Formalizing economic theory

16 May, 2022 at 08:18 | Posted in Economics | 5 Comments

Inflation - The New Economics PartyWhat guarantee is there … that economic concepts can be mapped unambiguously into mathematical concepts? The belief in the power and necessity of formalizing economic theory mathematically has thus obliterated the distinction between cognitively perceiving and understanding concepts from different domains and mapping them into each other. Whether the age-old problem of the equality between supply and demand should be mathematically formalized as a system of inequalities or equalities is not something that should be decided by mathematical knowledge or convenience. Surely it would be considered absurd, bordering on the insane, if a surgical procedure was implemented because a tool for its implementation was devised by a medical doctor who knew and believed in topological fixed-point theorems? Yet, weighty propositions about policy are decided on the basis of formalizations based on ignorance and belief in the veracity of one kind of one-dimensional mathematics

K. Vela Velupillai


  1. Simple Marshallian/neoclassical supply and demand analysis is a very powerful tool. This approach is particularly valuable because it is easy to understand.
    More generally, comparative static equilibrium analysis combined with the concept of tendency towards a moving equilibrium is highly relevant even in a dynamic world.
    In contrast, Velupillai’s article and his other writings are gross violations of the KISS principle – “Keep It SIMPLE Stupid” [or “Keep It SIMPLE and SAFE”].
    Velupillai claims that “liberation from the static point of view” requires “mathematics of a different kind”.
    After a long excursion into the mathematics and logic of general equilibrium theory he concludes that “there are non-orthodox varieties of economic theory with powerful mathematical underpinnings
    … I have, in the first instance, in mind Piero Sraffa’s remarkable Production of Commodities by Means of Commodities (1961) and Jacob Schwartz’s Lectures on the Analytical Method in Economics (1960).
    i.e. more tedious maths and general equilibrium theory with zero relevance to real world economic issues.

    • 《Simple Marshallian/neoclassical supply and demand analysis is a very powerful tool.》
      What if supply and demand for oil financial derivatives has more effect on oil price than supply and demand for oil itself?
      《the more recent explosion of option issuance, further accelerates market moves, and leads to unpredictable reversals that have to do with option positioning rather than fundamentals such as earnings, politics, or the state of the economy. The tail (the options and other derivatives markets) now wags the dog (the equities markets).》

      • You have misunderstood the article which you reference.
        The article does not suggest that the price of commodity oil is affected by financial prices.
        Rather the article suggests that there may be supply-demand relationships between the prices of different types of financial paper (oil derivatives and oil equities).

      • Kingsley, are you saying the relationship I’ve noticed lately between the rising equity price of oil and the rising price for gasoline I pay at the pump is purely coincidental?
        Is it too hard to imagine emotional momentum traders short-squeezing and gamma-squeezing oil prices up, thus driving retail consumer gas price inflation, just because they can? Might they change their minds tomorrow, for whatever arbitrary reason, and pile in on shorting oil, thus driving down prices at the pump for you and me?

  2. In one paragraph this wonderful little statement encapsulates why neoliberalism has been so successful at beguiling most people – including economists – across open society – with its bullshit economic mythology.

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