September 2, 2016

Equilibrium is stone dead — and now?

Comment on Lars Syll on ‘General equilibrium — the art of denying the obvious’

Blog-Reference and Blog-Reference on Sep 6 adapted to context

Frank Ackerman resumes: “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.” (See intro)

Heavens no! Nobody needs pointless excuses of why things got messed up. The one interesting question is how to get out of the mess as fast as possible. But here is the crux of the matter: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990, p. 362)

Economists know quite well that equilibrium is an inadmissible concept. The schizophrenia consist in the fact that equilibrium is firmly built into the axiomatic foundations. Orthodoxy is defined by these hard core propositions:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub, 1985, p. 109)

The methodological blunder that suffices to make this axiom set forever unacceptable is that HC3 and HC5 introduce nonentities and that HC6 is a petitio principii.

So, the microfoundations approach as defined by HC1/HC6 is dead. In fact, it has already been dead in the cradle since Jevons/Walras/Menger. In their bottomless incompetence and ignorance economists busily produce SS-DD-equilibrium models as one-size-fits-all explanation since more than 140 years.

ALL articles in peer-reviewed quality journals that contain the concepts equilibrium/ disequilibrium are scientific rubbish.  What does this tell you about the quality of economic quality journals? Or their editors and reviewers? Or the smartness of authors and readers?

Keynes made an attempt to switch from microfoundations to macrofoundations but he, too, failed methodologically. Note well, that Post Keynesians, too, busily apply equilibrium (2011).

The paradigm shift in economics requires the switch from behavior-centered bottom-up, i.e. subjective microfoundations, to structure-centered top-down, i.e. objective macrofoundations.

The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is given by these three objective structural axioms:
A1. Yw=WL wage income Yw is equal to wage rate W times working hours L,
A2. O=RL output O is equal to productivity R times working hours L,
A3. C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The investment good sector comes in at a later stage. So, what we have with the minimalist and equilibrium-free set A1 to A3 is the pure consumption economy as the most elementary economic structure. This structure is the core of what Keynes called the monetary theory of production and it fully replaces silly real exchange models, silly Walrasian equilibrium models, and silly Post Keynesian models.*

Economists are unable to get their heads around the fact that economics is a system science. A system can be unambiguously defined. This is the indispensable condition to do science. Walrasians, Keynesians, Marxians, and Austrians are like house flies which bang their heads incessantly against the window without ever changing the modus operandi. Nothing else than the fly swatter can bring this pathetic spectacle to an end.

Never ask stupidity to explain itself.

Egmont Kakarot-Handtke


References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

* See cross-references Paradigm shift