Home > rethinking economics > On the irrelevance of general equilibrium theory

On the irrelevance of general equilibrium theory

from Lars Syll

The general equilibrium approach starts with individual decisions. It assumes that trades are voluntary and that there exist mutually advantageous opportunities of exchange. Up to here, everyone can agree. The problem lies in the next step. At this point, let us folllow David Kreps’s (1990) reasoning in his A Course in Microeconomic Theory. Kreps asks the reader to “imagine consumers wandering around a large market square” with different kinds of food in their bags. When two of them meet, “they examine what each has to offer, to see if they can arrange a mutually agreeable trade. To be precise, we might imagine that at every chance meeting of this sort, the two flip a coin and depending on the outcome, one is allowed to propose an exchange, which the other may either accept or reject. The rule is that you can’t eat until you leave the market square, so consumers wait until they are sat- isfied with what they possess” (196).  

Kreps “imagines” other models of this kind. In each of them by the word “market” he means a “market square,” and he introduces rules (“flip a coin,” “nobody can leave before the end of the process”). He is aware that “exploration of more realistic models of markets is in relative infancy.” And when he speaks of “more realistic” models, he means more realistic with respect to perfect competition.

_files_2012_05_Foreclosure-MythsBut the problem with perfect competition is not its “lack” of realism; it is its “irrelevancy” as it surreptitiously assumes an entity that gives prices (present and future) to price taking agents, that collects information about supplies and demands, adds these up, moves prices up and down until it finds their equilibrium value. Textbooks do not tell this story; they assume that a deus ex machina called the “market” does the job.

Sorry, but we do not want to teach these absurdities. In the real world, people trade with each other, not with “the market.” And some of them, at least, are price makers. To make things worse, textbooks generally allude to some mysterious “invisible hand” that allocates goods optimally. They wrongly attribute this idea to Adam Smith and make use of his authority so that students accept this magical way of thinking as a kind of proof.

Perfect competition in the general equilibrium mode is perhaps an interesting model for describing a central planner who is trying to find an efficient allocation of resources using prices as signals that guide price taker households and firms. But students should be told that the course they follow—on “general competitive analysis”—is irrelevant for understanding market economies.

Emmanuelle Benicourt & Bernard Guerrien

I can’t but agree with these two eminent French mathematical economists. You could, of course, as Brad DeLong has asserted, consider modern neoclassical economics to be in fine shape “as long as it is understood as the ideological and substantive legitimating doctrine of the political theory of possessive individualism” and you manage to put a blind eye to all the caveats to its general equilibrium models — markets must be in equilibrium and competitive, the goods traded must be excludable and non-rival, etc, etc. The list of caveats soon becomes impressively large — and not very much value is left of “modern neoclassical economics” if you ask me …

what ifStill — almost a century and a half after Léon Walras founded neoclassical general equilibrium theory — “modern neoclassical economics” hasn’t been able to show that markets move economies to equilibria.

We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient. One however has to ask oneself — what good does that do?

As long as we cannot show, except under exceedingly special assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria — the value of general equilibrium theory is negligible. As long as we cannot really demonstrate that there are forces operating — under reasonable, relevant and at least mildly realistic conditions — at moving markets to equilibria, there cannot really be any sustainable reason for anyone to pay any interest or attention to this theory.

A stability that can only be proved by assuming “Santa Claus” conditions is of no avail. Most people do not believe in Santa Claus anymore. And for good reasons. Santa Claus is for kids, and general equilibrium economists ought to grow up.

Continuing to model a world full of agents behaving as economists — “often wrong, but never uncertain” — and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume the problem away) is a gross misallocation of intellectual resources and time.

  1. blocke
    April 13, 2015 at 7:11 am

    For people like me, who believe that nations trade with each other, and that the world is obsessed with the outcome of national rivalry and classify most information about trade and technological development accordingly, the discussion and the behavior of individualism in markets is pointless.

