There is a psychological bias to believe that exceptional events eventually give way to a return to “normal times.” But the world economy is far from a return to pre-2008 normality, with most of the obstacles to more robust recovery to be found on the demand side.Project Syndicate
All of these models are based on a parable of equilibrium based on Wicksell’s Rocking Horse model. We now know this to be mathematically false, so why don’t we just replace it?
His famous quote from 1918“If you hit a rocking horse with a stick, the movement of the horse will be very different from the stick. The hits are the cause of the movement, but the system’s own equilibrium laws condition the form of movement”Wicksells model was one of damped equilibrium. In nature equilibrium is a state of rest, so a pendulum for example will eventually stopped swinging. So the only way to make the rocking horse rock is to hit it with a stick.
To get away from models where change is generated by philosogen and chaloric we have to abandon the assumption that what drives cycles is outside the model. To get a rocking horse to rick requires energy, and how much it swings depends on its centre of mass. The economy is much more like a powered rocking horse where its centre of gravity is subject to rare but violent shifts to new equilibria.
I have been continuing the research for my next book (hopefully to be finished by May 2016) on the way in which the neo-liberals convinced policy makers including those in progressive social democratic political parties that the globalisation of finance and capital flows meant that the currency-issuing state was no longer capable of maintaining full employment through appropriate use of fiscal policies. The tenet we are entertaining is that the state never went away, it was just co-opted by capital to serve its interests. This will be a two-part blog and centres on a critical period in economic history in the mid-1970s, which marked the break with the full employment system which had moderated the excesses of capitalism. This was the period when the neo-liberal period dawned, and which steadily, opened the way for these excesses to reemerge, in all their indecent indulgence and destruction. It is also the period in which a series of economic myths crystallised into the mainstream narrative we know today, which opposes government deficits and allows unemployment to remain elevated at excessive levels. It is really important to understand what went on then because we are living with the legacy of the falsehoods introduced during this period.…Bill Mitchell – billy blog
Almost a century and a half after Léon Walras founded general equilibrium theory, economists still have not been able to show that markets lead economies to equilibria.
We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient.
But after reading Frank Ackerman’s article — or Franklin M. Fisher’s The stability of general equilibrium – what do we know and why is it important? — one has to ask oneself — what good does that do?Lars P. Syll’s Blog
It's nice to see some attention being paid to agent-based computational models on economics blogs, but Chris House has managed to misrepresent the methodology so completely that his post is likely to do more harm than good.…
What you cannot have in an ABM is the assumption that, from the outset, individual plans are mutually consistent. That is, you cannot simply assume that the economy is tracing out an equilibrium path. The agent-based approach is at heart a model of disequilibrium dynamics, in which the mutual consistency of plans, if it arises at all, has to do so endogenously through a clearly specified adjustment process. This is the key difference between the ABM and DSGE approaches, and it's right there in the acronym of the latter.…
A typical (though not universal) feature of agent-based models is an evolutionary process, that allows successful strategies to proliferate over time at the expense of less successful ones.… This rich feedback between environment and behavior, with the distribution of strategies determining the environment faced by each, and the payoffs to each strategy determining changes in their composition, is a fundamental feature of agent-based models. In failing to understand this, House makes claims that are close to being the opposite of the truth…
For instance, in the canonical learning model, there is a parameter about which learning occurs, and the system is self-referential in that beliefs about the parameter determine its realized value. This allows for the possibility that individuals may hold incorrect beliefs, but limits quite severely---and more importantly, exogenously---the structure of such errors. This is done for understandable reasons of tractability, and allows for analytical solutions and convergence results to be obtained. But there is way too much coordination in beliefs across individuals assumed for this to be considered part of the ABM family. …
The title of House's post asks (in response to an earlier piece by Mark Buchanan) whether agent-based models really are the future of the discipline. I have argued previously that they are enormously promising, but face one major methodological obstacle that needs to be overcome. This is the problem of quality control: unlike papers in empirical fields (where causal identification is paramount) or in theory (where robustness is key) there is no set of criteria, widely agreed upon, that can allow a referee to determine whether a given set of simulation results provides a deep and generalizable insight into the workings of the economy.…Rajiv Sethi — thoughts on economics, finance, crime and identity...
It is generally taken for granted by the great majority of academic economists that the economy always approaches, or is near to, a state of ‘equilibrium'; that equilibrium, and hence the near-actual state of the world, provides goods and services to the maximum degree consistent with available resources, … etc., etc. — all propositions which the pure mathematical economist has shown to be valid only on assumptions that are manifestly unreal — that is to say, directly contrary to experience and not just ‘abstract.’ —Nicholas KaldorLars P. Syll’s Blog
Almost a century and a half after Léon Walras founded neoclassical general equilibrium theory, economists still have not been able to show that markets move economies toequilibria. What we do know is that — under very restrictive assumptions — unique Pareto-efficient equilibria do exist.
But what good does that do? As long as we cannot show, except under exceedingly unrealistic assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria – the value of general equilibrium theory is nil.Modern economics — emperor without clothes
Economists have made the study of economies more tractable – some would say they have simplified things – by sealing off all the exits and entrances so as to prevent novelty from disrupting their analysis. Even then they were forced to enforce ever more strict definitions of rationality and access to information on the participants in an economy in order to arrive at their chosen outcome: that market magic exists. This is why, in general terms, an economic equilibrium exists when there are no sources of change within the economy.
As the quotes above illustrate, and presumably there are thousands like them littering the literature outside of economics, the very concept of the economy being a closed system is absurd. The act of closure severs the link with reality, thus rendering conclusions from the subsequent analysis highly suspect if not outright irrelevant. Defending such analysis on the grounds of simplification places a great burden on the assumptions involved and on the ease of transference of whatever is learned back into an open system such as planet earth.
Such simplification may, indeed, prove useful, but of much greater use is any analysis that tackles an economy as it actually exists rather than as it might exist in the imagination of an economist unaware of the progress other sciences have made in tackling the complexity of highly entangled systems where the pull of entropy undoes order relentlessly.
The consequences of this are the following:
(1) one of the major (alleged) mechanisms driving an economy to Walrasian full employment equilibrium collapses and the whole notion that market economies have a strong tendency to general equilibrium must be abandoned, andAs we've argued many times here at MNE.
(2) the Austrian (or Misesian) notion that market economies have a strong tendency to economic coordination effected by firms’ adjusting their prices towards market clearing values is fundamentally flawed and wrong.
