The Economics Book

211

See also: Free market economics 54–61 ■ Economic equilibrium 118–23 ■
Efficiency and fairness 130–31 ■ The theory of the second best 220–21

Gérard Debreu

Born in Calais, France, in 1921,

Gérard Debreu was educated

at the École Normale

Supérieure in Paris during the

German occupation. After a

period of service in the French

army, Debreu returned to his

studies of mathematics and

developed an interest in

economic problems. In 1949, a

fellowship allowed him to visit

some of the top universities

in the US, Sweden, and

Norway, bringing him up

to date with economic

developments that were then

unknown in France. In the

US he became part of the

highly influential Cowles

Commission, which had been

convened in the 1930s to

pursue the mathematical

treatment of economic issues.

He worked at the US

universities of Stanford and

Berkeley, teaching economics

and mathematics. In 1983, he

was awarded the Nobel Prize.

He died in 2004.

Key works

1954 Existence of an

equilibrium for a competitive

economy (with K. Arrow)

1959 Theory of Value: An

Axiomatic Analysis of

Economic Equilibrium

Smith’s “invisible hand” of the
market really guide self-interested
individuals to the best available
outcomes? Were markets more,
or less, efficient than other ways of
guiding society? Could completely
free markets even exist?

Stable markets
French economist Léon Walras
(p.120) was one of the pioneers
of this revolution in theory. He
attempted to show that markets,
left to their own devices, can
achieve a stable outcome for
the whole of society, perfectly
balancing the demands of
consumers and firms with the
supply of goods and services. ❯❯

POST-WAR ECONOMICS

Theories about

market efficiency

require many

assumptions

This implies that markets

lead to an “efficient”

economic outcome.

But this only happens if you

make assumptions that

rarely occur in the real world.

Governments redistribute wealth

by taxing goods such as gasoline. Under

certain assumptions, it can be shown

that the free market adjusts to achieve

efficient use of goods despite taxes.

So in theory prices

completely reflect both

consumers’ preferences

and the limits to

an economy’s resources.

Market prices reflect

demands for and supplies

of each commodity.