Friday, June 16, 2017

Andrew Lainton — General Equilibrium – Why Post-Keynsians Can’t Live Without it

From an MMT perspective, I would put it somewhat differently than Lainton's analysis.

General equilibrium means that all markets clear "in the long run," that gluts and shortages are corrected by "market forces," and that market failures are temporary and limited to the micro level. Firms may flounder, but the overall market absorbs these failures by repurposing the resources involved, as occurs in the case of disruptive technology, for instance.

As Linton observes the pesky issue is time. 

Keynes pointed out that the issue in economics is dynamic equilibrium over time and explained why an economy might find an equilibrium at less than optimal economic use of resources.

That is, an economy can settle into sub-optimal states that may persist for some indeterminate time, and "in the long run we are all dead."

Therefore, the neoclassical view of letting market forces work to solve market failures on the assumption of a tendency toward general equilibrium in the long run is foolhardy if there is a way to avoid longterm stagnation or sub-optimal performance.

Dynamic equilibrium is ensured in a monetary production economy by double-entry accounting. It is reflected in stock-flow consistent macro modeling. 

This results in the possibility of equilibrium states at less, greater or less than optimal use of available resources — real, financial and human — depending on choices, some of which are policy choices. 

These states can persist until different choices are made. For example, imposition of fiscal austerity can result in economic contraction lasting much longer than otherwise.

Optimal use in the present must also anticipate future conditions based foreseeable changes in conditions in terms of present deployment of resources. Policy must take this into consideration.

This further reveals that policy is a determinative factor in achieving stable equilibrium at an optimal level of resource use along with deployment of resources for future use, e.g., based on projections of changes in population and demographics.

Decisions, Decisions, Decisions
General Equilibrium – Why Post-Keynsians Can’t Live Without it
Andrew Lainton


Matt Franko said...

Looks like blueberries are in equilibrium .... oh wait:

Matt Franko said...

Too many blueberries? Blueberries not in equilibrium ?

Bob said...

I live in Nova Scotia, which also grows blueberries, yet the supermarkets are stocked with blueberries from Chile and elsewhere. I have yet to see blueberries from Maine, which is just across the gulf.

Matt Franko said...

"We're running out of blueberries!!!!"

Tom Hickey said...

Gluts are common at the micro level since as prices rise more producers and vendors enter the market. Competition drive prices down and the least efficient producers and vendor are forced to exit. There are cycles of gluts and shortages at the micro level but the assumption is that competition will result in a long run equilibrium. This is called "partial equilibrium."