Home > The Economics Profession > General equilibrium theory — a gross misallocation of intellectual resources and time

General equilibrium theory — a gross misallocation of intellectual resources and time

from Lars Syll

General equilibrium is fundamental to economics on a more normative level as well. A story about Adam Smith, the invisible hand, and the merits of markets pervades introductory textbooks, classroom teaching, and contemporary political discourse.getbourse The intellectual foundation of this story rests on general equilibrium, not on the latest mathematical excursions. If the foundation of everyone’s favourite economics story is now known to be unsound — and according to some, uninteresting as well — then the profession owes the world a bit of an explanation.

Frank Ackerman

Almost a century and a half after Léon Walras founded general equilibrium theory, economists still have not been able to show that markets lead economies to equilibria.

We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient.

But after reading Frank Ackerman’s article — or Franklin M. Fisher’s The stability of general equilibrium – what do we know and why is it important? — one has to ask oneself — what good does that do?

As long as we cannot show that there are convincing reasons to suppose there are forces which lead economies to equilibria — the value of general equilibrium theory is nil. 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, leaving their Santa Claus economics in the dustbin of history.

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. As Ackerman writes:

The guaranteed optimality of market outcomes and laissez-faire policies died with general equilibrium. If economic stability rests on exogenous social and political forces, then it is surely appropriate to debate the desirable extent of intervention in the market — in part, in order to rescue the market fromits own instability.

 


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On the use and misuse of theories and models in economics

by Lars Pålsson Syll    $20    153 pages   Cover of On the use and misuse of theories and models in economics

Introduction
1. What is (wrong with) economic theory?
2. Capturing causality in economics and the limits of statistical inference
3. Microfoundations – spectacularly useless and positively harmful
4. Economics textbooks – anomalies and transmogrification of truth
5. Rational expectations – a fallacious foundation for macroeconomics
6. Neoliberalism and neoclassical economics
7. The limits of marginal productivity theory

  1. August 19, 2015 at 4:49 pm

    Economy doesn’t have a simple equlibrium, it but has a typical predator-prey symmetry, see page 74-77 in http://arxiv.org/pdf/1407.6334v1.pdf

    • Blissex
      August 20, 2015 at 8:48 pm

      «Economy doesn’t have a simple equlibrium, it but has a typical predator-prey symmetry»
      «information- producing-nonlinear-dissipative dynamic systems that are about 95% path-dependent and about 5% stochastic. They are too complex to be adequately modeled. However, being dissipative, they have attractors describing their behavior»

      Both are sort of good approaches, and mostly about the same thing, which is to regard economic systems as dynamic slowly self-modifying ecologies. Which is more or less the point of view that JM Keynes had.

      BTW I am a bit more optimistic than «too complex to be adequately modeled». Perhaps too complex to be *precisely* modelled, or too *dynamic* to be long-term forecast. But it is amazing usually how small the fluctuations are in practice, and that I think would allow adequate modeling in most cases in the short-medium term.

      «If they do not usually explode, it is because they may reach self-organized equilibria»

      This “equlibria” must be a slip, because they travel acrosss limited disequilibriums.

      «brought about by intelligent actors and appropriate policies.»

      That happens in part, but in most part there is also an amazing amount of hysteresis in an economy, a point that most Economists that focus on the small-term short fluctuations that excite people interested in asset markets don’t often see.

      I was stunned once as to that when I read for the first time JM Keynes’s seemingly obvious observation that almost all capital is long term, and if research in political economy had not been so thoroughly corrupted just that observation would be the foundation of an entire research field in proper supply-side political economy.

  2. C-R D
    August 19, 2015 at 5:11 pm

    Every economist worth his or her salt knows the market economies are information- producing-nonlinear-dissipative dynamic systems that are about 95% path-dependent and about 5% stochastic. They are too complex to be adequately modeled. However, being dissipative, they have attractors describing their behavior. If they do not usually explode, it is because they may reach self-organized equilibria brought about by intelligent actors and appropriate policies. This is known today but thanks to the time and effort devoted to the study of general equilibrium aided by the theory of differential equation systems. Moreover, self-organized equilibria reduce Shannon entropy, and conserved information allows for growth.

    • PJM
      August 19, 2015 at 5:29 pm

      Interesting, C-R D. Care to share some links?

      • C-R D
        August 19, 2015 at 6:48 pm

        Dear PJM: Here are two:
        “On Market Economies:How Controllable Constructs Become Complex.” Expert Journal of Economics, vol 2 (3),2014;
        ” How Market Economies Come to Live and Grow on the Edge of Chaos.” MPRA Paper 65945, Aug 5, 2015.

  3. August 19, 2015 at 9:14 pm

    “If they do not usually explode”. Well, the problem is that they explode too often!

