Walrasian Economics in Retrospect

Two basic tenets of the Walrasian model, behavior based on self-interested exogenous preferences and complete and costless contracting have recently come under critical scrutiny. First, social norms and psychological dispositions extending beyond the selfish motives of Homo economicus may have an important bearing on outcomes, even in competitive markets. Second, market outcomes depend on strategic interactions in which power in the political sense is exercised. It follows that economics must become more behavioral and more institutional. We can return to these themes of the classical tradition, now equipped with more the powerful mathematical tools developed over the past century. ∗For publication in the Quarterly Journal of Economics. We would like to thank Kenneth Arrow, Robert Barro, Larry Blume, Ernst Fehr, Nancy Folbre, Karla Hoff, Robert Solow, Alessandro Vercelli, Elisabeth Wood, and the editors of this Journal for helpful comments, and the MacArthur Foundation for financial support. Themes touched on here are developed at length in Gintis [2000] and Bowles [2001].