Rudy F. writes [I've edited a bit in places, for brevity]:
> ...I have two questions about Hunt's treatment of
Walras and general equilibrium theory.
>
> The first question is pedagogical and related to the graphical
> treatment on pp 335-337. In his first example, Hunt shows
> what happens to commodity a when the price of commodity b
> changes. In his example when the price of b increases it causes
> an increase in the demand for a and an increase in the supply
> of a and the increase in supply is greater than the increase in demand.
> I presume that the increase in demand is because a and
> b are gross substitutes (he doesn't explain this point). Why is
> the an increase in supply and what guarantees that the supply
> increase will be greater than the increase in demand i.e., that
> the price of a will fall?
There are 2 ways an increase in the price of good B might lead to an
increase in supply of (as well as in demand for) good A. The first
way is that A and B are joint products of the same production process
(e.g., oil and natural gas). However, GE treatments usually abstract
from joint products. The other way is if A is a normal good in
consumption for those who are net suppliers of A(who specialize in
the production of A), and the income effect outweighs the
substitution effect for these folks. Reasoning: other things equal,
an increase in the price of B lowers the price ratio Pa/Pb. The
substitution effect has net suppliers consume more A, thus reducing
the quantity supplied of A, other things equal; but since raising the
price of B lowers the effective income of those who specialize in the
production of A, the income effect has them consuming less A, thus
increasing the quantity supplied of B. If the income effect
outweighs the substitution effect, the supply of A increases.
As for "what guarantees that the supply increase is greater than the
increase in demand...", the best way to answer this is that nothing
*prevents* the supply increase from being greater than the demand
increase; it's just a question of relative elasticities.
> In discussing the market for b he
> shows the effect of a decrease in the price of a.
> However in this case, he shows a decrease in the price of a
> causing an increase in demand for b and a decrease in the
> supply of b. To be consistent with the previous example,
> shouldn't there be a decrease in the demand for b as the price
> of a goes down?
Not necessarily. Consider the situation of net suppliers of good B(
and only good B). The decrease in the price of A reduces the price
ratio Pa/Pb. The substitution effect has these suppliers consume more
A and less B. However, effective income of B suppliers has
increased; therefore if B is a normal good in consumption to such
suppliers and the income effect outweighs the substitution effect,
their demand will increase.
I haven't worked out whether these two scenarios are mutually
consistent in a 2-good world, though it seems as if it could be. If
Hunt has in mind a 2-good world, this total effect should be
demonstrable in an Edgeworth Box.
> What causes the
> shift in the supply and again what guarantees that the shift
> in supply will be greater than the shift in demand...?
Same answer as before: a question of relative elasticities.
>
> My second question has to do with Hunt's evaluation of
> ge theory. He writes: "The theory [ge theory] can be easily
> extricated both from Walras's naive faith in the
> automaticity of the market and from his conservative,
> utilitarian ideology with which he justified competitive,
> laissez faire capitalism." He also refers to ge theory
> as "one of the most significant theoretical achievements
> in the history of economic ideas." This would seem to
> imply that ge theory is a valuable tool. I have never
> found this to be the case but perhaps I don't really
> understand enough about ge theory. I would be curious
> about other opinions on this matter.
I must say that I increasingly find GE theory to be a valuable tool,
and I don't think it's because I'm gradually getting co-opted over
time; if anything my critical attitude toward capitalism and
capitalist institutions is confirmed and more deeply entrenched as I
find that more and more critical truths (up to a limit I've discussed
in earlier posts) can be expressed in the language of mainstream
economics (understood to include game theory) as well.
I'd say that the essential value of general equilibrium theory is in
providing a "base case" format for exploring given ideas within a
framework that meets certain minimal requirements of "individually
rational" and "mutually consistent" behavior. Given that 1) one
can't prove that a given economy *isn't* in (possibly dynamic)
general equilibrium (just as one can't prove that an economy *is* in
equilibrium), that 2) it is difficult at best to imagine what other
background context to invoke in studying a system of interactive
decisions( on this score consider the difficulty game theorists have
encountered in trying to analyze behavior in "out-of-equilibrium"
settings), and that 3) general equilibrium does not preclude obnoxious
distributive and/or efficiency conditions (the latter, e.g., in the
presence of externalities), a GE framework provides one reasonable
place to begin analyses of a broad range of questions. John Roemer,
for example, has demonstrated the existence of capitalist
exploitation in the context of a GE model.
Moreover, other analytical systems also employ GE models, although
they don't call them that. The Sraffian system of "commodity prices
of production" is just a GE system (how else insist on the relevance
of equalized wage and profit rates?) with a lot of stuff left out
(like capital markets, for example. Last I looked, capitalist
economies had capital markets, and things like debt structure entered
into the cost structures of firms. On what logic are such aspects
excluded _a priori_ from the Sraffian world?).
The equation system undergirding "transformation problem"
calculations is also essentially a general equilibrium structure,
even if nobody calls it that (what's the use of studying it if the
quantitative relationships invoked are *purely* accidental?).
Final example, there is no important sense in which Marx's analysis
in Capital Vol I Chs 4-12 (say) isn't consistent with a GE story, and
in chapters 13-25 (say) isn't consistent with a dynamic or
comparative static analysis of a GE framework. Marx invokes
incomplete (labor) markets, but one can have GE in a world of
incomplete markets.
And I've left entirely aside the practical usefulness of "computable
general equilibrium" (CGE) models. In other words, one *can* use GE
models to get determinate predictions. [On CGE models, see Shoven
and Whalley, _Applying General Equilibrium_].
I used to ignore GE models, for basically the same reasons suggested
by Rudy. Now, although I don't use them much, I think they have
their place, even in [perhaps *especially* in] the formulation of
radical critiques of private ownership economies.
Gil [[EMAIL PROTECTED]]
NB: For reasons I won't go into here, I consider GE to be simply a
special or limiting case of a broader conception, i.e., non-
cooperative equilibrium, which applies in an essentially game
theoretic world. So my comments above apply perforce to the
usefulness of non-cooperative game-theoretic analysis.
