By the same author. EQUILffiRIUM AND DISEQUILffiRIUM GENERAL EQUILffiRIUM RESOURCE ALLOCATION AND ECONOMIC POLICY (editor with M. E.

Transcription

1 THEORY OF MARKETS

2 By the same author EQUILffiRIUM AND DISEQUILffiRIUM GENERAL EQUILffiRIUM RESOURCE ALLOCATION AND ECONOMIC POLICY (editor with M. E. Burstein) VALUE

3 THEORY OF MARKETS Michael Allingham Professor of Economic Theory University of Kent Palgrave Macmillan

4 ISBN ISBN (ebook) DOI / Michael AUingbam 1989 Softcover reprint of the hardcover 1 st edition 1989 AU rigius ~ For information. write: Scbolarly and Reference Division. SI. Martin's Press,Inc., 175 Fifth Avenue, New YOIt, N.Y First published in the United Stares of America in 1990 ISBN library of Congress Caraloging-in-PubHcation Data AUingham. Michael. Theory of markets / Michael AIIingham. p. CID. Inchldes bibliographical references. ISBN I. Marltct&-Mathematical models. 2. EquiHbrium (Economics) I. Tide. HFS470.A ()4.-(Jc CIP

5 Contents Preface 1 Introduction 2 Traders Preferences Utility Demand 3 Economies Excess Demands Decomposability Quasi-economies 4 Equilibrium The Market Correspondence An Aigebraic Approach A Differential Approach 5 Smooth Economies The Equilibrium Manifold The Natural Projection An Excess Demand Approach Index Analysis 6 Close Economies Revealed Preference Uniqueness, Stability and Scarcity Substitutes vii v

6 vi Contents 7 GoocIs aud Assets 82 Real Economies 82 Financial Economies 84 Mixed Economies 93 8 AUocations Efficient Allocations 97 Core Allocations 102 Approximation 104 Replication 108 Glossary 115 Bibliography 116 Index 119 ')7

7 Preface Adam Smith's famous invisible hand, through which the individual'by pursuing his own interest frequently prornotes that of society more effectually than when he really intends to promote it', operates through the market system. This book explores the workings of this system; how prices are formed, how they change and how they affect people. Tbe markets which affect people most directly are those for real goods and services, such as food, shelter and labour. Yet the markets which are most active are those for financial assets and instruments, such as stocks, bonds and currencies. Tbe currency markets in London alone are over twice as important, in terms of value, as the labour markets in the entire world. This book develops a unified theory of markets which integrates markets for real goods with those for financial assets. As the questions considered are quite deep the treatment is necessarily somewhat technical However, all the mathematics required is available in the standard treatments of mathematica1 methods in economics; an excellent summary may be found, for example, in the first chapter of Andreu Mas-Colell's The Theory 0/ General Economic Equilibrium. Although employing technical arguments the book is essentially about markets rather than technique. It thus differs from Mas-Colell's work, which is 'a book on technique, and technique is, undoubtedly, its raison d'etre'. In the same way it differs from a related book, Yves Balasko's Foundations 0/ the Theory 0/ General Equilibrium, which is 'devoted to a presentation of the theory that takes advantage of the differentiability assumptions'. Indeed, the technical requirements are kept as simple as possible; in particular, no use is made of topology on dimensionless spaces, or, beyond its most basic concepts, of measure theory. However, this does mean that certain topics are omitted; there is little discussion of spaces of preferences, or of economies with infinitely many traders. Tbis book developed from aseries of lectures which I gave at the School of Advanced Studies in Social Science in Marseilles, and developed further at the Institute of Advanced Studies in Vienna. I am grateful to colleagues in both institutions for many valuable discussions, and to the University of Kent at Canterbury for the period of leave in vii

8 vüi Preface which the book was written. I am also grateful to members of the Man group in London, New York and Hong Kong for an invaluable insight into the workings of markets in practice. MICHAEL ALLINGHAM