  2. April 13, 2015 at 7:45 am

    So what are the macro policies of general disequilibrium going to be?

    • merijnknibbe
      April 14, 2015 at 11:41 pm

      Governments who focus on stabilizing the flow of money and income as well as on protecting property and providing social security. But who do not focus on guaranteeing the wealth of creditors and increasing the value of property.

      • April 15, 2015 at 3:36 pm

        Excellent goals. And a distributive universal citizen’s dividend combined with a macro-economic discount on retail prices specifically fulfills those goals and breaks up the monopoly on credit as well as the monopoly on the paradigm of loan only that finance also holds. these would be transformational on the level of ideas. Then you could regulate Finance so far as the disallowance of certain unstable derivative creation. These are the goals and policies macro-economists should be overtly pushing because they both stabilize the economy/money system and free the individual at the same time.

  3. April 13, 2015 at 9:50 am

    You ask, given that under very restrictive conditions— which cannot be fulfilled in the real world—a general equilbrium exists, what good does that do? I think it gives us hope that ‘somewhere, over the rainbow’, it exists (like in the movie the wizard of oz). Is continuing to hope, or make models like that, a gross missalllocation of resources—it may be; maybe rather than a math model one could make a movie of it. Or, we could hope for others things, and allocate reasources accordingly—eg hope we will go to heaven (alot more people probably believe in that than santa claus) and build megachurches. (Some people still study variants of boltzmann’s ideal gas model as well as modifications of it, even though ideal hgases dont exist any more than spherical cows, except on paper–and maybe that is a waste of paper and trees).

  4. Macrocompassion
    April 13, 2015 at 10:57 am

    This should not be a confusing subject, but it is!

    Equilibrium is an ideal situation that is hardly or never achieved. Certainly it does not last for long, so our examination is not on whether we have it or not, but how fast we are tending towards it and how it sometimes happens to be disturbed. The trend towards it has another name: stability, and the disturbances are a natural result of the finite nature of actual MICRO-economic effects on the huge MACRO-system.

    From my analysis of the nature of the whole system with the knowledge of the equality of supply and demand, and the simple fact that most macroeconomic functioning entities also have equal input and output value quantities in goods, services, documents and in the reciprocal-flowing money, I can reasonably claim that in general the system is stable. When a disturbance does occur its effects spread over the system and become diluted, which results in a revised set of state variables which will stabilize (toward a state of equilibrium) after some time.

    To properly appreciate the full situation, we can see that certain quantities do slowly accumulate, and occasionally they get quickly released. These are the above-mentioned disturbing micro-economic effects. Land-values, oil supplies, mortgage-debts, electronic communication, are some recent examples of these, but compared to the size and strength of the overall system they are relatively small by nature.

  5. April 13, 2015 at 7:20 pm

    To Syll
    In Supply and Demand is not a Neoclassical Concern (http://mpra.ub.uni-muenchen.de/63135/) it is stated that equilibrium is a must only to neoclassical maximisation models and it is demonstrated that the neoclassical approach cannot be economic science for it is impossible to prove that people or companies maximise. The existence of equilibrium is not required to explain how supply and demand works out its economic and social consequences. One more outstanding contribution of yours to the improvement of economic theory could perhaps be your critical appreciation of this paper.

    • April 14, 2015 at 6:45 pm

      Thanks for the link Gerson! I’ll certainly have a look at it.

  6. April 14, 2015 at 7:07 pm

    Equilibrium in economics start by the equality between quantities produced and sold, but real world tells us that production takes time. So, this equality and hence equilibrium are unattainable; disequilibrium prevails in the real world. Marshall, Keynes and Robinson observed that actual disequilibrium values of endogenous variables are consequences of series of previous values of exogenous variables and that if time enough could be given to the system then the endogenous variables would arrive at their equilibrium values. More in Supply and Demand is not a Neoclassical Concern (http://mpra.ub.uni-muenchen.de/63135/) where an estimate (2SLS) of the US aggregate supply curve is offered as an experiment that gives support to the theoretical approach there suggested.

