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 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.Lars P. Syll's Blog
General equilibrium economics – a dead end
Lars P. Syll | Professor, Malmo University
Why did this quest turn out so poorly and why is it so difficult to give up? It's based on the myth of the invisible hand as the economic correlate of laws of nature in the hard sciences. This myth has been enshrined as neoliberal dogma, and it constitutes the supposed connection between Classical and Neoclassical economics (with Paul Samuelson introducing it into Keynesian analysis). This leads to the assumption that markets operate based on laws of nature as if guided by an invisible hand, so that there are natural rates that are determined and can be expressed mathematically as invariants.
The explanations are meticulously crafted but the predictions have neither been uniformly accurate nor comprehensive. Global financial crisis? The model did not predict it. What path will the recovery take and when will it be over. The model doesn't predict that either. So now economists are toying with multiple equilibria, and shifting natural rates.
As Joe Stiglitz famously said recently, there is no "invisible hand." And as Adam Smith's biographer Gavin Kennedy (Adam Smith's Lost Legacy) observes, Smith never used the phrase "invisible hand" in the way that later neoclassical economists' interpreted it in light of 19th century physics. See Gavin Kennedy, Adam Smith and the Invisible Hand: From Metaphor to Myth Econ Journal Watch, Volume 6, Number 2, May 2009, pp 239-263.
24 comments:
Equilibrium is a weasel word.
"I have $10 billion, you have $10 - we are in equilibrium"
Equilibrium is a weasel word.
Right, the economy was in glorious equilibrium in the South during slavery. This was actually used as an argument against abolition.
Of course, there is no "invisible hand" since Smith did not understand the nature of value as purely subjective and that, to the extent such expression of value is possible, value is reflected objectively in prices. The market does not fail until prices are fatally distorted by fractional reserve bank loans or fiat funny money loans and spending.
There are "no natural rates that are determined and can be expressed mathematically as invariants" because absent intervention, rates are determined by market actors based upon their subjective values and plans. There are no invariables in the equation.
Keynesians and MMTers did not reject as too simple the concept of distorted prices as the cause of the boom bust cycle. They simply refused to process the analysis in their tiny brains because it totally eviscerated the entire Keynesian hoax.
Where exactly is this Keynesian analysis which determined that funny money price distortions are too simple of an explanation of the boom bust cycle? Citations please. I say it does not exist.
any examples of that?
"This leads to the assumption that markets operate based on laws of nature as if guided by an invisible hand, so that there are natural rates that are determined and can be expressed mathematically as invariants. "
This is flat out religion Tom... rsp
"The market does not fail until prices are fatally distorted by fractional reserve bank loans or fiat funny money loans and spending."
Bob is literally dancing around naked in his own imaginary world, whilst being stared at by a bunch of bemused Japanese tourists, busily taking photos of the "crazy American guy dancing around naked whilst shouting incoherent nonsense about gold".
"Keynesians and MMTers did not reject as too simple the concept of distorted prices as the cause of the boom bust cycle"
You say it's about "distorted prices" relative to some imaginary gold barter system that you have invented inside your brain.
The more rational view is that it has more to do with unsustainable levels of private debt, exacerbated by and concealed by endemic financial fraud.
Generally dead personal economics - an equilibrium end (in the long run)
This is flat out religion Tom... rsp
I've suggested that Smith's notion of the invisible hand was actually an artifact of 18th c. Deism coupled with Newtonian physics (smith and Newton were friends), but Gavin Smith disputes that notion, saying he does not find evidence of it in Smith's works.
Whatever, it was turned into neoliberal dogma later.
Oops. Should be Gavin Kennedy above.
Smith and Newton were not friends. Smit was only four years old when Newton died.
The invisible hand was just a handy metaphor for some self-organizing allocative mechanisms that do not require deliberate planning. There is nothing wrong with the metaphor, and there ought not to be much controversy that such mechanisms do exist in some circumstances. The problem is when self-organization is elevated to the level of a comprehensive universal principle of economic organization sufficient to generate optimum results in all areas, and at every scale of organization. It's similar to arguing that because a half-dozen people will usually settle quickly on a place to sit when they go to a meeting, we don't need ushers, turnstiles, seat numbers or security services at a baseball stadium - 50,000 people will just figure it out on their own and self-organize into a good seating arrangement.
