On Missing Markets

Don Patinkin (and not Lucas) was the first to attempt macroeconomic analysis firmly grounded in Walrasian General Equilibrium Analysis. A generation of theorists for whom this (and Lange’s, 1944) work was vastly illuminating and stimulating are in his debt. It was not long after this that Arrow’s and Debreu’s great contributions appeared. Their generality, elegance and rigour have not often been surpassed in economics. But as far as macroeconomics in general and monetary theory in particular were concerned, this development was something of a dead end. Given the all embracing definition of a commodity together with the hypothesis that all finely distinguished commodities could be traded at a given price, it soon became clear that the absence of fiat money from this theory was no accident such money could, in the theory, logically not exist. In addition of course the theory looked at an economy which had attained market equilibrium at one primeval trading date. Not surprisingly, this ruled out many traditional macroeconomic concerns (although of course it did not rule out fluctuations as time, and states of nature, unfolded and triggered contracts made at the ‘initial’ date). It became clear that whatever its merits as a benchmark and aid to clear thinking (and they are considerable), the Arrow-Debreu model was descriptively seriously deficient and certainly an unpromising route to macroeconomics.