Date: Jun 7, 2019
Category: Economics Essay
General Equilibrium Theory

General equilibrium theory is one of the most debated theories of capitalism. Proposed by French economist Leon Walras in the 1870s, the general equilibrium theory mostly observes the fundamental characteristics of supply and demand in compound markets. The main objective of the theory of general equilibrium is to prove that all prices in the market are at equilibrium. It further defines the mechanisms, by which the choices of economic agents across all markets are coordinated. General equilibrium theory differs from partial equilibrium theory by the fact that it attempts to cover characteristics of several markets instead of narrowing down to a single market. This paper discusses the reservations raised by analysts as to why general equilibrium theory is irrelevant as a positive theory to capitalism, and why the belief in its uniqueness and stability is obsolete. In addition, the paper describes the essence and characteristics of capitalism and explains the relevant theories of capitalism and how capitalism operates.

General Equilibrium Theory and Capitalism

Since its inception, the theory of general equilibrium has been known as the crown jewel of neo-classical economics. However, changes in business systems, associated with the technological innovations that have brought about globalization, have overruled the theory of general equilibrium in terms of advancing a misleading concept that declined to equate the market socialism to capitalism. This has made the theory regarded as a grand total failure hence it is dead. Its implications in the business systems today and its cognitive status have raised a lot of controversies among the analysts who keep questioning its validity.

The first major shortcoming of the theory of general equilibrium is that it identifies the conditions that are actually unrealistic since it is not possible to attain an economy that has ideal composition and information without transaction costs. This cannot apply to the real-world situation because serious deficiency of the afore-mentioned components is tantamount to corporate philanthropy. Such businesses will not have any basis to operate since they will soon plunge into serious deficit and become extinct. Besides, the theory reiterates that nobody is able to establish business conditions for uniqueness or stability. Approved conditions leading to uniqueness are said to be theoretically unattractive and therefore are highly unrealistic. Concerning the issue of stability, those who are skeptical about the theory verify that provided there are more consumers than commodities in the market, there will always be a set of consumer favorites and endowments, which will definitely influence fluctuations in prices of commodities.

To have a better understanding of the equilibrium theory, one should realize what would happen in case a question is posed to a person who would be totally ignorant of the economic theory. For instance, what the situation would be like if the economy was organized around the individual exchange, motivated by greed but manipulated by a chain of agents. The most definite answer to such queries would be chaos. This kind of disposition often raises a lot of uproar among the economists who subjected the whole theory to a joke to the extent of excluding it from the list of positive theories of capitalism. There is no way the country’s economy can be in equilibrium if expectations, resources and people’s patterns of trade are ever changing.

The possibility of a general equilibrium to exist depends on excess demand or supply in any given market. It is very uncertain that the conditions of such a general equilibrium would be obtained. Conditions of this kind would perhaps include perfect information for all the partakers in the economy to become aware of the introduction of stringent conditions, involving no transaction costs and perfect competition among others. It is also probable that a decentralized competitive market system can be entangled into equilibrium once it gets there following the competing factors that would be functioning under equal conditions. Nevertheless, the perplexing question is; whether or not a decentralized spirited market system can remain in equilibrium, once it achieves it. Moreover, the following question is to be answered. If to suggest that a disruption of price occurs in an economy in general equilibrium, under what circumstances would that economic resume the general equilibrium status.

Finally, general equilibrium theory is committed to answering the question of whether and when the purported equilibrium will be effective. This confirms that such equilibrium is Pareto-efficient in a way that once the economy is in general equilibrium; no one can be made better without making another person worse than before. If everyone operates in a perfectly competitive market to perpetuate his/her own interest, everyone is bound to achieve economic benefits and progress. It is, therefore, wiser for a person not to interfere in highly competitive markets, as this completely thwarts the spirit of trade.

The Essence and Characteristics of Capitalism

The system of capitalism commonly favors privately owned enterprises and embraces a diversity of opinions and specializations. The conventional rationale behind it is dynamism of its innovations implemented in an inclusive way. At the same time, its propensity to cause instability is what has made it earn a negative reputation since it has been the reason behind the global economic crises, which have had untold consequences to both employed and non-employed. Capitalism by its very nature provides an avenue for anyone to contribute to the creation of wealth either directly or indirectly.

However, the principles of capitalism have in some cases been subjected to ridicule following its inability to guarantee the widespread innovation across the economic and social institutions. The failure of these institutions to perform according to the capitalist standards is quite conspicuous. Even worse, there is prevalent wayward functioning of the institutions which have adopted this rationale, taking into account the magnitude of benefits of this system, both in productivity and more generally to the recoup of its participants.

Besides, the extent of its irrelevance in regard to the stability and inclusion is greater in comparison with corporatists systems that are established in continental Western Europe and East Asia. Finally, capitalism fails to substantiate the variations and additions to those institutions and policies that are supposed to add dynamism, stability, and inclusiveness, and capitalist systems are more susceptible to financial crises than corporate ones.

The claims raised in the field of capitalism differ from the competitive nature of the market economy which is entrenched in the classical case. The competition of all participants at the market place would amount to wasteful resource allocation to be eradicated. This means that under equilibrium conditions, the earnings of one person cannot be raised further without causing inconveniences to another person. This hinders the harmonization of the priceless ability of unconstrained markets by the bureau that is managed by the central government. The question then arises as to whether the competition among corporate entities would be sufficient to engender transformation if private ownership is involved and vice versa. This question has been discussed by economists for years. Economists who favor the Keynesian model of economics believe that markets must be left in the hands of the prevailing market conditions. In this case, therefore, intermediaries, such as the government, have no role to play in the capitalist market. This means that regulatory measures must not be applied in such conditions, irrespective of their intentions.

