General Equilibrium

Lesson Plan

Objective

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

1. 7 Min Class participation review
1. Smith
People are naturally inclined to truck and barter, to higgle and haggle.
2. Nassau Senior
if you provide subsistence to workers, they will shirk. If they can't find work, let them migrate.
3. John Stuart Mill
favors central planning, promotes thinking in terms of utility.
4. Hayek
The prices system allows the man on the street corner to economize on knowledge, do what is computationally beyond the planner.
5. Robbins
Economics is the allocation of scarce resources among competing needs.
2. 15 min Walrasian GE
   1. 5 min intro
   Formalizing this takes some math.
   • What is equilibrium in chemistry?
   • Why is it so hard to teach?
   2. 5 min participation exercise on excess demand and interdependent markets
   Will numeraire good come up?
   3. 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. 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.
4. 25 min Complete Markets (shrink/skip to 5 minutes if needed)
1. 2 min the spirit of the 90s
2. 2 min forward contracts
3. 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.
5. 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

Lecture slides for the above.
Lecture slides on models in economics.