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.
To be sure, basic models – for example, theories of monopoly and simple oligopoly, the theory of public goods, or simple asymmetric-information theory – have some educational value. But few researchers actually work with them. The bread-and-butter theories for microeconomics research – incomplete contracts, two-sided markets, risk analysis, inter-temporal choice, market signaling, financial-market microstructure, optimal taxation, and mechanism design – are far more complicated, and require exceptional finesse to avoid inelegance. Given this, they are largely excluded from textbooks.
In fact, microeconomics textbooks have remained practically unchanged for at least two decades. As a result, undergraduate students struggle to understand even the abstracts of papers on the complex representations of microeconomic reality that fill research journals. And, in many areas – such as antitrust analysis, auction design, taxation, environmental policy, and industrial and financial regulation – policy applications have come to be considered the domain of specialists.