Note on the Economic Equilibrium for Nonlinear Models Author(s): Nicholas Georgescu-Roegen Source: Econometrica, Vol. 22, No.

1 (Jan., 1954), pp. 54-57 Published by: The Econometric Society Stable URL: http://www.jstor.org/stable/1909832 . Accessed: 20/12/2010 22:01
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NOTE ON THE ECONOMICEQUILIBRIUMFOR NONLINEAR MODELS

BY NICHOLAS GEo1RGESCU-RoEGEN

IS THE purposeof this note to presentfurtherresults concerning the existence of economic equilibriumin the case of a model more general than that considered by either Mr. Nikaido in the note published in this issue or by this writerin ActivityAnalysis of Production and Allocation.!
IT

1. The results reached by Nikaido can be obtained as an application of Theorem2 (and its Corollaries) of Bohnenblust,Karlin, and Shapley.2 Nikaido's note offers, however, a much more elementary proof for the particular case treated by him. Since this particularcase is of special importance in the discussion of economicequilibrium any elementarization of its treatmentdeservesour attention.3 In this respect, one may point out that Nikaido's results, concerningthe existenceof saddlepoints for bothK(A, j) andO(A, Y), can be provedby following step by step the procedureadopted by this writer in the paper already I - V are valid, mutatismutandisfor either mentioned.The results of Theorems K(A, j) or 4(A, Y) in case of concavity. In particular,Theorem III offers a sharpeningof Nikaido'sresults. Finally, it should be remarkedthat Nikaido's model does not constitute a real generalizationof von Neumann's model since parallel to dropping the assumptionof linearity,an important restrictionof the latter, it introducesa new restriction: limitationality.Indeed, in Nikaido's model, to each input A there corresponds of my argumentin the only one outputf(A). A reexamination volume on ActivityAnalysis, in the light of Nikaido's result, leads to the conclusion that the limitationalityrestrictioncan be eliminatedwithout affecting the existence of economic equilibrium.These new results are presentedin the next sections. 2. Referringto the technologicalhorizon H as the set of all feasible transformationsT = (A, B),4 we shall introducethe followingpostulates, I - III. I. The technological horizonforms a closed convexset in the positive orthant (al, a2, * , an, bi, b2, *, bn). R+2of the spaceof coordinates The problemof justifying this postulate is rather delicate. Some implications of (I) representwell-knowninterpretationsof "decreasing returns."Thus:
1 "The Aggregate Linear Production Function and its Application to von Neumann's Economic Model," loc. cit., pp. 98-115. 2 "Games with Continuous, Convex Pay-Off," Contributions to the Theory of Games, Vol. 1, Annals of Mathematics Studies, No. 24, pp. 181-192. (Their main Theorem 1 (p. 185) requires the additional condition that "inf, supa (pa(y) < + co . Indeed if c = + oo, the application of Lemma 1.5 is incorrect.) 3 E.g., J. von Neumann and 0. Morgenstern, Theory of Games and Economic Behavior, 2nd edition, p. 154n. 4 Georgescu-Roegen, op. cit., pp. 99-102. The present paper will use the same notations, with the exception of that for a transformation, introduced above. 54

NOTE ON GENERAL EQUILIBRIUM

55

I.1. The convexity propertyappliedto the transformations (A, B1), (A, B2),
yields a nondecreasingmarginal rate of product subbstitution.

I.2. The same property applied to (A1, B), (A2, B) yields a nonincreasing
marginal rate of factor substitution.

I.3. Finally, the convexity propertyapplied to (A, B), (XA,MB) yields nonincreasing returns to scale.

Obviously,(I) involves more than (I.1) - (I.3). One may, however,consider (I) as the most complete conditionfor nonincreasing returns.
II. For any T e H,
n

Ea

i )

a-

>

0;

ai

+ bi

>

hyi> O.

Any closed subset of R+2 satisfyingthese conditionswill be referredto as an

61 set.

Definition.The normalizedshadow t of any point (A, B) e 6Ris the point (XA, XB), where X2(ai + bi) = 1. The normalizedshadow of a set is the set of normalizedshadowsof its elements.
III. The normalized shadow r of H is closed.5

3. From the above postulates, the results (1) - (9), presentedbelow, can easily be derived by followingthe main line of the argumentpresentedin Activity Analysis. (1). If we write k(T) = min (T, Y), then k(T) is continuous over any 61. > min kb(T1), b(T2)]for (2). 4(X1T1 + X2T2) any T1, T2 belonging to a convex (R, X= K 1 X2 (0 1). This follows immediately from relations (40) - (42), Activity Analysis,

p. 110.
(3). The subset of a convex at such that + (T) > K is a closed convex set 6(R.
If ?b(T) = K, T belongs to B(6(K), the boundary of (Rc .

