Sunday, July 22, 2012

Does General Equilibrium Theory Make Economics a Hard Science or a Fantasy?

Lars P. Sylls Blog carried a post on “Why general equilibrium economics is a dead end” by Franklin M. Fisher
(21 July, 2012) HERE
Almost a century and a half after Léon Walras founded general equilibrium theory, economists still  have not been able to show that markets lead economies to equilibria.
We do know that – under very restrictive assumptions – equilibria do exist, are unique and are Pareto-efficient.
But after reading Franklin M. Fisher‘s masterly article The stability of general equilibrium – what do we know and why is it important? one has to ask oneself  – what good does that do?
As long as we cannot show, except under exceedingly special assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria - the value of general equilibrium theory is nil.  As long as we can not really demonstrate that there are forces operating – under reasonable, relevant and at least mildly realistic conditions – at moving markets to equilibria, there can not really be any sustainable reason for anyone to pay any interest or attention to this theory.
A stability that can only be proved by assuming “Santa Claus” conditions is of no avail. Most people do not believe in Santa Claus anymore. And for good reasons. Santa Claus is for kids, and general equilibrium economists ought to grow up, leaving their Santa Claus economics in the dustbin of history.
Continuing to model a world full of agents behaving as economists – “often wrong, but never uncertain” – and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume"
I am inclined to agree with the above comment/review by Lars Sylls, from his Blog and with the reported skepticism of Franklin M. Fisher about the value of theories of general equilibrium as taught in neoclassical economics departments. The relatively simple maths (to physics majors) of economics allegedly ‘prove’ to social science majors at least that economics is a hard science and worthy of the admiration of real scientists.  It certainly can be hard for less numerate students but whether it is a real science is another matter. There are reports of physicists smiling indulgently at such claims by some economists.
Mathematically minded economists, in my experience seldom indulge their fellow economists who prefer to study the real world rather than the imaginary world of general equilibrium.  Adam Smith, no mean mathematician himself – it was his favourite subject at Glasgow University and afterwards – studiously avoided applying his mathematical skills to his treatment of political economy. Hence he did not make presumptions about aspects of general equilibrium applying to his approach to Wealth Of Nations.
Franklin M. Fisher appears to agree coming at general equilibrium from another angle – it is disconnectedfrom the real economy. Lars P. Sylls also seems to be skeptical of its value too. So do I.


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