    • April 16, 2015 at 9:02 am

      The obsolete supply-demand-equilibrium market theory has already been replaced by Constructive Heterodoxy (see 2015). The correct market theory is part of the new heterodox curriculum.

      References
      Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market.
      SSRN Working Paper Series, 2547098: 1–10. URL
      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2547098.

      • April 16, 2015 at 1:34 pm

        Thanks for your comment, Egmont. I read your two papers (Market and aggregate demand) and I think that your endevour may be successfull. I agree with you about the NEOCLASSICAL supply and demand theory and I propose that what is wrong are the neoclassical assumptions, not the idea of supply and demand itself. I therefore offer an experimente that may be replicated. If enough replication is actually done my proposal may be accepted or not; I do not pretend to impose my ideas.

    • April 16, 2015 at 6:51 pm

      Dear Gershon, I have read your paper. Thank you for the link. The key sentence is “This paper first shows why the present mainstream notion of supply and demand has no scientific grounds, cannot be fixed and should be discarded.” This is the obvious starting point for the heterodox paradigm shift. What I do not really understand is how you can find anything of scientific value in Marshall, the founder of the Cambridge tradition of loose and pointless verbiage. Marshall, too, has to be discarded.

      • Macrocompassion
        April 17, 2015 at 3:23 pm

        Egmont, you make it look like we need to start off again with a better set of assumptions! (with which I certainly agree)

      • April 17, 2015 at 8:19 pm

        Dear Egmont, Alfred Marshal was not a founder of neoclassical doctrine. Neoclassical people appropriate many ideas of respected authors intending only to give credibility to neoclassical (fake) ideas. Marshall was and has been one of the prefered victims of this hoax. My paper introduces the theme “supply” (pp. 7-8) quoting a book review on this old prejudice: Caldari, Katia (2004): Book Review: The Economics of Alfred Marshall – Revisiting Marshall’s Legacy. Arena, Richard and Michel Quéré (eds). New York: Palgrave MacMillan, 2003. In EH.NET, September. http://eh.net/book_reviews/the-economics-of-alfred-marshall-revisiting-marshalls-legacy/. I do think that understanding economics require listening to Marshall´s ideas. Of course he was a person hence not perfect, but left many important contributions to economics that neoclassical authors cannot adopt.

      • April 28, 2015 at 10:09 am

        Actually, from what I read, Marshall is credited with the idea of ‘path dependence’ and ‘increasing returns’ in economics —i.e. non-ergodicity. This was discussed by W Brain Arthur (stanford and SFI) as well as Paul Davidson (on this blog, etc.) Many of the historical economists and scientists were very aware of the limits of their paradigms. I think i tend to agree with G Lima, from what i’ve skimmed. Poincare was a bit horrified around 1910 when he discovered chaos (and i even have a paper from 1950’s Am Ec Rev with simulations of dynamics that include chaos—but the article said we wont discuss those, since they didnt make any sense—they want convergence or divergence) . Only with computers could one think about chaos, and ‘phase transition theory’ (eg Onsager) and Turing (morphogenesis) allowed one to think about how to make classical conservation laws (Walras, Boltzmann) compatible with what is observed. (The analagous results exist in game theory). I remember when taking statistical mechanics the prof (who later became a president of amherst college and then died of a heart attack) explained the 2nd law of thermodynamics for self-organizing systems—he pointed out the entropy goes into the rest of the universe.

