The Economics Book

210

THEORIES

ABOUT MARKET

EFFICIENCY

REQUIRE MANY

ASSUMPTIONS

MARKETS AND SOCIAL OUTCOMES

B

y the 1860s and 70s

mainstream economics had

developed a distinctive set

of claims about the world, offering

mathematical models that allowed

economists to assess individual

behavior in certain market

conditions. These models were

taken from the rapidly developing

mathematics that described the

natural world. This development,

sometimes called a “marginalist

revolution,” involved a claim that

value is determined by people’s

preferences and resources rather

than by a more objective or

absolute standard, and it allowed

pressing theoretical questions to

be posed in new ways. Did Adam

IN CONTEXT

FOCUS

Welfare economics

KEY THINKER

Gérard Debreu (1921–2004)

BEFORE

1874 French economist

Léon Walras shows that a

competitive, decentralized

economy can achieve a

stable equilibrium.

1942 Polish economist Oscar

Lange provides an early proof

of the efficiency of markets.

AFTER

1967 US economist Herbert

Scarf demonstrates a method

for applying real-world

economic data to general

equilibrium models.

1990s New models of the

macroeconomy integrate

general equilibrium analysis

with real-world economic

data over time.