Economic Theory

 Introduction

My view on economic theory isn’t quite as dire as this image would suggest, but it’s pretty close. Things are improving on some fronts, but I think the image is still apt for a lot of what is published.

Economic theory is obviously an extensive field, so my intention on this page is not to survey it, but rather to highlight some of the resources I’ve found most useful in wading through it. I haven’t listed the standard graduate texts because they’re, well, standard, and they will be either familiar or easily discovered. I have tried instead to list resources and to provide interesting quotes from sources that standard courses might miss.

The economics profession is frequently criticised by non-economists – often (but not always) with good reason. But my overall impression is that while there have been plenty of criticisms of economics from outside the discipline, they are not nearly as powerful as those generated from within the discipline itself. Scattered throughout the economic literature over more than 110 years are hundreds of papers published in the top mainstream economics journals which critique different aspects of the dominant Walrasian / neoclassical / general-equilibrium framework. Together they amount to a comprehensive rebuttal of any simplistic notion that either standard textbook neoclassical theory, or the policy models based on it, give an adequate account of real-world complex economic systems.

The scope and power of the critique from within the economics discipline is both encouraging and frustrating. It is encouraging to realise that so many of the top economists have been fully aware of the very substantial limitations of much economic theory. Economics is certainly not the moribund, dismal field it is often made out to be – it is alive with dissent, self-criticism and innovation. But it is also frustrating that so little of that nuanced humility (not a humility universally shared by all top economists I might add), filters down to the textbooks, and still less to many of the models used for policy analysis, where real people’s livelihoods and lives are at stake. By the time it reaches the market fundamentalist hacks who staff so many of the right-wing think tanks, the last dregs of that humility have disappeared altogether. Blissfully unaware of how the top economists have wrestled with the immense complexity of our economic system, the hacks inhabit a world untroubled by complexity, nuance or shades of grey: Whatever the question, ‘the Market’ is their answer. Spurred on by the simplistic models they remember from Econ 101, in which governments do not exist, and yet contracts are costlessly enforced, market power is absent, information is costless and perfect, and tax is always and only a ‘burden’, they yearn for government to just get smaller and get out of the way.

Meanwhile, back on Earth, real-world economics is complex. Properly functioning markets don’t exist without legal, political and social underpinnings. If only it were taught that way. Personally, I think we’d all be far better off if undergrad economics was taught primarily through detailed case-studies and taxonomies of real-world markets, institutions and economic systems, and general theories were built up from there. Some of the simple models are useful for teaching, but they should come with warning labels and students should be taught not only the models but the very restrictive circumstances under which most of them can be applied to the real world. In general it may be better to leave the modelling for later, when the more advanced students have the tools to model complex systems properly. Most undergrad/college students never get beyond the simple models and are often not taught their limitations, as a result they are adversely affecting public economics education and public policy debate. Many economics students end up only studying (and believing) the models rather than real-world economies.

There also seems to be a widespread view in parts of the profession and among many students, that pretty much everything we need to know from the past has already been incorporated into modern textbooks. It’s very similar to the view that that all the important past information on a stock is reflected in its current price. Don’t believe it. There is plenty of gold in some of the older books and papers that is not so readily mathematised and which, as a result, has been forgotten by many modern textbooks. That’s why several of the books and papers listed below are decades old.

I still find it amazing that so much of the material below, mostly from the mainstream economic literature, seems to be so little reflected in modern economics education and the views of many policy economists. Maybe my impressions are wrong. I hope so. But maybe not. In a survey of top US grad school students conducted over 2001-2003 by David Colander, 51% of students thought that having a thorough knowledge of the economy was ‘unimportant’ for success in economics, and only 11% thought that having a broad knowledge of the economics literature was ‘very important’*. Either these students are right, in which case I worry about the profession, or they’re wrong, in which case I worry about the economics education system that would lead them to hold those views.

