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Critical inspiration

from Lars Syll

Almost a century and a half after Léon Walras founded neoclassical general equilibrium theory, economists still have not been able to show that markets move economies to equilibria. What we do know is that — under very restrictive assumptions — unique Pareto-efficient equilibria do exist.

But what good does that do? As long as we cannot show, except under exceedingly unrealistic assumptions, 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.

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.

In case you think this verdict is only a heterodox idiosyncrasy, here’s what one of the world’s greatest microeconomists — Alan Kirman — writes in his thought provoking paper The intrinsic limits of modern economic theory

If one maintains the fundamentally individualistic approach to constructing economic models no amount of attention to the walls will prevent the citadel from becoming empty …

[The results of Sonnenchein (1972), Debreu (1974), Mantel (1976) and Mas Collel (1985)] shows clearly why any hope for uniqueness or stability must be unfounded …

The idea that we should start at the level of the isolated individual is one which we may well have to abandon … we should be honest from the outset and assert simply that by assumption we postulate that each sector of the economy behaves as one individual and not claim any spurious microjustification …

Economists therefore should not continue to make strong assertions about this behaviour based on so-called general equilibrium models which are, in reality, no more than special examples with no basis in economic theory as it stands.

Getting around Sonnenschein-Mantel-Debreu using representative agents may be — from a purely formalistic point of view — very expedient. But relevant and realistic? No way!

Although garmented as a representative agent, the emperor is still naked.

  1. C-R D
    July 18, 2016 at 8:42 pm

    Ordinarily i enjoy reading Lars, but here I have to take issue with him. Modern economics is by now recognized as a complex and dissipative system, meaning that it has an attractor, Thus order preserving policies may lead to a self-organized equilibrium where behavior is determined. I do not think one can do science without paying heed to that. It does not mean that we have to go with the unrealistic assumptions of SDGE, but we now know a lot about how to analyze complex systems. Air circulation over the planet is a good example of a complex system, yet in self-organized equilibria, many durable patterns exist as long as an equilibrium is not disturbed.

    • July 19, 2016 at 5:40 am

      In a sense you are correct. In events and things labeled chaotic or complex certain events and patterns are expected. Attractors are one of these. Attractors are nothing more than equilibrium in a box. Within that box some predictability is possible, at least in physical systems. But events outside the box can change what’s happening inside the box or create something new. Perhaps a new attractor. Or perhaps into something else. Unfortunately as I’ve pointed out numerous times before economists are not equipped either temperamentally or in mathematics knowledge or skills to handle chaos/complexity.

  2. C-R D
    July 19, 2016 at 9:11 pm

    I agree in part with your remarks, except to add that nothing can be said about economics outside an equilibrium. A destabilizing policy will impact an existing equilibrium, but there are many islands of stability in the chaotic universe. A new stabilizing policy may again place the system in the stable subspace as argued by von Foerster.

    von Foerster, H. (1960).”On self-organizing systems and their environment.” http://e1020.pbworks.com/fulltext.pdf.

    Ashby, W. R. (1962). “Principles of the self-organizing system.” In Principles of Self-organization, by von Foerster and Zopt (eds.) U S Naval Research.

    Dominique, C-R. (2016). “Analyzing Market Economies from the Perspective of Information Production, Policy, and Self-organized Equilibrium” MPRA Paper 70725.

    • July 20, 2016 at 4:08 am

      I just have two simple question about all this stability and instability stuff. First, how does one conclude an “island of stability is in charge?” and how is that island compared with “the chaotic universe?” This all sounds so simple until one actually tries to show it happening.

    • jlegge
      July 20, 2016 at 8:21 am

      You need to (re)visit Kauffman’s Origins of Order. There will certainly be islands of stability most of which will eventually be swallowed by chaos as it percolates through the system. All the interesting things happen at the edge of chaos: that is where evolution occurs and that is where “economics” in your apparent definition has nothing to say.

      Engineers work on the edge of chaos all the time: look a the airflow over the leading blades of a jumbo jet engine. A few degrees too high and the engine will disintegrate with potentially disastrous consequences; too low and the aircraft will have an uncompetitive fuel economy. This has to be managed while the inlet air temperature and pressure vary over a huge range. I suppose that you could describe the system as being at an equilibrium at each point in a flight; but it will be in different equilibrium second by second. The control system cannot simply look at current conditions: it must respond to the phase trajectory leading up to the current instant.

      The tools for studying and managing complex systems exist; mainstream economists choose not to use them.

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