Home > rethinking economics > Ideas that must be forgotten

Ideas that must be forgotten

from Peter Radford

Much of what we are told as being advances in economics are diversions or delusions that serve only to trap us in a cul-de-sac. Sometimes that becomes a very long road to nowhere. Sometimes, it seems, economics will never return to being about actual economies, but will always be doomed to stay the plaything of a select group of very clever savants separated from the world by their contempt for its complex messiness.

I am not one of those to indulge in endless territorial fights over purity of thought. What matters to me is practical application. I measure the usefulness of an economic idea by the illumination it throws on a real world problem and on its ability to assist us better our collective lots in life. I frankly don’t care if it is the precise meaning that some long ago dead theorist gave to an idea. Our current divination of that meaning may have strayed from purity, but it might also work. Battles over intellectual turf are meaningless except for a very few whose reputations are involved. Other than that, who cares?

Thus I admit I find the current argument over IS/LM a sideshow. I realize that the Hicksian version of Keynes is impure. I realize that Hicks himself came to regret having given life to it. But, in a crude and first cut kind of way it works. Does that imply I want to dump the pure Keynes? No. No it doesn’t. But I would prefer to go into battle with the impure kind rather than with the absurdity of the orthodox alternative. It would be better to go into battle with the pure kind, but that isn’t in most arsenals nowadays. And we must go to battle. There’s an economy to understand.

This leads me back to my problem: all those ideas that block progress.

You see in a recent blog post Paul Krugman tells us about the origins of Keynes-via-Hicks, and how jolly useful it has been — to him anyway — as he thinks about the economic crisis that began in 2007/2008. Buried in that post is a question:

“What’s the minimum interesting general equilibrium problem? The answer is, an economy with three goods, which means that there are two relative prices. You can think of such an economy as having three markets, but because of adding up you only need to look at two – if any two are in equilibrium, so is the third.”

Actually I don’t find any general equilibrium problem interesting. Not even minimally. I don’t think of general equilibrium as being an interesting topic, at least not in the context of a modern and vastly complex economy. I have said this before, but let me repeat myself: I wish that economics would forget about equilibrium for a while and focus on disequilibrium which, to me at least, is the more normal, empirically abundant, and thus interesting topic.

And I know I have said this before too: I regard the landmark effort of the likes of Arrow and Debreu with the utmost respect. They demonstrated clearly the irrelevancy of general equilibrium. They showed it cannot exist except under the most extreme and utterly unreal circumstances. Their work ought to have killed off the idea for good, but it didn’t. General equilibrium arose from that death stronger. It became the central plank of all subsequent orthodox thought. I have no idea why because it makes no sense. Then again, sense and economics are uneasy bedfellows at the best of times.

This is not to say that economies don’t sometimes display periods of stability. Many complex systems settle periodically into such periods where the moving parts, their relationships, and the outcomes seem to act in some sort of harmony. Then something disturbs that harmony and off the system goes through a period of disequilibrium searching for new stability somewhere else.

Economic orthodoxy places the source of the disturbance outside the system. In other words the source of disequilibrium, the impulse for change, sits outside the economy — or at least the economy as defined by those who adhere to equilibrium analysis.

I find this deeply unsatisfying. It is like saying that the cause of the change in today’s weather wasn’t a change in weather, but was something else. Something made the weather change, but that thing cannot be weather itself. This is ludicrous.

At a basic level this is simply an admission that economists don’t understand the economy as a process through time, but have isolated it at a particular point in time, frozen it, and then described it. It is freeze frame economics. In freeze frame economics we need a projector attendant to restart the motion. We need something outside the movie to get us to the next frame. This reliance on outside influences means that the narrative of the movie — the story we are trying to understand — is also situated outside the frozen frame. Indeed it is outside all the frozen frames because each one has to be compelled into motion by an external force and that external force is the narrative.

Economists have thus removed the very object we need to get a handle on: why economies change through time. Which is not the same as understanding how the integral parts relate and fall into a stable relationship with each other.

I suppose this is just my way of saying that economics is more than the study of the allocation of scare resources against the endless needs/wants of humanity. It is also the history of the development of those needs/wants, and the arc of the complex set of relationships that allows us to invent, produce, move around, exchange and ultimately consume the things that satisfy those needs/wants. For within that complex history is the impulse that keeps the entire system in motion.

Economists, because of ideas like equilibrium, place that impulse outside the sphere of their analysis. This is unfortunate. It is what makes economies interesting things to think about.

Let me leave you with this quote from a wise book called “The Great Wave” by David Hackett Fischer:

“In economic history, equilibrium is the exception rather than the rule. A free market restores equilibrium only to break it down again, and to set in motion a new sequence of imbalances and instabilities with all the troubles that follow in their train. In the full span of modern history, most free market have been in profound disequilibrium most of the time — often dangerous and destructive disequilibrium.”

Economists have, I think, settled on the easier side of the problem. Perhaps they ought to move on to the other, more difficult side.

  1. rddulin
    March 17, 2015 at 10:32 pm

    Well stated. Very insightful. Inspires me to go back and read other Peter Radford posts.

  2. blocke
    March 17, 2015 at 10:58 pm

    “A free market restores equilibrium only to break it down again, and to set in motion a new sequence of imbalances and instabilities with all the troubles that follow in their train.”

    Anyone who knows the history of technological change, Peter, realizes that free markets are not necessary for change. Germany developed a dynamic economy in the late 19th century in a cartelized economy, so did Japan, and the U.S. economy was highly protectionist during the era of dynamic transformation (1971-1929). You don’t need free markets for technological change, you need a lot of other thing that, if you don’t have them, in a free trade regime their absence will do you in.

  3. Neville
    March 17, 2015 at 11:39 pm

    An interesting article. I find that re-reading Minsky offers more insight to dis-equilibrium and debt issues that are ignored in the Hicks model.

  4. March 25, 2015 at 12:57 pm

    The solution to the issue of equilibrium is the published article titled Favorable and Unfavorable balance of Equilibrium.in the article the author in my own opinion has finally brought to an end to the controversy surrounding the issue of equilibrium cos the article discusses the real thing found and existing in any economy.

  5. March 25, 2015 at 12:57 pm

    Interesting insight

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