Tracking the Invisible Hand: Convergence of Double Auctions toCompetitive Equilibrium

Economics is the science of want and scarcity. Weshow that want and scarcity, operating within a simpleexchange institution (double auction), can besufficient for an economy consisting of multipleinter-related markets to attain competitiveequilibrium (CE). We generalize Gode and Sunder's(1993a,b) single-market finding to multi-marketeconomies, and explore the role of the scarcityconstraint in convergence of economies to CE. When thescarcity constraint is relaxed by allowingarbitrageurs in middle markets to enter speculativetrades, prices still converge to CE, but allocativeefficiency of the economy declines.Optimization by individual agents, often used toderive competitive equilibria, is unnecessary for anactual economy to approximately attain suchequilibria. From the failure of humans to optimize incomplex tasks, one need not conclude that theequilibria derived from the competitive model aredescriptively irrelevant. We show that even incomplex economic systems which are highly inefficient,such equilibria can be attained under a range ofsurprisingly weak assumptions about agent behavior.