September 29, 2016

Sticky prices or sticky brains?

Comment on David Glasner on ‘Price Stickiness Is a Symptom not a Cause’

Blog-Reference and Blog-Reference on Sep 30

The discussion between Nick Rowe and David Glasner suffers from the obvious fact that they have no common and well-articulated model of the economy at the back of their minds. The arguments are drawn either from the Walrasian general-equilibrium-theory pool or from the Keynesian monetary-theory-of-production pool. What makes the discussion surreal is that both Walrasianism and Keynesianism are known to be failed approaches.

The elementary Walrasian story of the market economy goes roughly as follows. There are different types of markets (basically product, labor, money, real assets, financial assets) which function according to what Leijonhufvud called the totem of economics, that is, supply-function-demand-function-equilibrium and interact such that under the ideal condition of full price flexibility in each market all markets clear. It has ALWAYS been admitted that in the real world conditions are not ideal. The claim is that this does not affect the benchmark function of the Walrasian model. The elementary story is backed up by general equilibrium theory which provides the formal proof of the existence of a market clearing price vector.

The proof of the Walrasian story is worthless because its premises are false. Fact is that (i) the different market types work on DIFFERENT principles (2011), (ii) all three analytical elements of “the” market, i.e. supply function, demand function, equilibrium, are nonentities, (iii) the underlying behavioral assumptions are false.

In sum, the Walrasian story of the market economy is axiomatically false. The axioms are given with this set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)

Axiomatically false means that the theory/model is BEYOND repair and has to be fully REPLACED. The replacement of the axiomatic foundations is what methodologists call a paradigm shift. Nothing less will do.

Nick Rowe has not realized this and reiterates the Walrasian story with a new spin which is as senseless as adding epicycles to the Geo-centric model.

David Glasner is already enlightened: “Most of all, they represent an uncritical transfer of partial-equilibrium microeconomic thinking to a problem that requires a system-wide macroeconomic approach. That approach should not ignore microeconomic reasoning, but it has to transcend both partial-equilibrium supply-demand analysis and the mathematics of intertemporal optimization.” This crucial insight is beyond sticky Nick and others of the Walrasian ilk.

To rise above Walrasian and Keynesian drivel requires a paradigm shift from Walrasian microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations (2014).* New macrofoundations deliver the materially/formally consistent general theory of profit, employment, interest and money.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See also ‘From Orthodoxy to Heterodoxy to Sysdoxy’ and ‘How to restart economics

Immediately following 'A brief rectification employment theory'