Blog-Reference and Blog-Reference and Blog-Reference
David Glasner discusses the relationship between equilibrium and rational expectations. Thus he takes it for granted that something like equilibrium exists in the economy. This premise, though, is faulty and it does not matter much that it is shared by the majority of economists.
The majority accepts the neo-Walrasian axiom set with these hardcore propositions: “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)
It is a primitive methodological error/mistake/blunder to take equilibrium into the premises and then to establish and discuss the properties of general equilibrium. This error/mistake/blunder — known since antiquity as petitio principii #1 — is an age-old characteristic of incompetent scientists or savants: “These savants, as Galileo put it, first decided how the world should function in accordance with their preconceived principles. ... He openly criticized scientists and philosophers who accepted laws which conformed to their preconceived ideas as to how nature must behave. Nature did not first make men’s brains, he said, and then arrange the world so that it would be acceptable to human intellects.” (Kline, 1982)
The methodologically correct way is to give a description of the interrelationships of fundamental economic magnitudes and then to see how this elementary system behaves. Logically, there are three possibilities: explosion, implosion, or steady-state/equilibrium and we CANNOT KNOW at the beginning of the analysis what the outcome will be. Intuition is a bad guide because the rates of change of an explosion/implosion may be so small as to be practically imperceptible. Because of this, we are ― as a matter of methodological principle ― NOT allowed to take one of the three possible outcomes into the premises. Note, that the physicists had the same problem with the universe.#2
The key question that stands at the beginning of economics is in Keynes’ words: “... is the existing economic system in any significant sense self-adjusting.” This question has to be answered and not circumvented by putting the answer into the premises.
When the methodologically correct route is taken, then it turns out that the monetary economy is, in fact, unstable, that is, NO such thing as an equilibrium exists, neither in the short nor in the long run.#3
The right thing to do is throw the neo-Walrasian axiom set and all its NONENTITIES without further ado out of the window and to move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations and to NEVER use the word equilibrium in an economic text again.
Egmont Kakarot-Handtke
#1 Wikipedia
#2 See the story of the cosmological constant and Einstein’s “biggest blunder”
#3 Could we, please, all focus on the key question of economics?
Related 'Equilibrium is a NONENTITY like dancing angels on a pinpoint' and 'Ground Control to David Glasner' and 'Major Defects of the Market Economy'.
For more about why the economy is not self-adjusting see AXECquery.