  7. Ezra Davar
    April 25, 2015 at 9:35 am

    Yes, the general equilibrium theory of post-Walras era – since Pareto, especially modern – Arrow-Debreu, McKenzei, is irrelevant to real economics, but not Walras’s own original theory. There are the erroneous method, namely, two different theories post-Walras authors’ theory and Walras’s original theory, have been identified with each other.
    The classics (Smith, Ricardo, and Marx) and Walras stated that theory has to be as close to economic reality as possible. It is clear that theory cannot be a replica of real world. Hence, there will always some assumptions, due to simplification, which bring about theory that exists in a relevant real-world conceptual framework. Walras’s economic theory, despite some of its assumptions (free competition but not perfect, uniformity of prices for commodities and factors, fixed coefficients of production and so on), was relevant in his time. Since, his economic theory was characterized by a genuine linkage between micro (individual) economics and macro (whole) economics, the positiveness of all prices, unemployment (voluntary) of service and so on. Scientific approach is also characterized by evolutionary approach. The evolutionary approach means compatibility between progress of human society and economic theory. This means that paradigms must be replaced accordance with changes in economics, such that there has to be compatibility between them.
    Instead of gradually updating the Walrasian assumptions and extending his theory by introducing mixed competition, price discrimination and international trade and taxation, modern general equilibrium theory has retained almost all of Walras’s assumptions. Moreover, there are introduced an additional unrealistic assumptions. Here are indicated the unrealistic assumptions, which were not discussed by previous authors:

    (1) Price of several goods and services might be equal to zero and even might be negative.
    The proofing of equilibrium existence is based on two unrealistic assumptions: first, free good conception (non-Classical).
    This assumption says us that when there is an excess supply of a service (a product), i.e., an unused part of the service (the good) it is called “free good” and its price equals zero. In other words, in equilibrium, if a certain service is not fully employed, then its price is zero. For example, if unemployment exists, then wages should be equal to zero.
    Free goods rule (conception) (non-classical) is based on the replacement of the cause (good is being in abundance without any expenditures – like the goods of Nature) by the effect (its price is equal to zero). According to this conception, together with other assumptions, the equilibrium price of some goods and services, specifically when these are in excess supply, is equal to zero. For example, in an equilibrium situation, with high unemployment, wages have to be equal to zero. However, such wages contradict the real facts of economics. Therefore, the modern general equilibrium theory is inapplicable to the real world, and its main achievement of proving the equilibrium existence, once it is based on these assumptions, becomes completely not useful and meaningless.
    Second, “Walras’ Law”, formulated by post-Walras economists, is one of the crucial assumptions of the MGET and differs essentially from Walras’s original laws. Moreover, it is an intermediate stage of Walras’s own laws.
    (2) All economic agents (consumers and producers) are concentrated in one whole model.
    (3) The modern general equilibrium theory do not able to discuss problems of employment-unemployment, because that the excess demand (supply) for goods and services is determined as a difference between the final endowment and the initial (available) endowment.
    (4) In the modern general equilibrium theory money either disappeared or is considered in very simplified form and with unrealistic assumptions; moreover, there is only one type of money – fiat money.
    (5) Modern GET does not discuss the issue of saving and investment at all.
    (6) One of central conditions of equilibrium, equality between the selling prices of goods and its cost of production (supply price) in the Arrow-Debreu approach cannot be kept, because the cost of the production of goods is directly not determined; because of this it is important that not only the price of some goods might be equal to zero, but also the price of some services might be zero.
    (7) The utility function for each household is described as a function of all goods and all services in one function simultaneously, which is problematic if not impossible from the point of real economics.
    (8) The problems of circulation capital, products and money are not discussed by the modern GET.
    To sum up, the modern economic theory, based even if on one of above mentioned unrealistic assumptions, is incompatible with reality; hence its applicability is doubtful. Therefore, we can conclude that the Arrow-Debreu general equilibrium model is irrelevant to real contemporary economic life. In addition, modern scholars have been stating that the above-mentioned contradiction between theory and reality is inherited from the Classics and Walras. But this statement has no real basis.
    The central reason for such a situation is that the first group of economists, which are in the minority, who have read Walras’s original works, misunderstood and misinterpreted them, from Pareto through Keynes and Arrow-Debreu; and the second group of economists, which are in the majority, including modern authors who are writing about Walras’s theory, have not read them in the original and have been saturated by the erroneous “Walras’s approach” of the first group of economists.

