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 nil. As long as we can not really demonstrate that there are forces operating – under reasonable, relevant and at least mildly realistic conditions – at moving markets to equilibria, there can not 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.Read it at Lars P. Syll's Blog
Why general equilibrium economics is a dead end
by Lars P. Syll
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.We have to ask why this would continue for so long, when it is clearly unfruitful, and, moreover, both inefficient and damaging.
There are at least three possible explanations.
First, the people involved are excessively stubborn to the degree of being in denial wrt feedback. Check.
Secondly, it might be due to institutional momentum resulting from prior investments. Check.
Thirdly, as Ravi Batra asserts based on his analysis of historical evidence, it results from co-optation of the upper-echelon intelligentsia by the ruling elite, in this case the acquisitors that benefit from and support research recommending policy that favors the elite. Hmmm?
I recall some wag saying that since Marriner Eccles, the elite have never permitted anyone to be appointed as a central banker who actually understood central banking.
It seems like something similar happened in economics after Lorie Tarshis wrote the first introductory exposition of JMK, The Elements of Economics. Tarshis was promptly denounced as a communist sympathizer (sound familiar today?), The book was withdrawn as a textbook and is long out of print. (It's available for free download here).
Paul Samuelson tried to save Keynes by sanitizing him though a "synthesis" whose result was "bastard Keynesianism." Now "Keynesianism" of any sort is synonymous with "socialism."
And we are stuck with policy models that don't work other than for those benefitting from them most, and resistance to change is fierce. Accidental, or coincidental?