This follows from (2) and from the fact that ?(T) = K requires bi = Kai,

bj > Kaj, (i $ j) for at least one i = 1, 2, ***, n.

(4). The return to the dollar, O(T, Y), admits a saddle point (TO, Y?) over H and S.6 (5). If q(T0, Y?) = M, then b? = Ma?, i , o-; b? > Mai, yi = 0, i> (6). The set of all To is a convexset Ho n H, whereHo is a cone whose normalized shadow ro C B((r). The set of all Y? is a convex So C S. (7). rF, so (and hence HO) are closed.

We need now the if for T1, T2, e B(H) and A1 - A2, Definition.H is said to be strictlyB-convex the transformation + X2T2,where0 < XI = 1 - X2 < 1, does not belong X1Tj to B(H).
(8). If H is strictly B-convex, the AOof all To is unique.
6

6 Ibid., p. 110, (39).

Ibid., pp. 103n, 109. This postulate is a consequence of (I), if H is a cone.

56

NICHOLAS

GEORGESCU-ROEGEN

This follows immediately from the fact that To e Ho n H c B(H), result (6). One may go even a little further: (9). If H is strictly B-convex, and the rank of To is n,7 then To is unique. 4. The essential difference between a linear model and a nonlinear model is that the equilibrium of the former leads to a set of linear processes, that of the latter, to a set of transformations.Since scale is the element that differentiates transformation from linear process, it is only natural that the nonlinear model should raise additional problems related to size. One of these problems concerns the availability of AO. The technological equilibrium To may not be achievable because the resources at the disposal of the community do not suffice in all respects. However, this new aspect of the problem does not interfere with the results of the preceding section. In general, the available amounts of resources limit the ai's either individually or by groups. The latter is the case when a certain type of labor, for instance, may have alternative input uses. On the other hand, the employment of some factors may have to be maintained above a certain minimum level. All these restrictions lead to
EaE

ai

<, L,

,,#2 ai >, M,

((x' 0i).

Therefore, one may now introduce the additional postulate: IV. The availableinputs form a closed convex set, a, having a closed normalized shadow.8 The set of all technologically feasible equilibria which are at the same time economically achievable, i.e., for which A E a, forms the economic horizon, 30 c H. Because of IV, the economic horizon satisfies postulates (I) - (III). Therefore, the results regarding H, presented in the preceding section, are valid for SCtoo. In particular (10). A nonlinear model satisfying postulates (I) - (IV) has a technological equilibrium To as well as an achievableequilibrium go.' 5. The distinction between the technological and the achievable equilibria raises a series of problems. The following preliminary remarks are intended to offer a sample of the problems that could be pursued further. (a) If N is the maximum value of the integer n such that ng0 E a, the achievable equilibrium of the entire economy consists of N units go. (b) If two economies, E1, E2, have the same technological horizon, but E2 is underdeveloped relative to E1. To # <J0is a reasonable k(go1)> k(go2), essential criterion for absolute economic underdevelopment. Economic underdevelopment is not necessarily caused by lack of know-how alone. Any economy may be underdeveloped in both the absolute and relative sense.
7Ibid., p. 110. 8 Cf. Nikaido, op. cit., p. 49. The assumption of boundedness is not necessary. 9 The role of postulate IV appears now in its true light. It does not replace any characteristic of the technological horizon, in spite of the fact that from the analytical point of view one may regard all transformations which arenot in JCas if not technically achievable.

NOTE

ON GENERAL

EQUILIBRIUM

57

Y?). This (c) If a1 C a2 and 92 # To then p(9?, Y?) < 0(J?2 Y?) < 4(T, explains why, in an underdeveloped economy, additional amounts of any short factors can earn increasing returns. (d) If To 5 Jo, then \jo + (1 - X)T0, (0 < X < 1) cannot belong to a. This follows from (c) and (2). Obviously, this shows that there is a kind of optimum utilization of a. It also shows that by introducing some "rationing" of the short factors, one can increase the employment of the other factors. (e) Finally, the question of development, i.e., the structure of the sequence N19?, N2c92, *.., where the output of NJ influences the available inputs for Ni+1j+j1, is mentioned here only as an illustration of the rather interesting problems related to the dynamic aspects of the model.
Vanderbilt University