  8. April 26, 2015 at 11:51 am

    Walrasian double-blunder
    Comment on Ezra Davar

    As far as economics is concerned, equilibrium is a nonentity; a metaphor that appeals to animistic thinking, but nothing real corresponds to it. On the other hand, the economy is not a pure random walk either. A better metaphor is therefore that of two drunkards tied together with a string that restricts their movements to a broader path, which, however, has no definitive endpoint or may even evolve toward a cliff.

    Because equilibrium is a nonentity ALL equilibrium models are methodologically unacceptable. This includes Walras’s original model.

    In addition, this model gets the interdependence between product and labor market wrong.

    Davar sums up: “In other words, in equilibrium, if a certain service is not fully employed, then its price is zero. For example, if unemployment exists, then wages should be equal to zero.”

    Constructive Heterodoxy proves that, to the contrary, there is a POSITIVE feedback loop between wage rate and employment (2015). That is, with a wage rate of zero the economy simply vanishes. The correct employment equation is given with:

    If unemployment exists, the wage rate should rise. Yes, rise!

    Walras equilibrium model contains at least two fatal errors/mistakes. It is as irrelevant as more recent versions.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment.
    SSRN Working Paper Series, 2576867: 1–11. URL http://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=2576867.

  9. Ezra Davar
    April 30, 2015 at 8:23 pm

    Is Input-Output Analysis of Leontief a nonentity?
    Comment on Egmont Kakarot-Handtke

    In your comment you state that “Because equilibrium is a nonentity ALL equilibrium models are methodologically unacceptable. This includes Walras’s original model.” You stressed ‘ALL’, so, this means that Input-Output Analysis of Leontief is also a nonentity! Modern Input-Output Analysis is a child of the 20-Century. Leontief, in his famous 1936 paper, founded this new branch of economic analysis, both empirical and theoretical, without which it is difficult to imagine the economics literature and economic analysis of the 20th century. Therefore, state the statement like your may make a person who never applied any models for the practice and absolutely misunderstand the real economics.
    If you could be read carefully my comment, you could see that your quotation is relate to the modern general equilibrium together with another unrealistic assumptions. But this not means that even it is a nonentity; only it is incompatible and irrelevant to real economics. So, our task to change them by much more realistic assumptions.
    What is an alternative? your Keynesian wrong and confusing macro model similar to Keynes’s original models? I glanced your works where employment is discussed, and could not find any reminding about types of unemployment (voluntary and involuntary) and how the magnitude of unemployment is determined (measured).
    Finally, can you discover what are ‘Walras equilibrium model contains at least two fatal errors/mistakes. It is as irrelevant as more recent versions’.

    • May 1, 2015 at 3:19 pm

      What are the alternatives?
      Comment on Ezra Davar

      You ask ‘Is Input-Output Analysis of Leontief a nonentity?’

      As far as it is used as a mathematical device it is not, as far as it abused to illustrate the Walrasian equilibrium of all markets it is. For a formal proof see (2013).

      You say ‘So, our task to change them [the assumptions of general equilibrium] by much more realistic assumptions.’

      It is not so much a matter of assumptions. Each theory is based on axioms, so we have to move from the obsolete orthodox axiom set to a heterodox axiom set. This is what a paradigm shift is all about. Playing with realistic/unrealistic assumptions keeps economists busy without ever leading to worthwhile results.

      You ask ‘What is an alternative?’

      I agree with you, Keynes’s approach is not an alternative to Walras’s. It too suffers from severe methodological deficits. For a formal proof see (2011).

      The alternative has already been pointed out by Joan Robinson: Scrap the lot and start again!

      Egmont Kakarot-Handtke

      References
      Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN
      Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438.
      Kakarot-Handtke, E. (2013). Walras’s Law of Markets as Special Case of the
      General Period Core Theorem. SSRN Working Paper Series, 2222123: 1–12.
      URL http://ssrn.com/abstract=2222123.

