Equilibrium: a weed to pull
from Peter Radford
Just how pejorative must we be in order to get attention? There are silly things in economics that need to be weeded out, so that something better can emerge. Sometimes I just say the whole thing is a waste of time, after all economics is not simply a body of thought, but it is also a social phenomenon, it has its own language, its own self-referential estimate of quality, its own hierarchy, and its own history that locks it tightly along a specific path.
And, frankly, that path has led it astray.
Take this piece of silliness from one of its greats:
” Just as we measure gravity by its effects in the motion of a pendulum, so we may estimate the equality or inequality of feelings by the decisions of the human mind. The will is our pendulum, and its oscillations are minutely registered in the price lists of the markets. I know not when we shall have a perfect system of statistics, but the want of it is the only insuperable obstacle in the way of making Economics an exact science.” ~ William Stanley Jevons
Well, we do know about Jevon’s ‘perfect system of statistics’. We will never have it. An economy is too complex to fit neatly into any statistics Jevons could imagine. Maybe he was hinting at that when he called the lack of it an ‘insuperable obstacle’.
In any case, the entire search for equilibrium has bedeviled economics long enough. Those mechanical references to nicely oscillating systems slowly swinging away under the influence of gravity are totally inappropriate for something like an economy. Equilibrium is a nasty weed. It clutters up our garden. It distracts us from reality. Rip it out!
As I get older I get steadily more disdainful of the silliness embodied in the notion of equilibrium. It is something economists use to avoid engagement with the complexity of reality. It was a bold and popular idea back in the early days when economists were besotted with physics envy. It is irrelevant and likely to cause delusion in the context of our more modern understanding of reality. It plods along in the intellectual toolkit not because it is useful, but because no one dare say the truth: it is a weed. Rip it out.
If we want to move forward we need to stop using the word and the idea it introduces. Indeed the inclusion of a reference to equilibrium ought to be a disqualifying event for any academic writing on economics henceforth. Except, naturally, when it is included in a history of the subject as an example of something tossed aside as a hindrance to progress.
Besides, innocent though its origins might have been, equilibrium has become an ideological tool. The futility of pushing against the supposed inexorable motion of the free market as it inevitably settles down into equilibrium is the great and powerful argument of those who deny the validity of the government as a positive economic agent. And, since the government is ‘we the people’ acting in concert, equilibrium has become, consequently, an anti-democratic tool. For, if equilibrium is inevitable, we mere mortals have no right to question its ultimate position. Our resistance has no purpose other than to frustrate us and any foolish non-market thoughts we might harbor.
Equilibrium began its illusory life as an illumination of the bright magic of the marketplace. Then it became the dystopian pall behind which the opponents of democracy took cover.
It is a weed. It is toxic. Rip it out.
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Real-World Economics Review Blog 
“And, since the government is ‘we the people’ acting in concert, equilibrium has become, consequently, an anti-democratic tool.”
Yes. Here government is incomplete in definition. What exists is not working. A new kind of government is required for species survival.
The government is the public organization we the people use to patch the roads etc. We the people acting in concert is separate from the government. We the people acting in concert use government as one means to accomplish our goals. Autonomous democracy.
Equilibrium for cosmic powered biology surfing big still banging is a very weird idea indeed. We are raveling at life speed in the sea of Cosmos that is also most likely expanding at life speed.
Efficiency also becomes a strange idea when one thinks about it in real world economics. What is efficient about pollution induced extinction as that accelerates into the present with low cost labor, accelerated depreciation and reduced taxes?
Throwing out the baby instead of the bath water. According to you the concept of equilibrium is not pertinent in complex dynamic systems! What is next? Dynamical analyses should also be abandoned. May I remark that the search for an equilibrium does not mean that the economy is in equilibrium. The economy lives rather far from equilibrium, but the pull toward some form of equilibrium is what is producing information. Let us be more serious. If we want economics to be a social science, let us focus on:
a) the mis-specification of individual demand;
b) learn about the dynamics of dissipative systems;
c) learn about attractor reconstruction in order to proper study behavior.
Especially c.
Especially not c.
I think chaos theory is wonderful, its just that it has nothing to do with economics. I like the graphs such systems can produce and some of them can be made to look just like interest rates, or credit spreads during the GFC. But that does not mean it models anything. I can play with the jump and volatility parameters of a Brownian motion random walk jump diffusion process and get the simulations to look just like whatever time series you pick from the GFC. But it will have no explanatory power and will not reflect the process generating the economic series you chose. Chaos theory is not applicable to economics and I believe it is attractive because it is fun and interesting to do such programming, not because it is useful. As others continually point out here, economics is closer to social sciences like psychology and sociology than it is to physics and chemistry. Chaos theory is a nice tool but should not be applied in the wrong field. The results from this misapplication is more like an exercise in stenciling than analytics.
