Thursday, April 19, 2018

Equilibrium in Economic Theory

Everything you may have wanted to know about equilibrium in economics.

Post Keynesianism generally dismisses the neoclassical assumption of equilibrium in economic theory, but these posts serve to clarify the concept and the debate around it. David Glasner explores the history, while Jason Smith comments on the concept for the POV of physics and explains it in terms of information equilibrium.

Uneasy Money
On Equilibrium in Economic Theory
David Glasner | Economist at the Federal Trade Commission

Information Transfer Economics
An agnostic equilibrium
Jason Smith

See also

The Undercover Historian
What is the cost of ‘tractable’ economic models?

1 comment:

AXEC / E.K-H said...

Comment on David Glasner’s ‘On Equilibrium in Economic Theory’

David Glasner explains the evolution of the equilibrium concept: “Equilibrium is an essential concept in economics. While equilibrium is an essential concept in other sciences as well, and was probably imported into economics from physics, its meaning in economics cannot be straightforwardly transferred from physics into economics. The dissonance between the physical meaning of equilibrium and its economic interpretation required a lengthy process of explication and clarification, before the concept and its essential, though limited, role in economic theory could be coherently explained.”

What David Glasner overlooks is that equilibrium is one of the worst methodological blunders of the failed science economics. Hence, the history of equilibrium economics from demand-supply-equilibrium to DSGE is in essence not different from the history of the Flat Earth Theory. It can only be told as a cautionary example of utter scientific incompetence.

The lethal methodological blunder of standard economics consists of putting equilibrium into the premises. This is the verbalized neo-Walrasian axiom set:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub, 1985)

Obviously, since we do not know at the beginning of the analysis whether something like an equilibrium exists in the monetary economy, it is illegitimate to put it into the premises. This idiocy/fraud is known since antiquity as petitio principii.#1, #2, #3, #4

At the beginning of economic analysis stands Keynes’ question: “... is the existing economic system in any significant sense self-adjusting.” Keynes started with the right question but he could not answer it in a scientifically correct manner.#5, #6, #7

Because equilibrium (and by implication disequilibrium) does not exist, all theories/models that contain the concept are a priori false and scientifically worthless. The history of equilibrium economics cannot be told as a story of progressive insight and growth of scientific knowledge but as a delirious march into the woods towards the inescapable end: “... 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.” (Hume)#8, #9

David Glasner, though, lacks even this little judgment.

Egmont Kakarot-Handtke

#1 Equilibrium and the violation of a fundamental principle of science

#2 There is NO such thing as supply-demand-equilibrium

#3 Forget equilibrium

#4 Equilibrium is stone dead — and now?

#5 Could we, please, all focus on the key question of economics?

#6 What Keynes really meant but could not really prove

#7 Proof of the inherent instability of the market economy

#8 Economists: Standing on the Shoulders of Gnomes

#9 New insight from Meta-Learning: delete economics