April 26, 2015

Walrasian double-blunder

Comment on ‘On the irrelevance of general equilibrium theory’

Blog-Reference

As far as economics is concerned, equilibrium is a nonentity; a metaphor that appeals to animistic thinking, but nothing real corresponds to it. On the other hand, the economy is not a pure random walk either. A better metaphor is therefore that of two drunkards tied together with a string that restricts their movements to a broader path, which, however, has no definitive endpoint or may even evolve toward a cliff.

Because equilibrium is a nonentity all equilibrium models are methodologically unacceptable. This includes Walras's original model.

In addition, this model gets the interdependence between product and labor market wrong.

Davar sums up: “In other words, in equilibrium, if a certain service is not fully employed, then its price is zero. For example, if unemployment exists, then wages should be equal to zero.”

Constructive Heterodoxy proves that, to the contrary, there is a positive feedback loop between wage rate and employment (2015). That is, with a wage rate of zero the economy simply vanishes. The correct employment equation is given here.

If unemployment exists, the wage rate should rise. Yes, rise!

Walras equilibrium model contains at least two fatal errors/mistakes. It is as irrelevant as more recent versions.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL