An unpleasant dilemma for contemporary general equilibrium theory

Abstract

By examining the contributions of two prominent contemporary neoclassical economists, i.e. Lucas and Hahn, the article attempts to shed light on the problematic relationship between neoclassical theory and observation. It is argued that this approach must face the unpleasant dilemma of having to choose between endowing general equilibrium theory with an explanatory role that is marred by its illegitimate notion of capital as a single factor of variable form (Lucas); or alternatively, to consistently treat each capital good as a distinct factor of production, with the bitter implication that the theory must simply renounce to have a correspondence with observation (Hahn).