply are brought into balance in the market for every
good and service simultaneously. The market prices of everything we buy and sell are
principal determinants of what we can consume, and so, of the well-being we can
achieve. Thus, market prices determine to a large extent who gets what in a market
economy.
In this chapter, we do not merely ask under what conditions a set of market-clearing
prices exists. We also ask how well a market system solves the basic economic prob-
lem of distribution. We will begin by exploring the distribution problem in very general
terms, then proceed to consider the existence of general competitive equilibrium itself.
Along the way, we will focus particular scrutiny on Smiths claim that a competitive
market system promotes societys welfare through no conscious collective intention of
its members.