      • Steve
        May 1, 2015 at 3:30 pm

        It is not only economic theory that must be transcended…it is its scarcity and mere exchange paradigms of themselves.

  10. Ezra Davar
    May 2, 2015 at 9:37 am

    Comment on Egmont Kakarot-Handtke May 1, 2015

    Your last comment once again demonstrates not only your, but also majority of modern authors, fundamental mistake, namely identification between Walras’s original theory and pos-Walras economists theory.
    (1) You write ‘You ask ‘Is Input-Output Analysis of Leontief a nonentity?’
    As far as it is used as a mathematical device it is not, as far as it abused to illustrate the Walrasian equilibrium of all markets it is. For a formal proof see (2013)’. However, Leontief stated that Walras’s model was used as the basis for the theoretical scheme of input-output: ‘The input-output method is an adaptation of the neo-classical theory of general equilibrium to the empirical study of the quantitative interdependence between interrelated economic activities. It was originally developed to analyze and to measure the connections between various producing and consuming sectors within a national economy,’ (Leontief, 1966, p.134).
    So, your above statement is erreneous.
    (2) In the work (2013) you concluded: ‘Walras’s Law does actually not embrace the labor market. The familiar interpretation is methodologically illegitimate. Walras’s Law, as commonly understood, overlooks the existence of different market types and therefore amounts to a category mistake. In fact, the product markets and the labor markets are orthogonal. As a matter of principle, when the product price is determined by supply-demand-equilibrium in the product market, the real wage cannot be determined by supply-demand-equilibrium in the labor market. This is the structural axiomatic Law of Markets’.
    Once again, this law is not Walras’s original law as you and modern economic literature has been erroneously trying to present. This law was formulated by Lange, Patinkin, Arrow-Debreu and majority of modern economists; and it differs essentially from Walras’s orriginal laws (see Davar, 2012).
    (3) Yet, you write: ‘It is not so much a matter of assumptions. Each theory is based on axioms, so we have to move from the obsolete orthodox axiom set to an heterodox axiom set. This is what a paradigm shift is all about. Playing with realistic/unrealistic assumptions keeps economists busy without ever leading to worthwhile results. …
    The alternative has already been pointed out by Joan Robinson: Scrap the lot and start again!’
    What you call axiom is equivalent to assumption (realistic/unrealistic). Every science, includes economics, may be to progress by substituting of old paradigm (assumption-axiom) which become incompatible to contamporary real economics, by new paradigm compatible to reality.
    So, with my deep respect to Joan Robinson her suggestion is erroneous. In development of any science a continuity plays crucial role. So, it is impossible to neglect achievement of such authors as Smith, Marx, Walras, Marshall and so many others eminent authors. By the way, the abandoment of Classics and Neo-Classics is main cause of the deep crisis of modern economic science.
    I am still waiting when you discover what are ‘Walras equilibrium model contains at least two fatal errors/mistakes. It is as irrelevant as more recent versions’.

    References
    Davar, E. (2012) Is ‘Walras’ Law’ Really Walras’s Original Law?, World Review of Political Economy, V.3, N.4, 478-500
    Davar, E. (2013) Input-Output Analysis and Contemporary Economics, LAP Lambert
    Leontief, W. (1966) Input-Output Economics, New York, Oxford University Press.

    • May 2, 2015 at 12:50 pm

      Walras is long gone
      Comment on Ezra Davar

      Let me start with your summary. You say:
      “In development of any science a continuity plays crucial role. So, it is impossible to neglect achievement of such authors as Smith, Marx, Walras, Marshall and so many others eminent authors.”

      Since economics is scientifically in secular stagnation most economists, you included, have obviously lost sight of the idea of scientific revolution.