Ooops. Senior moment. I should have attributed influence rather than friendship.
From Wikipedia
Enlightenment philosophers chose a short history of scientific predecessors – Galileo, Boyle, and Newton principally – as the guides and guarantors of their applications of the singular concept of Nature and Natural Law to every physical and social field of the day. In this respect, the lessons of history and the social structures built upon it could be discarded.[105]
It was Newton's conception of the Universe based upon Natural and rationally understandable laws that became one of the seeds for Enlightenment ideology.[106] Locke and Voltaire applied concepts of Natural Law to political systems advocating intrinsic rights; the physiocrats and Adam Smith applied Natural conceptions of psychology and self-interest to economic systems; and sociologists criticised the currentsocial order for trying to fit history into Natural models of progress. Monboddo and Samuel Clarke resisted elements of Newton's work, but eventually rationalised it to conform with their strong religious views of nature.
What Adam Smith actually said in the Wealth of Nations, regarding the "invisible hand":
"By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."
What he's saying is that capitalists will support the domestic economy for selfish reasons, and that this will "as if led by an invisible hand", benefit the country.
It's an argument in favour of both the 'free market' AND 'nationalism' - but opposed to what (today) we call "globalisation" and "offshoring".
Basically, it's not a neoliberal argument.
"By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." Smith's use of "frequently" shows he realized that the "invisible hand" is not a universal "law" the way neoliberalism makes it out to be.
yes that occurred to me too
I would love to a fly on the wall when our beloved Bob Roddis receives his pay checks in fiat funny money. Wonder how he handles them.
The more I read his comments the more he sounds like an atheist who took a job of cleaning a church's alter.
I dont think an appeal to authority to Smith here or Marx or any of these people who came up with their observations or whatever now centuries ago adds much value to our efforts to explain to people TODAY how our current system operates.
All of these people were operating in a system of metallic standards for "money" which is now gone from the scene.
That chapter in human history looks like it is over now. Probably best to move on and stay focused on some simple truths FOR TODAY...
rsp,
Smith's importance is rhetorical. His authority a key element in the creation of the myth of the free market.
Smith has been celebrated by advocates of free market policies as the founder of free market economics, a view reflected in the naming of bodies such as the Adam Smith Institute in London, the Adam Smith Society[114] and the Australian Adam Smith Club,[115] and in terms such as the Adam Smith necktie.[116]
Alan Greenspan argues that, while Smith did not coin the term laissez-faire, "it was left to Adam Smith to identify the more-general set of principles that brought conceptual clarity to the seeming chaos of market transactions". Greenspan continues that The Wealth of Nations was "one of the great achievements in human intellectual history".[117] P. J. O'Rourke describes Smith as the "founder of free market economics".[118]....
Similarly, Vivienne Brown stated in The Economic Journal that in the 20th century United States,Reaganomics supporters, The Wall Street Journal, and other similar sources have spread among the general public a partial and misleading vision of Smith, portraying him as an "extreme dogmatic defender of laissez-faire capitalism and supply-side economics". [emphasis added]
Wikipedia.
Matt, I don't mean to be argumentative but have you ever read Marx or Smith in depth? There is little context to where we are today absent their insights. Whether you acknowledge it or not there's a heck of a lot more to understanding than what math inspires, believe it or not (http://www.washingtonpost.com/wp-dyn/content/article/2010/10/22/AR2010102205451.html). I know of no informed intellect, especially regarding economics, that is not familiar and or deeply interested in either person, but especially Marx (in my case). Dismissing them as irrelevant to the times is not a mark of sophistication or even mathematically meaningful. :) ....and there's also much more to figuring out how we should live than understanding MMT....understanding MMT might be necessary but it's not sufficient.
In Smith's 18th century context, the most noted and controversial defender of what was sometimes called "the selfish doctrine" was Mandeville, who, in The Fable of the Bees had defended a doctrine of extreme psychological egoism. He also articulated the notion of "private vices turned into public benefits." He had scandalously argued that given a modicum of wise government society benefits when people are driven by vicious greed, concupiscence and other vices. So Smith is writing in an intellectual context in which the idea that society can benefit from self-interest action, undirected by any significant degree of planning, was very much in the air.