  4. August 19, 2015 at 11:58 pm

    Unsmart allocators
    Comment on ‘General equilibrium theory — a gross misallocation of intellectual resources and time’

    “Thousands upon thousands of scholars, as well as thousands of statesmen and men of affairs, have contributed their efforts to the attempt to understand the course of events of the economic world. And today this field of investigation is being cultivated more extensively, than ever before. How is it, then, that in all these years, and with all the undoubted talent that has been lavished upon it, the subject of economics has advanced so little?” (Schoeffler, 1955, p. 2)

    Since science is a trial and error process, a fair amount of time is inevitably wasted with groping in the dark and following blind alleys. This, however, is not as big a loss as it seems at first. The positive result consists in knowing better which approach does not work and — most importantly — why. The gargantuan wasting sets in with sticking to a degenerating research program.

    With regard to equilibrium theory we have the peculiar phenomenon that it took the representative economist so long — about 100 years or so — to realize that he is in a cul-de-sac.

    Every heterodox economist worth his or her salt knows that all theories/models that take at least one of the following concepts into the premises are scientific black holes: utility, expected utility, rationality/bounded rationality, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/prices, and ergodicity. All these items are economic nonentities comparable to the perpetual motion machine, unicorns, or dancing-angels-on-a-pinpoint.

    Orthodox economists have no clue how to do economics without these concepts and are hopelessly chained to their degenerating program. They are simply not up to the challenge: “A new idea is extremely difficult to think of. It takes a fantastic imagination.” (Feynman, 1992, p. 172)

    Unfortunately, a scarcity of imagination and an abundance of confusion has always been the hallmark of the representative economist.*

    Egmont Kakarot-Handtke

    References
    Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
    Schoeffler, S. (1955). The Failures of Economics: A Diagnostic Study. Cambridge,
    MA: Harvard University Press.

    * See ‘Secular intellectual stagnation’
    http://axecorg.blogspot.com/2015/08/secular-intellectual-stagnation.html

  5. Franklin Chiemeka Agukwe
    August 20, 2015 at 12:06 am

    I have always believed that general equilibrium is nothing short of a failure. It is of no benefit to economics and to think that this non sense was awarded the Nobel prize is really stupid. Indeed economics is nothing but celebration complex jargon

  6. August 20, 2015 at 2:20 am

    Yes. It’s all that ever needs to be said about general equilibria, and the whole neoliberal project that has been imposed on the world. End of paradigm.

    It can be said more directly and simply. It can readily be shown there are forces that produce disequilibrium (such as pervasive economies of scale), so equilibrium is an irrelevant abstraction. Then there are clear examples of disequilibrium. A market crash is an extremely obvious example, but then there is the exponential growth of new technology firms, the excessive fluctuations of financial markets trading at 50 times the required rate, and more.

    Rather than just say “you haven’t yet proven equilibrium”, just say “equilibrium is disproven”. You don’t even need to do differential equations.

    See my ebook http://sacktheeconomists.com,
    my blog https://betternature.wordpress.com
    and my several articles on this site,
    e.g. https://rwer.wordpress.com/2012/11/28/finding-a-framework-for-a-new-economics/

  7. Eubulides
    August 20, 2015 at 2:36 am

    Talking and writing about GE is itself a waste of intellectual time-effort. Yes I contradict myself. That is all.

  8. Macrocompassion
    August 20, 2015 at 8:03 am

    Equilibrium is never reached but asymptotically continuously being sought. Disturbances cause it to become upset to a greater degree than the current state, and the whole system regularly responds to try to obtain a more stable situation.

    A logical scientific evaluation of how equilibrium is being sought is that each of the 6 or more entities in the system (see my model in DiagFuncMacroSyst.pdf in Wikimedia and other places, having Landlords, Householders, Producers, Capitalists, Finance Institutions and Government) are seeking independently to balance their input with their output flows of money and the values of goods, service, access rights, valuable documents, etc. So general equilibrium is not simply obtainable as through the supply and demand intersection curves of only one kind of variable.

    • August 21, 2015 at 2:11 am

      Just to be clear about my own comment above, when I say “Equilibrium is disproven”, I mean the economy is *far* from equilibrium. So a more accurate statement is “Near-equilibrium is disproven”. A far-from-equlibrium system is a very different beast, erratic, changeable.

      So Macro I don’t agree with your assessment.

  9. August 20, 2015 at 5:22 pm

    i believe that we are and will always be at general equilibrium. you start as a baby and average your years out. see ‘poincare recurrence’. i don’t actually believe but i do bel;ieve in conventionalism .

  10. Blissex
    August 20, 2015 at 8:29 pm

    «We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient.»

    SInce Sraffa at least, and anyhow thanks to the works of many others, political economists who pay attention to details or at least read Steve Keen’s summaries know that neither Marshallian nor Walrasian general equilibrium theories have any of those properties, and in particular Arrow-Debreu-Lucas theories are simply broken by some pretty critical semantic and mathematical errors.

    Even when general equilibrium theories are amended to actually have equilibria, which Sraffa with great care succeded in doing for very simple cases, it is practically impossible to find ways to make those equilibria unique in general, never mind Pareto-efficient.

