Arrow Debreu Model

Kenneth Arrow and Gerard Debreu

Named after American economist Kenneth Arrow and French-born economist Gerard Debreu, who examined the dynamics of the whole economic system and were able to prove the existence of a multimarket equilibrium in which no excess demand or supply exists.

The theory is based on two assumptions:

Firstly, that a competitive equilibrium exists if each person in the economy possesses some quantity of every good available for sale in that market;

Secondly, that exploitable labour resources exist which are capable of being used in the production of desired goods/services.

The Arrow-Debreu Model is considered to have been a major advance in economic theory.

The case for unrealistic assumptions

There are many theories in economics but more and more economic and commercial commentators are questioning the application and suitability of economic theory in today’s world.

And so the question is posed in relation to the two key assumptions above is it likely for example that each person in the economy possesses some quantity of every good available for sale in that market. The answer is obviously no. So the multimarket equilibrium it can be argued does not exist in real economies. Public and private sector debt for example continues to grow unless influenced by an external force such as a curb on government borrowing. Debt arrangement schemes at a personal debt level have recently increased due to Government intervention to regulate the market.

It would seem that in today’s ever changing economic world that demand and supply are always out of kilter.

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