Rediscovering Classical Economics in the Laboratory

Abstract

At mid-twentieth century, the neoclassical mathematical theory of value culminated in Arrow and Debreu's (1954) model, which characterizes the static general equilibrium state of an economy. However, this description is unsatisfactory unless markets converge to such an equilibrium. That the Arrow-Debreu model could not accomplish this is an implication of the important result by Sonnenschein, Mantel, and Debreu, also known as the SMD Theorem (1972, 1973a, 1973b; 1974; 1974). 2 The heart of the problem is that the principle of individual utility maximization has no interesting implication for aggregate market demand, not even the law of demand; in fact, demand is essentially arbitrary in this theory. But this aggregation problem is often, if unintentionally, evaded through the artifice of the Representative Agent (Arrow, 1986; 1 This paper is part of the authors' larger in-process research and book manuscript on "a rehabilitation of classical economics." The centerpiece is a modern mathematical restatement of the classical theory of value, based directly on the original observational foundations contained in Adam Smith's ([1776] 1904) contribution, and inadvertently rediscovered in the literature of experimental economics. Necessarily, the program requires an examination of neoclassical marginal utility economics and its separation from the classical tradition in the French and English