Today I only read mathematics as poetry. Thank you for your poetry Risk Analyst.
Risk Analyst,
You’re right Chaos Theory itself has nothing constructive to offer us in economics…..except to remind us that humans cannot long survive in a chaotic environment/system and also that the answer to chaos is rational and ethical control which is one of the definitions of Wisdom.
Viz economics this means that if the economic system is in continual flux/chaos the wise thing to do is to craft and implement policies that encompass the entirety of the process so as to stabilize it, and also find the stopping points within the flux/chaos where policies can be implemented for maximum beneficial effect for all.
One of the earliest insights of Wisdom that comes to us via the Rig Veda is that the temporal universe is in a continual process of Starting, Changing and Stopping so Wisdom has been aware of chaos much longer than modern theorists have, and begs us to deal with it in as rational and ethical a fashion as we can….via the closer and more complete look that is Wisdom itself. Economics requires Wisdom which is the lesson of chaos.
wisdomicsblog.com
“Just how pejorative must we be in order to get attention?”
Pejorative enough whip out data and to call the theory of equilibrium false.
Or, using their lingo, call use of the word, equilibrium, B.S. signaling.
Have those mythical mythologists looked at any of the 10s of thousands of time series collected?
For example:
https://fred.stlouisfed.org/series/EMRATIO A Cycle. Not sinusoid but a cycle none the less.
https://fred.stlouisfed.org/series/gdp Close to exponential growth.
” I think chaos theory is wonderful, its just that it has nothing to do with economics. I like the graphs such systems can produce and some of them can be made to look just like interest rates, or credit spreads during the GFC. But that does not mean it models anything.”
There seems to be a problem your understanding of chaos and complexity. What is Chaos Theory?
I read, as did everyone else at the time, Gleick’s original 1987 version of his book on the subject, with butterfly effects and other examples showing the interesting impacts of deterministic systems seeming to appear random. Its been very long while since I looked at such material, but since you believe I have the wrong impression, perhaps you could enlighten me.
Many non-linear dynamic systems are chaotic by their very nature, and so is economics. There are tools designed to measure the chaoticity of such systems. Good notions of dynamics and experience can teach one to navigate in such systems. By navigating toward some islands of stability one produces information, innovations, etc. We also know how to distinguish between random determinism and chaoticity. For example, the quadratic map, which is a prototypical fractal attractor, shows that in random determinism, Lyapunov characteristic exponents are less than zero. You can go further than Gleick, by taking a look at Poincare, Golgomorov, Sinai, Ruelle, and many more. Good perusal.
OK, I will revisit this and see what is new. Certainly not something I will get done today. However, I am already starting with a bias or belief that simple rules and theory (Minsky, updated Kalecki) can be more effective than C++ code in flagging an impending crisis.
In fact, I tend to agree with everything so say. However, you do not address the question of information production. Beside, a chaotic sea throw- in many durable patterns; if they are perceived, they are called :” Rules”; take a look at water circulation in the Oceans.
There is a qualitative difference between a rule for a solar powered circulation system and accelerating expansion of information as each new idea meets another. What might the rule be within accelerating cosmic expansion pumped in parallel by accelerating information? All this on a finite planet thankfully in dynamic equilibrium with the sun.
Continuous accelerating material gnp is a rule that exists and needs changing first.
I’ve always thought that Gleick made an error in the title he chose for his book. The title and the everyday use of the word chaos are inconsistent. That inconsistency is a problem. Gleick did not mean by that title that events and actions, such as those economists supposedly study are out of control or unpredictable. He means that these things are complexity. Complexity is that notion humans invented to identify events, actions, things that aren’t fully trackable or predictable, that don’t fit within the Greek tradition of logical positivism. In physics complexity came with Einstein’s relativity, quantum mechanics, and now string theory. In sociology and anthropology, it came with Actor-Network-Theory, new organizational theory, and communications theory. A few economists, mostly in Asia and western Europe, and mostly in applied work have based work on complexity ideas. Otherwise, complexity is not a path mainstream economists follow. Curiously, complexity does include equilibrium. A moving equilibrium. Examine any attractor. At certain points on its transit the relationships come closer to balance (never fully balanced and at later points clearly not balanced). This is complex equilibrium. Economists’ studies would improve greatly by including complexity. Is that a forlorn hope?
Ken,
“Curiously, complexity does include equilibrium. A moving equilibrium.”
