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Impossibilities and The Market Turn

from Peter Radford

One of the least credible aspects of economics, an enterprise that suffers from a credibility problem at the best of times, is that of general equilibrium. Chasing after this mirage comes at a great cost. For one thing it makes economists look more like priests than scientists or even artists. It is an article of faith, not anything remotely plausible in a real economy. Any reference to general equilibrium in an article, book, or paper, automatically disqualifies its author as being about to pronounce on the economy as we experience it. It is, rather, a necessary badge to be sworn within the temples so as to allow the author to assert membership of the highest faith.

Economists have been fixated on the apparent order exhibited in the economy ever since the discipline began to form in its modern guise. Adam Smith’s unfortunate and passing reference to an invisible hand with its supernatural ability to turn individual greed into aggregate happy circumstance was the beginning of a chase down one of economic’s deepest rabbit holes. Turning lead into gold is a time honored endeavor and has always made its aspirants look foolish.

There is no global order. There is no general equilibrium. All that apparent calm on the surface is simply a gloss over the constant seething and deep undercurrents beneath. You cannot suddenly jump from individual activity with all its idiosyncrasy to smooth seas above with no intermediate explanation at all. Unless, as economists do, you suppress the individual and impose absurd constraints.  

It is one of the great scandals of economics that its proponents of what they call rational choice act so irrationally and disingenuously. In order to force their predetermined preferred outcome on their own theories they utterly undermine any semblance of reality: they disallow any and all activity that we would otherwise recognize as human, so as to make their analysis tractable. The effect is to subvert human agency in the name of choice and to turn consumers into nothing more than a caricature where all efforts on the part of those consumers to assert individuality is blocked. In an even more bizarre turn this authoritarian attack on the individual is then given an Orwellian twist. The total elimination of whim, changing preference, subjective experience, qualitative expression, and so on, is done in the name of “proving” the superiority of “freedom” over anything remotely hinting of central planning.

To prove the efficacy and existence of the forces of the freedoms economists want to advocate, they, in effect, destroy those very freedoms. They burn the village in order to save it.

Worse, they are forced, by their own ideological imperatives, to go further. Not only are the individuals in their models grotesque contortions, they are given attributes that no one attached to reality would recognize. In particular, economists assume people are cognitively superhuman. They can perceive events far into the future with perfect clarity. They can gather near infinite amounts of information. They can process that information. They all arrive at precise conclusions. And they all act robotically according to those calculations. There is no error. No smidgeon. No nudge. No near misses. No nuance. Just supreme perfection.

This microeconomic sand then is used to underpin macroeconomic theorizing.

All in the great cause in the sky called general equilibrium.

Economists are then reduced to laughable explanations to defend their lunacy.

Milton Friedman argued that consumers behave “as if” they had those superhuman cognitive powers. After all, he said, billiard players aren’t all wizard mathematicians when they play billiards. So why can’t we theorize that consumers act “as if” they possess the calculating power of economists? Well, because economists don’t have that calculating power either. No one does. No one ever has. It doesn’t exist.

Friedman’s dodge was superseded by another trick. Later generations of economists simply got rid of people all together. They collapsed all those individuals into one “representative” individual. This, naturally, makes things easy for economists, which was their goal. They tossed reality even further away — if that was possible. In the big models economists subsequently constructed these “representative” entities, one for consumption and one for production, then went about their business and allowed economists to ignore the messiness of actual economies.

The mirage of general equilibrium and of basing macro level analysis on the presumed security of its micro foundations is one of the shoddiest parts of contemporary economics. The most sympathetic conclusion we can derive from looking at the effort is that it was earnest and doomed. All the proofs of general equilibrium are actually perfect disproofs. No one should mention general equilibrium again.

The least sympathetic conclusion is that, given economists still include general equilibrium in their arsenal, they are attempting to undermine democracy.

When we mention this anti-democratic effort to most economists they are aghast. How could we impugn their democratic credentials? We simply respond: let the evidence speak for itself. How else are we to interpret it? And if they don’t then realize this reality we have every justification for ignoring their advice.

The so-called market turn in economics was simultaneously an anti-democratic turn.

It’s time to turn back.

  1. patrick newman
    April 10, 2017 at 11:58 am

    If only consumer decision making could be reduced to a billiard like proposition! The player in returning to the table in a week’s, month’s or year’s time could be sure the rules haven’t changed, nor the size of the table or balls and most important, nor Newtonian Physics which underpins the player’s ability to acquire empirically consistent skills.
    Pity the poor modern consumer who is confronted by near infinite choice, frequently changing, and working with a cacophony of carefully designed misinformation (e.g. Volkswagen deception one of the crudest!). Consumers would like to be rational but they above all consume to live not live to consume.

  2. April 12, 2017 at 9:11 am

    Wise remarks and quite accurate. But I don’t think we need to throw out markets with equilibrium. Markets have been a part of most western societies for over 1,000 years. During that time they have been combined with monarchical, oligarchic, and several forms of democratic government. Today markets cover the world. And are coupled with some of the most democratic and most autocratic governments. And with many forms of government in-between. So, it’s not markets per se that are the problem. It’s how they’re controlled and by whom. And what’s expected of them. Markets can’t deliver economic equilibrium or anything close to it. But with a reasonable mix of openness and control markets can allow trading that benefits all parties involved in the trades, as well as society in general. But markets are only a tool to help communities, not a moral code for those communities. That’s the main error many economists make regarding markets. They treat them like an end in themselves, when they are and always have been merely a tool to achieve community goals.

  3. April 19, 2017 at 12:44 am

    Here’s a link to the 38-page Oxfam “Rigged Reform”https://www.oxfam.de/system/files/rigged_reform.pdf

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