General Economic Equilibrium

General economic equilibrium (GEE) refers to a state of economic equilibrium where all markets are simultaneously balanced, meaning that supply and demand are equal in each one. In simpler terms, there is no surplus or shortage in any market, so consumers and producers have no reason to alter their decisions since everyone is trading goods and services at prices they consider optimal.

For instance, in an economy with n markets, a price vector P (p₁, ... , p_n) establishes the equality between supply and demand quantities d_i=s_i across all n markets. This condition, where all markets are in balance, defines general economic equilibrium.

Walrasian Equilibrium

The first formal theory of general economic equilibrium is credited to 19th-century French economist Léon Walras. His pioneering idea proposed a hypothetical process where an auctioneer announces an initial set of prices (the price vector P) for all goods across various markets. In this model, known as Walrasian equilibrium, buyers and sellers express their preferences and intentions based on these prices. After trading, the auctioneer checks whether supply equals demand in each of the n markets. If there’s a mismatch between supply and demand in any market, the auctioneer recalculates the price vector and announces new prices, initiating a continuous adjustment process called tâtonnement. This process repeats until equilibrium prices are reached in all markets, bringing the system to a state of general equilibrium.

Underemployment Equilibrium. One of the major critiques of Walras’ general equilibrium theory comes from John Maynard Keynes. Keynes argued that general equilibrium could be achieved even under conditions of underemployment, where not all productive resources, including labor, are fully utilized. Unlike Walras’ neoclassical theory, which assumes full employment as a necessary condition for equilibrium, Keynes suggested that markets could reach equilibrium without achieving full employment.

General economic equilibrium remains a cornerstone of theoretical economics, but its practical application has been subject to numerous revisions and criticisms. While Walras’ model provides a consistent and logical mathematical framework for understanding how markets interact, Keynes’ insight into the possibility of equilibrium with underemployment opened new paths for analyzing economic crises and unemployment. The interplay between these contrasting perspectives continues to shape our understanding of global economic dynamics.