      “… most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

      Apply your argument to Copernicus, Kepler, Galileo in their relation to Ptolemy and you immediately see that continuity is not exactly the top priority of great scientist. This is especially so when they are confronted with savants (instead of real scientists).

      “These savants, as Galileo put it, first decided how the world should function in accordance with their preconceived principles. … He openly criticized scientist and philosophers who accepted laws which conformed to their preconceived ideas as to how nature must behave. Nature did not first make men’s brains, he said, and then arrange the world so that it would be acceptable to human intellects.” (Kline, 1982, p. 48)

      So let us first of all put the authors ‘Smith, Marx, Walras, Marshall’ into the category of savants and place them next to Ptolemy in the scientific Walhalla.

      With regard to economics the most deleterious of the preconceived ideas has been equilibrium.

      “Wherever economics is used or thought about, equilibrium, is a central organising idea.” (Hahn, quoted in Boland, 2003, p. 99)

      In a previous post I summarized ‘Because equilibrium is a nonentity ALL equilibrium models are methodologically unacceptable.’ And this means that the differences between the multitude of variants of equilibrium models plays no role at all.

      So your attempt to argue ‘What Walras really meant’ is futile because if anything is indisputable then that Walras was an equilibrist. Of course, I agree with you that there are differences and overlaps between the original Walrasian, the input-output, and the Neo-Walrasian approach (see Mitra-Kahn 2008) but these are only of historical interest.

      “At long last, it can be said that the history of general equilibrium theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin …” (Blaug, 2001, p. 160)

      Let Walras rest in peace and equilibrium with him.

      Equilibrium in whatever definition must not be taken into the premises. Methodologically, this amounts to a petitio principii (cf. Mill, 2006, pp. 819-827). Not admitted are, in addition, utility, optimization, and rational expectation. The first rule of theory building says: never put nonentities into the axiomatic premises (2014, p. 11).

      Egmont Kakarot-Handtke

      References
      Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of
      Economic Perspectives, 15(1): 145–164.
      Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective.
      London, New York, NY: Routledge, 2nd edition.
      Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
      Cambridge University Press.
      Kakarot-Handtke, E. (2014). The Logic of Value and the Value of Logic. SSRN
      Working Paper Series, 2399550: 1–20. URL http://papers.ssrn.com/sol3/papers.
      cfm?abstract_id=2399550.
      Kline, M. (1982). Mathematics. The Loss of Certainty. Oxford, New York, NY:
      Oxford University Press.
      Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected
      View of the Principles of Evidence and the Methods of Scientific Investigation,
      volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
      Mitra-Kahn, B. H. (2008). Debunking the Myths of Computable General Equilibrium
      Models. SCEPA Working Paper 2008-1,

  11. Ezra Davar
    May 6, 2015 at 4:41 pm

    Comment on Egmont Kakarot-Handtke May 2, 2015

    It is impossible to dance on two marriages simultaneously similarly to Keynes.
    On the one hand, In your comment from 1 May you state that ‘I agree with you, Keynes’s approach is not an alternative to Walras’s. It too suffers from severe methodological deficits. For a formal proof see (2011)’.
    On the other hand, all your statements are founded on the macroeconomic models which are based on the Keynes’s incomplete and erroneous macro model.
    I am still waiting when you discover what are ‘Walras equilibrium model contains at least two fatal errors/mistakes. It is as irrelevant as more recent versions’.

    • May 7, 2015 at 9:09 am

      What are Walrasians waiting for?
      Comment on Ezra Davar

      Walras tried to formulate a general equilibrium theory (GET). Middle-of-the-road economists like Cassel were quite happy with it but when mathematicians like Wald and von Neumann looked closer at it they were struck by the naivete of economists. Von Neumann pointed the way that led ultimately to Debreu, Arrow, McKenzie. General equilibrium has therefore to be regarded as a correction of Walras’s untenable model. This formal rectification, though, had to be bought with some unacceptable behavioral assumptions like the auctioneer.

