Shaking an invisible hand

Abstract

The research program of general equilibrium theory originated with Adam Smith’s vision of the emerging world economy. It evolved through a long series of efforts by economists and mathematicians. However, a major challenge arose with the discovery that the shape of Walrasian excess demand functions makes unique stable equilibria the exception rather than the rule. This has led to a highly problematic disconnect between modeling for policy support and the understanding of the world economy that is actually available. A promising route to overcome these difficulties has been opened by recent research on the dynamics of social norms, building on the theory of perturbed dynamical systems. This work could lead to a fruitful new reading of Adam Smith. The marginal analysis of current general equilibrium theory can be successfully applied to processes within a historically established basin of attraction, and it can be complemented by the “inframarginal” study of historical transitions from a given basin of attraction to one of several future possibilities.