Price Theory

August 2015
E. Glen Weyl

I survey the literature on "price theory," defined as neoclassical microeconomic analysis that reduces rich and often incompletely-specified models into "prices" (approximately) sufficient to characterize solutions to simple allocative problems. I argue that this definition is more descriptively accurate today, coherent through history and useful than are alternative definitions. I illustrate my definition by showing how it naturally leads to price theory's distinctive and familiar characteristics: its affinities to other disciplines, approach to measurement and use of diagrams and problem sets. I trace the origins of price theory from the early nineteenth century through its segregation into the Chicago School in the last quarter of the twentieth. I suggest that this relative scarcity combined with natural complementarities between price theory and work outside the tradition have fueled a recent resurgence of price theory in fields ranging from market design to international trade. This, in turn, has raised the value of developing more rigorously the approximation methods used in price theory, a literature still in its infancy.

Publication Type: 
Working Paper