      As things turned out, GET in its mathematically correct neo-Walrasian form does not hold water either (Ackerman and Nadal, 2004; Ingrao and Israel, 1990).

      So all arguments are on the table and there is no need for me to explain the numerous defects of the Walrasian approach to Ezra Davar who thinks the truth will come to him when he waits long enough (see his preceding post). All proofs are assembled at SSRN and come with a mouse click:
      http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665

      The crucial question is this. If all is clear and settled, why are there still Walrasians around? The answer is long known.

      “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

      In economics it is indeed possible to argue ‘as if nothing had happened.’ And this means that, for some reason, the scientific mechanisms do not work properly. This explains why economics is a failed science.

      For a heterodox economist there is not one good reason to occupy himself with Walrasianism in any of its futile variants. The issue has been decided long ago.

      Equilibrium is a nonentity. It falls to the remaining stray Walrasians to get the point and to rise to scientific standards.

      Egmont Kakarot-Handtke

      References
      Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York, NY: Routledge.
      Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
      Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL http://www.jstor.org/stable/1824735.

  12. Ezra Davar
    May 8, 2015 at 4:41 pm

    Comment on Egmont Kakarot-Handtke May 6, 2015

    The book of Ackerman, F., and Nadal, A. is one of excellent examples of the fundamental mistake of modern authors, namely identification between Walras’s original theory and post-Walras economists theory: ‘The weaknesses in neoclassical theory that ultimately led to the SMD (Sonnenschein–Mantel–Debreu) theorem, as described in the previous section, include not only the high dimensional model of consumer choice, but also the asocial, individualistic nature of preferences’ (p.16).
    Post-Walras’s economists, since Pareto, have misunderstood and misinterpreted Walras’s economic theory. They have erroneously asserted that his pure theory is an “abstract theory”, i.e. irrelevant to the hypothetical reality; his mathematics is very primitive; his economy is characterized by full employment; and monetary theory is not integrated into his theory, etc. This group of Post-Walras authors (Pareto, Cassel, Schlesinger, Wald, and von-Neumann, Hicks, Keynes, Lange, and Patinkin) then recast Walras’s theory into incorrect and wrong form; their error further compounded when a later group of economist-mathematicians (Arrow, Debreu, Friedman, Samuelson, Solow and others) accepted their interpretation without reservation. In fact, each of them, when carefully examined, was trying to create his own general equilibrium theory — which formally resembles Walras’s approach — but actually is no more than a distortion of Walras’s theory.
    Dear Egmont, before to write the next comment, please, takes a look carefully, at least, my comment from 25 April (will be better if my works: see Reference).

    References

    Davar, E. (2012) Is ‘Walras’ Law’ Really Walras’s Original Law?, World Review of Political Economy, V.3, N.4, 478-500
    Davar, E. (2014) Walras and Contemporary Financial-Economic Crisis, Modern Economy, Vol. V, No. 5, pp. 635-656

  13. May 8, 2015 at 9:27 pm

    Troubles with logic?
    Comment on Ezra Davar

    You say about the Post-Walrasians: “In fact, each of them, when carefully examined, was trying to create his own general equilibrium theory — which formally resembles Walras’s approach — but actually is no more than a distortion of Walras’s theory.”

    I agree with you. The Post-Walras approaches of ‘Pareto, Cassel, Schlesinger, Wald, von Neumann, Hicks, Keynes, Lange, Patinkin as well as Arrow, Debreu, Friedman, Samuelson, Solow and others’ are defective and unacceptable.

    From this, however, does NOT follow that Walras suddenly becomes acceptable.

    The common denominator of all these approaches is that they are based on the notion of equilibrium.

    My post of 26th states:
    “Because equilibrium is a nonentity ALL equilibrium models are methodologically unacceptable. This includes Walras’s original model.”

    In addition, this includes Marshallian, Keynesian, Post Keynesian, New Keynesian and New Classical equilibrium models. What could be unclear about ALL?

    Egmont Kakarot-Handtke

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