Almost all of the social thinkers of the period were influenced by Mandeville, but also tried to resist his ugly and relentlessly selfish vision of humanity. Smith, following his predecessors Hutcheson and Hume, and other thinkers of the Scottish enlightenment repudiated Mandeville's psychological egoism. He wrote:
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.
Smith was certainly interested in "invisible hand" phenomena of self-organization, and described many ways in which the common pursuit of self-interest by many agents could result in outcomes that benefit all, even though producing those benefits is not their intent. But he also described several kinds of public needs whose achievement requires organized government action: education, what we call "infrastructure" development, and the maintenance of an effective rule of law and civil order.
He was also very skeptical about what happens when business people get together to organize or just club:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Equilibrium is a weasel word.
It's just so very implausible. Complexity economics + MMT realism is probably win.
Mal,
Im not taking anything away from Marx's ability to discern injustice/coercion, class distinctions, etc.. and he certainly has his historic place....
But I was making the point that in what I see as Job #1, ie educating the public about the facts about how our current monetary system operates and elimination of the falsehoods parlayed back and forth and repeated often by the morons among us on this topic, I dont think it adds value to that focused effort to bring Marx into it as he has nothing to add in this regard... he never operated in this environment.
Better to cite Aristotle for instance for what applies for today...
I offer as an example, there is a guy David Harvey who has been teaching Marx's 'Capital' for like 40 years and he still thinks "Capital" is an enigma... his course is on you tube and Ive sat thru it...
If youve been teaching something for 40 years and still think it is an enigma, that should be a tip-off that something is wrong...
in this case Harvey does not understand that Marx's work there is 150 years old or whatever and was written in the context of a completely different monetary system than he is living under for the 40 years he has been teaching 'Capital'.
So this is what he comes up with after 40 years: "Capital is not a thing but a process in which money is perpetually sent in search of more money."
Teleological double metonymy (after 40 years... this is all he can come up with...)
So you can see he is all confused and all he can come up with is this "The Enigma of Capital" sophistry and so forth.
I just dont see any value in Marx ONLY as far as supporting a mission of monetary system education... bringing him in to those discussions will only confuse the matter....
And agree that there is "more to life" than an understanding of our current monetary arrangements, and do not mean to denigrate Marx as a secular source of observations on a personal journey towards what is just and righteous. He for sure had some truthful observations wrt those larger (and more important) issues...
rsp,
If economists want to do equilibrium, they should look to biology (homeostatis) rather than physics. Physics is more about static equilibrium in closed systems, while biology is about dynamic equilibrium in open complex systems. Very different models.
In physics, a body stays at rest or maintains its direction and speed of motion unless affected by another force. For economists, this is a "shock." But in biology organisms are always exchanging resources with the environment and are continuously affected by even small changes in the environment.
The physics metaphor is way to simplistic, as the "explanation" of the GFC shows — it was a "shock" that "no one could have foreseen," meaning their model could not handle change at the margin.
And their "solution" is to just let it be and trust the process to right itself (return to equilibrium at their definition of full employment).
The problem is now they claim that there may be multiple equilibria and the natural rate of UE may have shifted from 4-6% to 6-8% for "structural" reasons.
In my view, the major contribution of Marx was realizing that economics is a piece in the puzzle of a philosophical (normative) and scientific (empirical) conception of the human challenge in the face of increasing complexity (industrial age). He realized that this must begin with a philosophical investigation of fundamental principles - ontology, epistemology, ethics, and social and political philosophy, as well as incorporate the latest scientific thinking. Marx saw economics built on a bed of anthropology and sociology, and he was also a precursor of institutionalism.
Marx (1806-1883 - Das Kapital - published 1867–1894) joins Darwin (1809-1882 - theory of evolution 1859) and Freud (1856-1939 -The Interpretation of Dreams 1899) as one of the most important thinkers of the 19th c. in terms of impact on later thinking. The English and Americans tend to dscount Marx, but in the rest of the world Marxism and Marxian ideas are a major force.
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