what is general equilibrium theory 
general equilibrium theory or walrasian general equilibrium attempts to explain the functioning of the macroeconomy as a whole rather than as collections of individual market phenomena 1the theory was first developed by the french economist leon walras in the late 19th century 2 it stands in contrast with partial equilibrium theory or marshallian partial equilibrium which only analyzes specific markets or sectors 3understanding general equilibrium theorywalras developed the general equilibrium theory to solve a much debated problem in economics up to that point most economic analyses only demonstrated partial equilibrium that is the price at which supply equals demand and markets clear in individual markets it was not yet shown that equilibrium could exist for all markets at the same time in aggregate general equilibrium theory tried to show how and why all free markets tend toward equilibrium in the long run the important fact was that markets didn t necessarily reach equilibrium only that they tended toward it as walras wrote in 1889 the market is like a lake agitated by the wind where the water is incessantly seeking its level without ever reaching it general equilibrium theory builds on the coordinating processes of a free market price system first widely popularized by adam smith s the wealth of nations 1776 this system says traders in a bidding process with other traders create transactions by buying and selling goods those transaction prices act as signals to other producers and consumers to realign their resources and activities along more profitable lines 1walras a talented mathematician believed he proved that any individual market was necessarily in equilibrium if all other markets were also in equilibrium this became known as walras s law the general equilibrium theory considers the economy as a network of interdependent markets and seeks to prove that all free markets eventually move towards general equilibrium special considerationsthere are many assumptions realistic and unrealistic inside the general equilibrium framework each economy has a finite number of goods in a finite number of agents each agent has a continuous and strictly concave utility function along with possession of a single pre existing good the production good to increase his utility each agent must trade his production good for other goods to be consumed there is a specified and limited set of market prices for the goods in this theoretical economy each agent relies on these prices to maximize his utility thereby creating supply and demand for various goods like most equilibrium models markets lack uncertainty imperfect knowledge or innovation alternatives to general equilibrium theoryaustrian economist ludwig von mises developed an alternative to long run general equilibrium with his so called evenly rotating economy ere this was another imaginary construct and shared some simplifying assumptions with general equilibrium economics no uncertainty no monetary institutions and no disrupting changes in resources or technology the ere illustrates the necessity of entrepreneurship by showing a system where none existed 4another austrian economist ludwig lachmann argued the economy is an ongoing non stable process replete with subjective knowledge and subjective expectations he argued that equilibrium could never be mathematically proven in a general or non partial market 5 those influenced by lachmann imagine the economy as an open ended evolutionary process of spontaneous order 