General equilibrium — the art of denying the obvious

2 September, 2016 at 11:10 | Posted in Economics | 1 Comment

denadexplanationGeneral equilibrium is fundamental to economics on a more normative level as well. A story about Adam Smith, the invisible hand, and the merits of markets pervades introductory textbooks, classroom teaching, and contemporary political discourse. The intellectual foundation of this story rests on general equilibrium, not on the latest mathematical excursions. If the foundation of everyone’s favourite economics story is now known to be unsound — and according to some, uninteresting as well — then the profession owes the world a bit of an explanation.

Frank Ackerman

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  1. It all makes sense if economics is understood as an extraordinarily successful propaganda campaign aimed at protecting the political privileges of capital, as opposed to an actual scientific discipline.

    See:

    _The Great Transformation_, Karl Polanyi, 1944

    It’s lamentable that it is so very badly written; it might be more widely read otherwise.

    Or look at _Wealth of Nations_ itself.

    In Chapter 4, Adam Smith spends the first six paragraphs making a (completely ahistorical) argument for a metallist theory of money. And then in paragraph 10, turns around and argues for a chartalist theory of money which directly contradicts the metallist argument of the first six paragraphs.

    Two centuries of economists have somehow conspired not to notice this.

    This is easily explained by observing that the argument in the first case is that the involvement of the state is unnecessary to the formation of money, and the argument in the second case is that the involvement of the state is harmful to the formation of money.

    So long as both arguments serve the political end of limiting the economic role of the state, the fact that each is logically incompatible with the other is unimportant.

    And so, 240 years later, it is unimportant, for example, that this is logically absurd:

    As long as the “independence” of the central bank from the state is preserved, all is good.


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