Waiting for an echo: the revolution in general equilibrium theory and the paralysis in introductory economics

Abstract

The current framework for the introductory microeconomics course is predicated on the Invisible Hand lessons of mid-twentieth century General Equilibrium Theory. During the final decades of the century, however, the theory changed. Proofs of the path-dependent instability of general equilibrium, the multiplicity of equilibria and the problem of equilibrium selection, and the failure of asymptotic convergence to the properties of equilibrium (The General Theory of the Second Best) provided a sweeping disconfirmation of the Invisible Hand. This paper argues that these topics are fully teachable, even at the principles level, and that they point toward a new framework for the curriculum in which institutions can reclaim much of the explanatory space now occupied by market analysis.