  11. August 21, 2015 at 9:28 am

    What puzzles me is how economic discussion is always of equilibrium as a thing: an abstract “state” rather than “state of something”. A state of what? Water in a U-tube? Electrical current (i.e. not level but flow of electrons) in a resistive circuit? A state of staying on course to be achieved in steering a ship [of state]? As Ishi suggests, a conventional way of overlooking variation by seeing only an average?

    Does anyone else remember hi-fi record player motors in which a rotating alternating current electromagnet is attracted to one after another of a ring of permanent magnets? Its equilibrium speed was maintained exactly by sacrificing positional error, arriving at the next magnet only more or less on time. But it could also slip out of equilibrium if the positional error became too large, for then the magnetic attraction of the electromagnet would arrive too late, by when it had turned into repulsion. It seems to me something mathematically like that seems to happen at crash time in the economy, when investment doesn’t keep up with depreciation and uninvested QE has the opposite effect to that intended.

  12. August 21, 2015 at 10:22 am

    The Napoleon game
    Comment on ‘General equilibrium theory — a gross misallocation of intellectual resources and time’

    Above in ‘Unsmart allocators’ I said that equilibrium is a nonentity and this implies that disequilibrium is also a nonentity. So, any discussion about equilibrium/disequilibrium/nearequilibrium/nonequilibrium/longrunequilibrium etcetera is as good as a discussion about whether the Easter Bunny has red or green ears.

    For a heterodox economist to enter any discussion about a nonentity is to fall into the Napoleon trap. Solow put it nicely: “Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon.”

    In economics, to accept the concept of equilibrium/disequilibrium means getting tacitly drawn into the game that the other guy is a scientist. He is not, he is only a dilettante economist. The last thing for Heterodoxy is to get involved in any technical discussion about nonentities with any sort of scientific Napoleons.

    Egmont Kakarot-Handtke

    • Jeff Z
      August 22, 2015 at 4:24 pm

      I agree that general equilibrium is a flawed concept. I agree with Dave Taylor when he says we should always be mindful of the ‘of what?’ part when discussing equilibrium. Egmont is correct that a better kind of economics needs to find a replacement for the list of ideas he elaborated in his August 19, 11:58 post.

      However, the problem with the Napoleon game he describes here is that it implies that our only audience is the orthodox economics community. That is a very limited audience. Many other people in power have ACCEPTED that orthodox economics is science. Or by your analogy Egmont, that the man has arrived, his audience believes him to be Napoleon, and is now engaged in that conversation about cavalry tactics at the Battle of Austerlitz (discussion of orthodox economic policy responses to pressing economic problems).

      If we engage only our fellow economists, the government and policy officials will probably continue with the same policies, having no real replacement to hand. We may have to try and convince some of them that the concepts of orthodox, neoclassical economics are flawed and need to be replaced. Some of them are likely to be more practical than the ‘defenders of the faith,’ and some won’t so that is not an easy battle either.

      To try and disprove an idea, you have to engage it.

  13. August 22, 2015 at 10:13 am

    The market is shifting from one state of disequilibrium to another. But that doesn’t mean that in general it tends toward equilibrium most of the time. That’s why Walras is not completely useless, just limited.

  14. JdeV
    August 22, 2015 at 1:33 pm

    Sorry -reply above was to Dave Taylor re hi-fi

    • August 22, 2015 at 9:18 pm

      Do you mean Egmont’s reply above? His first was to the point – equilibrium is a scientific black hole – but gets us nowhere. His second displayed a surprising lack of logic. General Equilibrium is a concept, so the issue is not whether it is whether it has red or green ears but whether it applies, and if not why not? Taking the Solow line is to refuse to engage with Macrocompa’s spot-on argument above, that it cannot exist because the dynamics of seeking to balance six independent and diverse flows in of the economy will not allow it. (That has long been mathematically proven for any number of independent variables greater than three).

      Likewise with Solow’s refusal to engage with a putative Napoleon, who in his French way might have very interesting things to say about the economics of war. Is Egmont saying he doesn’t wish to engage with me as a scientist, excusing his own ignorance of the scope of mathematics and what science is by dismissing me as a “dilettante economist”? He would become more of a man by learning to understand, check out and present better the history, philosophical controversies, arguments and relevance of successful pure and applied sciences instead of wasting his time wallowing like a politician in sceptical ad hominism.

      In any case, thank you, Jeff Z, for your human slant on the logic of what I am saying here.

  15. August 23, 2015 at 11:50 am

    ICYMI

    “It is good to have [the technically best study of equilibria], but perhaps the time has now come to see whether it can serve in an analysis of how economies behave. The most intellectually exciting question of our subject remains: is it true that the pursuit of private interest produces not chaos but coherence, and if so, how is it done?” (Hahn, 1984)

    Smart orthodox economists have abandoned equilibrium long ago. Let us now all turn to the intellectually more exciting question of theoretical economics, that is, how does the actual economy work?

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