FROM THE ARCHIVES

David Warsh posts (10 August, 2014) HERE

“The Startling Story behind a Famous Footnote”

 “Progress is a slippery word; but none can doubt that price theory, the preoccupation with markets that historically has at the heart of economics, has seen a great deal of elaboration in the least 75 years.  Jerry Green, of Harvard University, gave a graphic illustration when he travelled to Middlebury Colllege last fall to give a lecture on the history of the discipline. He carried with him a series of graduate micro texts.

He held up Microeconomic Theory: A Mathematical Approach, by James Henderson and Richard Quandt, the slim book (291 pp.) with which he began his graduate education in the 1960s. H&Q had made waves when it first appeared in 1958, Green noted. Earlier texts – The Theory of Price, by George Stigler, say, or Economic Analysis, by Kenneth Boulding -- derived mainly from Alfred Marshall’s 1890 classic, Principles of Economics. These literary expositions bristled with diagrams, but there were no equations. 

H&Q was just the beginning. In rapid order came Edmond Malinvaud’s Lectures in Microeconomic Theory (1972) and, in 1978, Hal Varian’s Microeconomic Analysis. In 1990 David Kreps introduced game theory and decision theory to the curriculum with A Course in Microeconomic Theory (850 pp.). The current best-seller, Microeconomic Theory, by Andreu Mas-Colell, Michael D. Whinston, and Harvard’s Green followed in 1995 (981 pp.). The first volume (584 pp) of Kreps’ magnum opus  Microeconomic Foundations appeared in 2012, dealing mainly with choice and competitive markets. Kreps promises a second volume on game theory and strategy and a third treating various advanced topics of incentives.

Understand, this is not really about textbooks at all.  The growth of knowledge has produced a series of correlative jobs in the world itself, not just teaching competition and cooperation in university departments and business schools, but  practicing in government offices, law firms, courts, and consultancies around the world. If it is regulated – or deregulated, unregulated, or re-regulated – it is a matter of microeconomics.

What happened? The post-war mathematization of economics stems in general from two epochal works, Foundations of Economic Analysis (1947), by Paul Samuelson, and, with a lag, The Theory of Games and Economic Behavior (1944), by John von Neumann and Oskar Morgenstern. But books are advertisements for particular programs seeking concrete results.  One mathematical adventure more than any other is said to underlay the expansion of microeconomics in the second half of the twentieth century: the proof, in 1952 or ’53 or ’54, of the existence of a competitive general equilibrium.

It had been intuitively obvious since Adam Smith that, in an economic system, everything depends on everything else, and thought possible, since Leon Walras, to calculate and measure such a system – in other words, to produce a blueprint to test against the world.  But proving that such a coherence is possible in the first place in a world of many competing individuals was the necessary first step to describing it in detail.  And, as Mas-Colell, of Pompeu Fabra Univesity, in Barcelona, has put it, the existence proof was “the door that opens into the house of analysis”

Comment

The mathematical proof of “General Equilibrium” operating in the real world required highly restrictive assumptions, acceptable to some economists, but not a proof of how GE could exist in the real world. If the assumptions do not or cannot exist in the real world the assertions remain tentative at best or irrelevant.

While rightly celebrated among mathematical economists GE receives scepticism from practical economists.

“It had been intuitively obvious since Adam Smith that, in an economic system, everything depends on everything else, and thought possible, since Leon Walras (1801-1866) to calculate and measure such a system” but when GE is tested “against the world” it “produces a blueprint” of an imaginary, fanstasy world an one we do not live in.

The assumptions to make models of General Equilibrium work are not characteristic of a “real world”.  In the decades since Walras postulated the possibility of GE to model the real world, nobody has shown how GE represents the real world.

Reality is messy. Economies are untidy. Markets do not operating to the same schedules. Human organisations are open, not closed systems; the product cycles are not synchronised as second and third-hand (plus) markets demonstrate.

I believe Romer is realising these truths in economics - with more eloquence than I can muster - and so are particle physicists, the most mathematical of all who deal with models closer the reality than economics and with the advantage that particles do not depend on humans for their behaviours. 

Long after the extinction of the last human on Earth, hopefully after many millennia to come, those known and as yet unknown particles of matter will continue doing what they have always done, as if we had never happened - and to be fair, our time since we evolved will be but a blink of an eye.