On the Nature of Production and Contracts in an Arrow-Debreu Economy

Abstract

Any economic theory, even one characterized by only the simplest exchange relationship, requires a statement concerning the institutional assumptions from which that analysis emanates. In reality, institutions have no natural basis, but rather exist only as sociohuman contrivances. Theorists, too, are notorious for contriving institutions; but, in these instances, their purpose is to act as dei ex machina, rescuing the analysis from any immanent anomalies that might undermine the preconceived goals set by these theorists.1 The history of economic analysis is filled with such creations. Two particularly famous examples of institutions by fiat, both attributable to Leon Walras, are the fictitious commodity (E) that was to be purchased by those persons desiring to save a portion of their income, for which they would receive, in return, shares of perpetual net income; and the assumption that the tatonnement process (groping toward the equilibrium) was first to be carried out and reconciled by the exchange of bons (tickets) prior to the commencement of any actual exchange and production.