Still, I am optimistic overall. Over the last 30 years there has been a gradual but widespread awakening among top economists to the enormous theoretical and practical challenges involved in understanding economies as complex systems, and a moving away from simplistic toy models that rely on single representative agents, perfect competition, complete markets, aggregate capital and production functions, perfect information, and so on. Now we just need the policy models to catch up, and for that more nuanced understanding of how economies work to filter into public policy debates. The public policy challenges we are facing are enormous, particularly in the areas of climate change, economic development and energy so this needs to happen as quickly as possible. Time is short. My personal view is that agent-based models offer the most viable framework for simultaneously incorporating the theoretical advances made over the past 30 years. But whatever framework we choose, the models used to guide public policy need to take into account simultaneously the theoretical advances and challenges highlighted below.

* Colander, D., (2005) “The Making of an Economist Redux“, Journal of Economic Perspectives, Vol. 19, No. 1, Winter, pp. 175-198; p. 181

Books

Papers & Chapters

Quotes Topics:
General
The Sonnenschein-Mantel-Debreu results – You may never hear of them, even in grad school, but their implications are huge.
The pitfalls of aggregation – There are many and the pit is deep.
Total Factor Productivity (TFP) – Could one of the most common economic meaures be nonsense?
Perfect competition – Most real-world markets don’t come close.
Equilibrium & General Equilibrium Theory – The mothership of economic policy models.
Disequilibrium & approaching equilibrium – The gaping hole at the heart of economic theory.
Multiple equilibria – They’re the rule – not the exception.
Comparing equilibria vs. modelling disequilibrium dynamics – A clue: They’re not the same.
Comparative statics – One of the standard methods of policy analysis has feet of clay.
Imperfect information – It changes everything.
Uncertainty – As above, but more so.
Incomplete markets – They routinely yield multiple equilibria.
What kind of mathematics? – A clue: Are prices and quantities best defined over the integers, or the larger set of real numbers?
Consumer preferences – They’re not exogenous (determined outside and apart from the workings of the economy)
The rationality & computational capacities of economic agents – Does it matter if people have limited computational capacities or aren’t perfectly rational?
Increasing returns – More than just production specifications.

Links

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Books

Arthur, W.B., Durlauf, S.N. and Lane, D.A. (Eds.), (1997) The Economy as an Evolving Complex System II, Santa Fe Institute Studies in the Sciences of Complexity; Westview Press, Boulder, xiii + 583 pp.

Auyang, S.Y., (1998) Foundations of Complex System Theories: In Economics, Evolutionary Biology and Statistical Physics, Cambridge University Press, Cambridge, New York, Melbourne & Madrid, xii + 404 pp.

Batten, D.F., (2000) Discovering Artificial Economics: How Agents Learn and Economies Evolve, Westview Press, Boulder and Oxford, xxi + 314 pp.

Colander, D. (Ed.) (1996) Beyond Microfoundations: Post Walrasian Macroeconomics, Cambridge University Press, Cambridge & New York, xiii + 266 pp.

Colander, D. (Ed.) (2006) Post Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model, Cambridge University Press, Cambridge, xxi + 416 pp.

Colander, D., Holt, R.P.F. and Rosser, J.B., Jr., (2004) The Changing Face of Economics: Conversations with Cutting Edge Economists, University of Michigan Press, Ann Arbor, x + 358 pp.

Commons, J.R., (1924) Legal Foundations of Capitalism, Transaction Publishers reprint, 1995, New Brunswick, NJ; Originally published by Macmillan, xxxvi+394 pp.

Commons, J.R., (1934) Institutional Economics: Its Place in Political Economy, 2 vols; Transaction Publishers reprint, 1990, New Brunswick, NJ; Originally published by Macmillan, xxxvii + 921 pp.

Das, S., (2008) Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives, Financial Times Prentice Hall, Harlow, UK, xiv + 334 pp.

DeCanio, S.J., (2003) Economic Models of Climate Change: A Critique, Palgrave Macmillan, New York & Houndmills, Basingstoke, UK, xiii + 203 pp.
[I cannot recommend this book highly enough. DeCanio displays a deep understanding of the complexities of economic theory and of the limitations of models built upon that body of theory. Anyone involved in climate policy or even general economic policy should read it and absorb its lessons.]

Dopfer, K. (Ed.) (2005) The Evolutionary Foundations of Economics, Cambridge University Press, Cambridge, xiii + 577 pp.

Fisher, F.M., (1983) Disequilibrium Foundations of Equilibrium Economics, Cambridge University Press, Cambridge & New York, xi + 236 pp.

