TOULOUSE – For the last half-century, the world’s leading universities have taught microeconomics through the lens of the Arrow-Debreu model of general competitive equilibrium. The model, formalizing a central insight of Adam Smith’s The Wealth of Nations, embodies the beauty, simplicity, and lack of realism of the two fundamental theorems of competitive equilibrium, in contrast to the messiness and complexity of modifications made by economists in an effort to capture better the way the world actually functions. In other words, while researchers attempt to grasp complex, real-world situations, students are pondering unrealistic hypotheticals.
This educational approach stems largely from the sensible idea that a framework for thinking about economic problems is more useful to students than a ragbag of models. But it has become burdened with another, more pernicious notion: as departures from the Arrow-Debreu model become more realistic, and thus more complex, they become less suitable for the classroom. In other words, “real” microeconomic thinking should be left to the experts.