Well‐Behaved Production Economies

We show that production economies are tâtonnement stable if consumers satisfy the weak axiom of revealed preference. To ensure that producer supply decisions are well defined, we restrict prices in the tâtonnement so that positive profits cannot occur but do allow supply decisions to be multi‐valued. The model therefore permits linear activities and hence the technologies that admit capital theory paradoxes. The result thus shows that if the consumer side of the economy is well behaved then capital theory paradoxes are irrelevant for stability. Other features of the Walrasian general‐equilibrium model that have aroused suspicion (e.g. that a price below its equilibrium value may have negative excess demand and thus temporarily move even lower in a tâtonnement) may be a sign of trouble but also have nothing to do with capital theory paradoxes. We show that these phenomena arise even when there is no choice of technique and there is an aggregate production function.