Out of equilbrium

from David Ruccio

Equilibrium is not the foundation of economics; it’s the foundation of NEOCLASSICAL economics.

That’s what Mark Thoma seems not to understand in his discussion of the macroeconomic foundations of microeconomics [ht: nk].

Microeconomists generally assume that prices move to clear markets. Their main interest is in understanding how equilibrium outcomes change when there are changes in the economic environment. . .

Exactly how prices do this isn’t well specified. Instead microeconomists make use of an abstraction — the Walrasian auctioneer — who calls out prices, assesses the outcome in terms of excess demand or excess supply in all markets, readjusts prices, computes a new assessment of excess supply and demand, and this continues until demand equals supply in all markets.

No, NEOCLASSICAL microeconomists assume that prices move to clear markets and that the auctioneer calls out price vectors until general equilibrium is achieved. Non-neoclassical economists do not make such assumptions.

Actually, there are two different ways of proceeding: One is to focus on supply-and-demand equilibrium and then assume appropriate and instantaneous movements of prices and quantities between equilibrium positions. The other is to use equilibrium as a metaphor to focus on the nonequilibrium movement of prices and quantities, trades in historical time, exchanges outside equilibrium. The former is the method of neoclassical economics; the latter is the method of Marxian theory and other heterodox approaches to economics.

Thoma makes the mistake of assuming that equilibrium and the auctioneer are appropriate for microeconomics, although perhaps not for macroeconomics. Economists using Marxian theory or other heterodox approaches focus on the overdetermined, contradictory constitution of market prices and quantities outside equilibrium, at both the microeconomic and macroeconomic levels, without the need for a fictional auctioneer.

That’s one of the key differences between neoclassical and non-neoclassical approaches to economic analysis: while neoclassical economists fetishize equilibrium models (and can’t imagine conducting economic analysis without them), Marxian and other non-neoclassical economists focus on changes in prices, quantities, and so on in situations that are not necessarily in equilibrium. When useful, the latter group utilizes equilibrium as a metaphor, a heuristic device to focus on the myriad factors impinging on micro- and macroeconomic phenomena in order to highlight the changes that are taking place. In such a world, markets do not necessarily clear, and there is no Walrasian auctioneer.

To put it succinctly: neoclassical economists focus on equilibrium, while Marxian and other heterodox economists emphasize change.