General equilibrium — economics as ideology

14 May, 2019 at 09:03 | Posted in Economics | 3 Comments

what-ifAlthough I never believed it when I was young and held scholars in great respect, it does seem to be the case that ideology plays a large role in economics. How else to explain Chicago’s acceptance of not only general equilibrium but a particularly simplified version of it as ‘true’ or as a good enough approximation to the truth? Or how to explain the belief that the only correct models are linear and that the von Neuman prices are those to which actual prices converge pretty smartly? This belief unites Chicago and the Classicals; both think that the ‘long-run’ is the appropriate period in which to carry out analysis. There is no empirical or theoretical proof of the correctness of this. But both camps want to make an ideological point. To my mind that is a pity since clearly it reduces the credibility of the subject and its practitioners.

Frank Hahn

I can’t but agree. You could, of course, as Brad DeLong has asserted, consider modern mainstream economics to be in fine shape “as long as it is understood as the ideological and substantive legitimating doctrine of the political theory of possessive individualism” and if you manage to put a blind eye to all the caveats to its general equilibrium models — markets must be in equilibrium and competitive, the goods traded must be excludable and non-rival, etc, etc. The list of caveats soon becomes impressively large — and not very much value is left of modern mainstream economics if you ask me …

Still — a century and a half after Léon Walras founded neoclassical general equilibrium theory — modern mainstream economics hasn’t been able to show that markets move economies to equilibria.

We do know that — under very restrictive assumptions — equilibria do exist, are unique and Pareto-efficient. One, however,​ has to ask oneself — what good does that do?

It’s strange that mainstream macroeconomists still stick to a general equilibrium paradigm more than forty years after the Sonnenschein-Mantel-Debreu theorem — SMD — devastatingly showed that it is​ an absolute non-starter for building realist and relevant macroeconomics.

As long as we cannot show, except under exceedingly special assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria — the value of general equilibrium theory is negligible. As long as we cannot really demonstrate that there are forces operating — under reasonable, relevant and at least mildly realistic conditions — at moving markets to equilibria, there cannot really be any sustainable reason for anyone to pay any interest or attention to this theory.

Stability​ that can only be proved by assuming ‘Santa Claus’ conditions is of no avail. Continuing to model a world full of agents behaving as economists — “often wrong, but never uncertain” — and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume the problem away) is a gross misallocation of intellectual resources and time.


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  1. Given that Pareto optimality requires both perfect information, and all goods for sale (private ownership over information and consequent restrictions on access), Pareto optimality is internally contradictory, so only in the sense that any conclusion follows from a logical contradiction can it be said that Pareto optimality is possible.

  2. Why, when Walras is brought up, is it never mentioned that he advocated for land nationalization as a baseline. Maybe DSGE becomes less rough with a national land value tax?

  3. Kaldor on Debreu: The Critique of General Equilibrium Reconsidered’
    Thomas A. Boylan and Paschal F. O’Gorman
    Department of Economics- National University of Ireland, Galway
    “This paper revisits Kaldor’s methodological critique of orthodox economics. The main target of his critique was the theory of general equilibrium as expounded in the work of Debreu and others. Kaldor deemed this theory to be seriously flawed as an empirically adequate description of real-world economies.

    According to Kaldor, scientific progress was not possible in economics without a major act of demolition, by which he meant the destruction of the basic conceptual framework of the theory of general equilibrium.

    We extend Kaldor’s critique by recourse to major developments in 20th century philosophy of mathematics, and then go on to demonstrate that Debreu’s work, based as it is on Bourbakist formalism and in particular Cantorian set theory, is conceptually incompatible with Kaldor’s requirements for an empirical science. This aspect of Kaldor’s critique has not been explored, and as a consequence a major source of substantiating his critique has remained undeveloped.”

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