# General Equilibrium

Lecture slides for the following: geslides.pdf

## Lesson Plan

### Objective

Introduce the gist of general equilibrium theory sufficient to
contribute to a history of thought approach to financial instability.
### Outcomes

- Have a sense of interconnected markets
- Be able to explore simulated GE on your own
- Be aware of the psychology at the dawn of financial
engineering
- Understand the concept of complete markets over space and
time
- Be able to explore the probability of gambling and the linear
algebra of complete markets
- Be familiar with some of the major names in the field
- Be able to follow up with literature critical of the General
Equilibrium approach

- 7 Min Class participation review
- Smith
People are naturally inclined to truck and barter, to higgle and
haggle.
- Nassau Senior
if you provide subsistence to workers, they will
shirk. If they can't find work, let them migrate.
- John Stuart Mill
favors central planning, promotes
thinking in terms of utility.
- Hayek
The prices system allows the man on the street corner to economize on
knowledge, do what is computationally beyond the planner.
- Robbins
Economics is the allocation of scarce resources among competing
needs.

- 15 min Walrasian GE
- 5 min intro
Formalizing this takes some math.
- What is equilibrium in chemistry?
- Why is it so hard to teach?

- 5 min participation exercise on excess demand and interdependent markets
Will numeraire good come up?
- 5 min simulation
Resource: Do only the simplest case
in General
Equilibrium Simulations. In section 1 of the documentation, read
only Hoseholds and Firms. Read section 2 to run on your own.

- 3 min Computable GE
Scarf's house and ternary plots.

Resource: Read bio of Herbert Scarf as
interested. Under the section **Work** Read 7, particularly the
'house' algorithm, perhaps play the linked atropos game.
- 25 min Complete Markets (shrink/skip to 5 minutes if needed)
- 2 min the spirit of the 90s
- 2 min forward contracts
- spanning and
unattainable bundle example
Resource: Read An Introduction to Complete Markets

up to p. 35. Skip the discussion in terms of horse racing,
unless you are a gambler or otherwise find that terminology
illuminating. See the conclusion after the box on p. 36. Enjoy the box
on linear algebra if you like, then choose between incomplete markets
described in horse race terms or pick up on p. 42 in economic terms
with 'Some Economic Applications' up to the 'Futures and Risk
Shifting' section on 46, then skip to the
conclusion. If you don't have time, just read the conclusion.
- Conclusion:
- Markets are interdependent.
- A persuasive case is made that letting the markets adjust is in
some way optimal.
- The math should not distract from the strong assumptions and the loaded issues that have
gone into this so far.
Resource: See Jan Kregel for a critique of General Equilibrium
thinking.

### Resources

General
Equilibrium Simulation

Computable General
Equilibrium

Complete Markets

Critical Appraisal
Lecture slides for the above.

Lecture slides on models in economics.