17 October 1983
THIS YEAR's ECONOMICS PRIZE AWARDED FOR
RESEARCH ON MARKET EQUILIBRIUM
The Royal Swedish Academy of Sciences has decided to
award the 1983 Prize in Economic Sciences in Memory of Alfred
Nobel to
Professor Gerard Debreu, University of
California, Berkeley, USA,
for having incorporated new analytical methods into economic
theory and for his rigorous reformulation of the theory of
general equilibrium.
General Market Equilibrium
This year's prize is awarded for penetrating basic research work
in one of the most central fields of economic science, the theory
of general equilibrium.
In a decentralized market system, individual consumers and firms
make decisions on the purchase and sale of goods and services
solely on the basis of self-interest. Adam Smith had already
raised the question of how these decisions, apparently
independent of one another, are coordinated, and result in a
situation whereby sellers usually find outlets for their planned
production, while consumers realize their planned consumption.
Smith's answer was that, given price and wage flexibility, price
systems automatically bring about the desired coordination of
individual plans. Towards the end of the 19th century, Léon
Walras formulated this idea in mathematical terms as a system of
equations to represent consumers' demand for goods and services,
producers' supply of these same goods and services and their
demand for factors of production, and equality between supply and
demand, i.e., equilibrium in each market. But it was not
until long afterward that this system of equations was
scrutinized to ascertain whether it had an economically
meaningful solution, i.e., whether this theoretical
structure of vital importance for understanding the market system
was logically consistent.
Gerard Debreu's major achievement is his work in proving
the existence of equilibrium-creating prices. His first
fundamental contribution came in the early 1950s in collaboration
with Professor Kenneth Arrow.
Arrow received the 1972 Prize in Economic Sciences in Memory of
Alfred Nobel for his work in this and other adjacent
fields.
Arrow and Debreu designed a mathematical model of a market
economy where different producers planned their output of goods
and services and thus also their demand for factors of production
in such a way that their profit was maximized. Thus, connections
were generated within the model between the supply of goods and
demand for factors of production on the one hand, and all prices,
on the other. By making additional assumptions about consumer
behaviour, Arrow and Debreu were able to generate demand
functions or "correspondences", i.e., relations between
prices and supplied and demanded quantities. In this model, Arrow
and Debreu managed to prove the existence of equilibrium prices,
i.e., they confirmed the internal logical consistency of
Smith's and Walras's model of the market economy.
Subsequent to these pioneering efforts, there has been
considerable development and extensions of such proofs with
Gerard Debreu at the forefront. His book, Theory of Value,
from the late 1950s has already become a classic both for its
universality and for its elegant analytical approach. The theory
developed in this study lends itself to many far-reaching
interpretations and applications. The concept of "goods", for
instance, is defined so broadly that the theory may be used in
pure static equilibrium analysis, the analysis of the spatial
distribution of production and consumption activities,
intertemporal analysis and the analysis of uncertainty. Thus,
within the same model, Debreu's general equilibrium theory
integrates the theory of location, the theory of capital, and the
theory of economic behaviour under uncertainty.
Efficient Resource Utilization
An essential issue which is related to the market economy and
which can also be traced back to Adam Smith concerns the
normative properties of the market allocation of resources. Will
the fulfillment of self-interest through the "invisible hand" of
the market mechanism lead to efficient utilization of scarce
resources in society? Will the resources be used and production
adapted so as to result in a situation where any attempt to make
one individual better off necessarily means taking away from
other individuals, i.e., a situation without any waste
whatsoever? It has long been known that in certain circumstances,
market price formation has such efficiency properties, but the
exact nature and full extent of the conditions which must be
satisfied in order to guarantee them had not been determined.
Through the work of Debreu and his successors, these conditions
have been clarified and analysed in detail.
Stability
The idea of the market economy also concerns stability of
equilibrium. An interesting property of stability involves the
question of whether it would be profitable for any group of
market agents to withdraw completely from the market economy so
as to ensure, independently, improvement of the agents' own
economic position. Debreu has made enduring contributions in this
field, especially in a joint article from the early 1960s with
Herbert Scarf, and through subsequent major accomplishments. He
has shown that in very large economies (i.e., with
numerous market agents), it will not be profitable for any group
to cease trading in the markets. Hence, in this respect, the
market equilibrium will be stable.
Debreu has also made significant contributions to the theory or
consumer behaviour. He has indicated possible representations of
consumer preferences in terms of so-called utility functions, and
has also studied the feasibility of consistently aggregating
individual demand functions over groups of individuals.
Debreu's Influence
Debreu's foremost contribution is perhaps of a more indirect
nature, however. His clarity, analytical stringency, and
insistence on always making a clear-cut distinction between a
theory and its interpretation have had a profound and unsurpassed
effect on the choice of methods and analytical techniques in
economics.