Wednesday, December 7, 2016

David Glasner — A Primer on Equilibrium

Good summary of equilibrium in economics and rational expectations.

Uneasy Money
A Primer on Equilibrium
David Glasner | Economist at the Federal Trade Commission


AXEC / E.K-H said...

Equilibrium is a nonentity like dancing angels on a pinpoint
Comment on David Glasner on ‘A Primer on Equilibrium’

Economics is a failed science and this is the current state in Hume’s apt metaphor: “... when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.”

What has led economists astray is the concept of equilibrium. Methodology 101 tells us: every economist who accepts supply-demand-equilibrium as an explanation of how markets work disqualifies himself as a scientist.*

The state of imbecility is documented by the acceptance two nonentities, viz. equilibrium and rational expectations.

Egmont Kakarot-Handtke

* For details see ‘Methodology 101, economic filibuster, and the mother of all excuses’

and ‘The road that turned out to be a blind alley’

AXEC / E.K-H said...

The prime primer on equilibrium
Comment on David Glasner on ‘A Primer on Equilibrium’

David Glasner discusses the relationship of equilibrium and rational expectations. Thus he takes it for granted that something like equilibrium exists in the economy. This premise, though, is faulty and it does not matter much that it is shared by the majority of economists.

The majority accepts the neo-Walrasian axiom set with these hard core propositions: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985)

It is a primitive methodological error/mistake/blunder to take equilibrium into the premises and then to establish and discuss the properties of general equilibrium. This error/mistake/blunder — known since antiquity as petitio principii — is an age old characteristic of incompetent scientists or savants: “These savants, as Galileo put it, first decided how the world should function in accordance with their preconceived principles. ... He openly criticized scientists and philosophers who accepted laws which conformed to their preconceived ideas as to how nature must behave. Nature did not first make men’s brains, he said, and then arrange the world so that it would be acceptable to human intellects.” (Kline, 1982)

The methodologically correct way is to give a description of the interrelationships of fundamental economic magnitudes and then to see how this elementary system behaves. Logically, there are three possibilities: explosion, implosion, or steady state/equilibrium and we CANNOT KNOW at the beginning of the analysis what the outcome will be. Intuition is a bad guide because the rates of change of an explosion/implosion may be so small as to be practically imperceptible. Because of this, we are ― as a matter of methodological principle ― NOT allowed to take one of the three possible outcomes into the premises. Note, that the physicists had the same problem with the universe.#2

The key question that stands at the beginning of economics is in Keynes’s words: “... is the existing economic system in any significant sense self-adjusting.” This question has to be answered and not circumvented by putting the answer into the premises.

When the methodologically correct route is taken, then it turns out that the monetary economy is in fact unstable, that is, NO such thing as an equilibrium exists, neither in the short nor in the long run.#3

The right thing to do is throw the neo-Walrasian axiom set and all its nonentities without further ado out of the window and to move from false Walrasian microfoundations and false Keynesian macrofoundation to entirely new macrofoundations and to NEVER use the word equilibrium in an economic text again.

Egmont Kakarot-Handtke

#1 Wikipedia

#2 See the story of the cosmological constant and Einstein’s “biggest blunder”

#3 See ‘Could we, please, all focus on the key question of economics?’

AXEC / E.K-H said...

Ground Control to David Glasner
Comment on David Glasner on ‘A Primer on Equilibrium’

Economics is the science that tries to figure out how the actual economy works. Scientific knowledge takes the form of a theory which satisfies the criteria of material and formal consistency. A theory is the humanly best mental representation of reality.

David Glasner and his interlocutors, though, do not talk about the economy but indulge in meta-communication. The whole discussion circles around the question about the content and meaning of different features and versions of the general equilibrium model. In their communicative parallel universe they are mainly occupied with the difference between rational expectations, perfect foresight, perfect knowledge, complete knowledge and so on.

Economic equilibrium does NOT exist. And it has been PROVEN that it does not exist. So ALL equilibrium theory ― partial and general ― is axiomatically false because this concept is built right into the premises of standard economics.#1 This is methodologically inadmissible. Axiomatically false means that the theory has to be shredded and fully replaced, there is no twisting and tweaking of behavioral assumptions that can save it.

This is NOT news: “At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin (Ingrao et al., 1991). It has been a dead alley because the most rigorous solution of the existence problem by Arrow and Debreu turns general theory into a mathematical puzzle applied to a virtual economy that can be imagined but could not possibly exist, while the extremely relevant ‘stability problem’ has never been solved either rigorously or sloppily. General theory is simply a research program that has run into the sands.” (Blaug, 2001)

Equilibrium is a NONENTITY, that is, it has NOTHING to do with the real world which is the subject matter of economics understood as science.

From this follows that the whole equilibrium paradigm has to be replaced. This, too, is NOT news: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990)

Instead, David Glasner discusses the relationship of equilibrium and rational expectations. To see the absolute senselessness of this economics sitcom, equalize the nonentity equilibrium with angels-dancing-on-a-pinpoint and the nonentity rational expectations with navel-of-Adam, then David and Nick and Henry are clarifying the question of how many angels can dance on Adam’s navel ― without ever realizing that they are making fools of themselves.

Needless to emphasize that the participants are also confused about other foundational concepts like pure competition and profit and their relationship: “Pure competition simply means that transactors are price-takers. Perfect competition adds the condition that (economic as opposed to accounting) profit is zero.” The zero-profit economy is another nonentity which follows from the methodological fact that economists do not understand until this day the difference between income, profit and distributed profit. So, the concept of zero-profit perfect competition, too, is a nonentity.

Standard economics is proto-scientific rubbish. The concept of equilibrium has already been dead in the cradle 140 years ago. Since Jevons, Walras, Menger all talk about equilibrium is vacuous.

Ground Control to David Glasner. Your circuit’s dead, there’s something wrong. Can you hear me, David Glasner?

Egmont Kakarot-Handtke

#1 See ‘The prime primer on equilibrium’