Comparatively, some European economies have recently become workshops where competitive exhibitions are held in the absence of private ownership. Between the 1960s and 1980s, the European governments permitted parastatals to determine the cost of their products, profits, workforce, and wages in terms of competition with others. The question of whether or not the efficiency could be sustained was suspended for some time. Funny enough the state-owned corporate entities never seemed to take any chances to increase sales or make any difference because of the belief that the state was liable for whichever outcome; profits or loses. They totally lacked the spirit of innovation and competitiveness and came to the conclusion that competition was not sufficient for economic dynamism.

The proponents of capitalism are in favor of the managers’ mandate to employ and sack necessitating them to take risks of creating jobs hence serving to amplify the standard level of remuneration and employment as well. Another issue of fluctuation is the right of appraising elongated booms to be unfit in comparison with long slumps. More radically, the question is raised about the validation for jamming or moderate long slumps, as long as it is carried out on a structural basis, but as an outcome of the faulty monetary system.

The final fundamental question concerning the relevance of capitalism laments why the system is only fit for the learned and educated who in most cases have an economic say and further reap rich benefits as opposed to the vulnerable groups. Most probably, there is no ultimate harm to encompass the vulnerable people or no cost incurred were it to be considered. Such insertion is commonly deemed tolerable but on other occasions, just a few are employed.

How Capitalism Works

The adoption of capitalism in the corporate world has been associated with a number of effects, some of which are positive, while others are negative. First of all, capitalism has enhanced imbalanced economic growth in society. Based on its tough principles, which not every person can meet, there has been gradual economic deterioration of some people as others recorded impressive progress at the expense of the former. If the trend is maintained, the situation that will finally take place will be worrying and jeopardizing to the economically advantaged social groups that would be vulnerable.

More so, capitalism is often characterized by consumer exploitation. Merchants would be more concerned by their output at the expense of the consumers who heavily depend on them for survival and satisfaction of their needs. This may often be witnessed in the manner in which packaging of some commodities is done or misinforming of the public about the existence or content of certain commodities. Such forms of exploitation in the recent past have resulted in situations when consumers mobilize each other and came out in protest to the vices, in what is referred to as consumerism.

In addition to that, because of capitalism in the corporate sector, a lot of unethical practices have been reported among business owners as a way of coping with the prevalent unhealthy competition and the urge to remain relevant. Cases of forgery and production of counterfeits have been on the rise. In addition, dishonesty and integrity issues have prevailed where some merchants attempt to use unscrupulous means to attain their means. For instance, the practice of adjusting the quantity or the quality of the contents of commodities, hoarding commodities in speculation of a hike in prices and smuggling among others constitute common irregularities in this model. All these vices are perpetuated due to the need of the business owners to catch up with the competitive nature of the capitalist market.

In spite of that, due to increased competition, capitalism has led to the improvement of qualities of commodities. This is because every manufacturer and all participants want to be the best, and that should be reflected in the quality of the product that they present in the competitive market. In the long run, this competition is beneficial for the consumer because it is the consumer who is on the extreme receiving end. Although in most cases the improvement of quality of products is directly proportional to the price attached to the commodity. In the situation where capitalism favors the affluent only, the economically vulnerable ones may never enjoy quality products, which is the scenario of modern days.

At the same time, capitalism has contributed to the high rate of dependency where the majority of vulnerable people look up to the affluent people for help. This hampers the progress of the few capitalists who are being relied on by many people. Sometimes even the rich develop biases when dealing with their dependents. Dependants, on the other hand, may devise unscrupulous ways of securing their ends; a situation that often results in antisocial behavior. A few who are not lucky collide with the wrath of the long arm of law and finally languish in a detention center for a certain period of time. The most terrible thing is that even after the sentence, many of these people cannot manage their lives since they are dependent on others for survival. Therefore, the probability of them going back to their original habit is very high.

On the contrary, capitalism has led to the rapid growth of the countries’ economy. This is because of a high competition between participants which stimulates the establishment of many corporate entities with a hope of making money. The mushrooming of these enterprises provide the government with ample opportunities to increase their revenue through taxation and licenses. The revenue is then invested in income generating projects that will offer employment opportunities to the citizens. Some other portion of revenue is spent to improve the infrastructure and social amenities. Such facilities are the indication that the country’s economy has been improved and the country is, therefore, able to sustain the livelihoods of its people.


The chief reason behind the theory of general equilibrium as a crown jewel of the neo-classical economics can be explained in a number of ways. It will also permit economists to haul up the holy grail of neo-classical economics as the clarification of all virtual prices in an economy. With the general equilibrium theory, economists would expound the statics and dynamics of the structure of all sorts of prices throughout an economy. Secondly, the theory seeks to validate the market systems alongside non-market systems such as the essential authoritative setting of prices or feudal systems of production. Neo-classical economists have often preferred market systems over non-market systems. The third explanation of general equilibrium is that the theory seeks to give details on the possibility of explaining the central principles of neo-classical economics. However, the theory is purportedly marred with shortcomings, which are a reason of why it has been rendered irrelevant. The theory is indeed of no use as a positive theory to capitalism since it will no doubt promote complacency, laziness, and procrastination among the participants. It would also hinder the spirit of innovation which is always entrenched on the basis of competition in the corporate market.