Yes it does. A dynamic equilibrium in other words. A dynamic equilibrium assumes at least two interacting factors/forces that CONTINUALLY balance out….even within the process of each moment, i.e through Time. But a mere statistical/stochastic equilibrium is a momentary one, and in that sense is actually a full stop…which violates the temporal universe reality of the flow of both Time and everything within the temporal/time universe. Now DSGE assumes that it has done this, but it actually violates the nature of the temporal universe PROCESS…as well as didn’t see the GFC coming nor wisely corrected what caused it….which was the underlying disequilibrating ratio/reality that modern technologically advanced capital intensive economies CONTINUALLY create a greater rate of flow of total costs/prices to total Individual incomes.
So what IS the solution? The INVERSION/TRANSFORMATION of the problematic ratio above via an abundant universal dividend (after several centuries let the labor market adjust to abundance instead of scarcity) which indeed will create a dynamic moving equilibrium PROCESS, and then, just to maintain that process in an inevitably not fully rational or ethical world where powerful corporate and financial interests whose wealth and whose enforced monetary paradigms might try to disrupt and co-opt even an ethically beneficial system for all, you prevent such by strategically implementing a price discount policy of sufficient percentage at each of the full stopping points throughout the entire economic process which becomes “an offer such economic entities cannot refuse” and at the same time such policies break up the financial paradigms of Debt and Loan ONLY.
wisdomicsblog.com
“Complexity is that notion humans invented to identify events, actions, things that aren’t fully trackable or predictable, that don’t fit within the Greek tradition of logical positivism. In physics complexity came with Einstein’s relativity, quantum mechanics …”
Ken, “complex” simply means “with parts”; it is the notion of complicated (“with ties”) that you are referring to. The parts may be seen differently at different levels of language. In Einstein’s arguments the parts are different dimensions; in quantum mechanics different groupings of the same subatomic parts; in my arguments there are both complex two-dimensional structures (as in the Square of Opposition, complex number or Leavitt’s Diamond) but also what’s going on inside it, like the message hitch-hiking on the energy flow down, e.g. a telephone circuit. Get this and we may be less often at cross purposes.
At the most general level I’ll go with Gleick on complexity. He sums it up by how it operates – nonlinearity and feedback. Which together lead to large and diverse patterns. Complex patterns. In “Complexity: The Emerging Science at the Edge of Order and Chaos,” Mitchell Waldrop focuses on some simple basics. 1) many independent agents interacting with one another in great many ways; 2) spontaneous self-organization; 3) that adapt to changing circumstances; 4) these many interacting agents that self-organize and adapt display a dynamism that makes them qualitatively different things that are merely complicated, such as computer chips or snowflakes These are some of my jumping off points for considering complexity.
In “Nonlinear Dynamical Economics and Chaotic Motion (Lecture Notes in Mathematics)” Hans-Walter Lorenz summarizes as follows,
“The behavior of nonlinear dynamical systems can differ completely from that of linear dynamical systems. Regular oscillatory motion as well as seemingly irregular motion can emerge in these systems without resort to exogenous influences or peculiar parameter values. Recent mathematical advances made in the theory of nonlinear dynamical systems allow the restrictive linear approach to dynamical phenomena in economics to be discarded and observable fluctuations of economic variables to be modelled in a simple and convenient way. This book attempts to familiarize the reader with the standard tools in nonlinear dynamical systems theory.” One of those tools is what’s called the Tamari Attractor. Set up as follows:
Tamari Attractor – Economic Attractor – Economics
Tamari attractor
variables:
x’ = (x – ay)cos(z) – bysin(z) “x” output
y’ = (x + cy)sin(z) + dycos(z) “y” money
z’ = e + fz + gatan{ [(1 – u)y] / [(1 – i)x] } “z” pricing – spiral version
z’ = e + fz + gatan{ (1 – u) / (1 – i) xy } “z” wealth – attractor version
Exogens:
a ≡ Inertia = 1.013
b ≡ Productivity = – 0.011
c ≡ Printing = 0.02
d ≡ Adaptation= 0.96
e ≡ Exchange = 0
f ≡ Indexation = 0.01
g ≡ Elasticity/Expectations= 1
u ≡ Unemployment = 0.05
i ≡ Interest= 0.05
x0, y0, z0, = 1 , 1 ≤ x, y, ≤ 4
Source: Tamari, B. (1997). “Conservation and Symmetry Laws and Stabilization Programs in Economics.”
But, the best pejorative statement, should be understandable to all outside economics also.
But no one outside economics could possibly believe in equilibrium.
Maybe it was done in Dilbert.
If you want to do math for some thing that is dynamic you need to use equations or functions with time as an independent variable. In macro the models that assume equilibrium almost never have the independent variable time.