Temporary Equilibrium: A History of Applied General-Equilibrium Analysis

Abstract

After the existence of general equilibrium was proved in the early 1950s, the next decade brought applications of general-equilibrium theory to policy issues such as the welfare effects of tariffs and the incidence of the corporate income tax. By the 1970s, general-equilibrium theory was being applied to practical problems through the numerical implementation of models calibrated to actual data, in what has become known as applied or computational general-equilibrium analysis (AGE, CGE). AGE is actually an umbrella term for a diverse family of related approaches, which we outline below. We focus most on the intellectual tradition of Herbert Scarf because his is distinct from other branches of AGE analysis as “the most direct link between [general-equilibrium] theoretical work and CGE modeling” (Peter Dixon and B.R. Parmenter 1996, 6). Scarf’s work took place in the context of post-war institutional collaborations between the Cowles Commission for Research in Economics, the RAND Corporation, Yale University, and Stanford University, as well as the shift in economics toward mathematical exposition. We consider how general-equilibrium theory became applied. Building on advances in applied mathematics and computing capabilities, Scarf’s algorithm allowed researchers to find an explicit numerical solution for a Walrasian general-equilibrium system, “a revolutionary advance that has helped shape policies affecting every American” (Glenn Hubbard in Sam Roberts 2015). The history of AGE analysis reveals how developments since the 1970s, including computerization, have profoundly shaped the economist’s approach to applied economics.