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What is General Equilibrium Theory

Chapter 14
Handbook of Research on Nature-Inspired Computing for Economics and Management
As agent-based computational economics (ACE), general equilibrium theory is a bottom-up approach to the study of economic systems. But in opposition to ACE, general equilibrium theory makes use of methodological individualism and reductionism. Taking as its starting point endowments, preferences, and technologies of economic agents, general equilibrium theory uses an auctioneer to calculate a vector of prices that will clear all markets. Methodological individualism allows general equilibrium theory to regard preferences as given, and the existence of an auctioneer prevents trading at false prices, since agents are only allowed to interact through the auctioneer. A number of fundamental problems arise when the ideal general equilibrium model meets the real world. Among these is the problem of making room for money in a setting where there is no need for a medium of exchange and where any good can take the role as unit of account.
Published in Chapter:
Agent-Based Computational Economics
C. Bruun (Aalborg University, Denmark)
Copyright: © 2007 |Pages: 15
DOI: 10.4018/978-1-59140-984-7.ch014
Abstract
This chapter argues that the economic system is best perceived as a complex adaptive system, and as such, the traditional analytical methods of economics are not optimal for its study. Agent-based computational economics (ACE) studies the economic system from the bottom up and recognizes interaction between autonomous agents as the central mechanism in generating the self-organizing features of economic systems. Besides a discussion of this new economic methodology, a short how-to introduction is given, and the problem of constraining economics as a science within the ACE approach is raised. It is argued that ACE should be perceived as a new methodological approach to the study of economic systems rather than a new approach to economics, and that the use of ACE should be anchored in existing economic theory.
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