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equilibrium theory is irrelevant as a positive theory to capitalism, and why the belief in its uniqueness and stability is obsolete.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.