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Who Changes The Prices?

An assumption in neoclassical models of perfect competition is that all agents are price-takers. That is, they take prices on the market as parametric data. If everybody takes prices as given, nobody is left to change the prices. So, for example, in general equilibrium theory, one has to assume the existence of an auctioneer to oversee the tâtonnement process. No trading, consumption, and production can take place outside of equilibrium.

This is not an original criticism. Bernard Guerrien calls this problem "the logical flaw in micro theory" and "the principal bug in microeconomics". (I do not agree. Neoclassical microeconomics has so many bugs it seems hard to justify calling one, even though important, the principal bug.) Apparently Kenneth Arrow brought this problem up in 1959. ("Toward a Theory of Price Adjustment", in The Allocation of Economic Resources (edited by M. Abramovitz), Stanford University Press).

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