Forni, M. and Lippi, M., (1997) Aggregation and the Microfoundations of Dynamic Macroeconomics, Oxford University Press, Oxford, xvii + 235 pp.

Fullbrook, E. (Ed.) (2004) A Guide to What’s Wrong with Economics, Anthem Press, London, vii + 323 pp.

Harcourt, G.C., (1972) Some Cambridge Controversies in the Theory of Capital, Cambridge University Press, Cambridge, x + 272 pp.

Hartley, J.E., (1997) The Representative Agent in Macroeconomics, Routledge, London & New York, x + 229 pp.

Hodgson, G.M., (2001) How Economics Forgot History: The Problem of Historical Specificity in Social Science, Routledge, London & New York, xix + 422 pp.

Ingrao, B. and Israel, G., (1990) The Invisible Hand: Economic Equilibrium in the History of Science, trans. McGilvray, I.; MIT Press, Cambridge, MA & London, xiii + 491 pp. [Shows clearly what assumptions need to hold true for the invisible hand to work as it’s supposed to.]

Keen, S., (2011) Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned?, Zed Books, London & New York, xviii + 478 pp.

Keynes, J.M., (1936) The General Theory of Employment, Interest and Money, 1973 Edition; The Collected Writings of John Maynard Keynes, Vol. VII; Macmillan Press for the Royal Economic Society, London, xxxv + 428 pp.

Knight, F.H., (1921) Risk, Uncertainty and Profit, Reprinted 2002 by Board Books, Washington DC; Originally published by Hart, Schaffner & Marx, lxvi + 381 pp.

Leijonhufvud, A., (1968) On Keynesian Economics and the Economics of Keynes, Oxford University Press, New York & London, xiv + 431 pp.

Lindert, P., (2004) Growing Public: Social Spending and Economic Growth Since the Eighteenth Century, Cambridge University Press, Cambridge, New York, Melbourne, Madrid, Cape Town, Vol. 1, xvii + 377 pp.

List, F., (1856) The National System of Political Economy, trans. from the German by G. A. Matile. Including the notes of the French translation by Henri Richelot. With a preliminary essay and notes by Stephen Colwell; JB Lippincott & Co., Philadelphia, v-lxxxiv + 61-497 pp.

McCloskey, D.N., (2000) How to be Human* *Though an Economist, University of Michigan Press, Ann Arbor, 287 pp.

McMillan, J., (2002) Reinventing the Bazaar: A Natural History of Markets, W.W. Norton & Co., New York, x + 278 pp.

Metcalfe, J.S. and Foster, J. (Eds.), (2004) Evolution and Economic Complexity, Edward Elgar, Cheltenham, UK & Northampton, MA, xix + 227 pp.

Minsky, H.P., (1982) Can “It” Happen Again? Essays on Instability and Finance, ME Sharpe, New York, xxiv + 301 pp.

Minsky, H.P., (1986) Stabilizing an Unstable Economy, Yale University Press, New Haven, CN, xiv + 353 pp.

Mirowski, P., (1989) More Heat than Light: Economics as Social Physics: Physics as Nature’s Economics, Cambridge University Press, Cambridge, New York & Melbourne, xii + 450 pp.

Mirowski, P., (2002) Machine Dreams: Economics Becomes a Cyborg Science, Cambridge University Press, Cambridge, New York & Melbourne, xiv + 655 pp.

Nelson, R.R. and Winter, S.G., (1982) An Evolutionary Theory of Economic Change, Belknap Press of Harvard University Press, Cambridge MA, xi + 437 pp.

Ormerod, P., (1994) The Death of Economics, Faber & Faber Ltd., London, x + 230 pp.

Ormerod, P., (1998) Butterfly Economics, Faber & Faber Ltd., London, xv + 217 pp.

Potts, J., (2000) The New Evolutionary Microeconomics: Complexity, Competence and Adaptive Behaviour, New Horizons in Institutional and Evolutionary Economics; Edward Elgar, Cheltenham, UK and Northampton, MA, xii + 239 pp.

Schumpeter, J.A., (1934) The Theory of Economic Development: An Enquiry into Profits, Capital, Credit, Interest and the Business Cycle, Transaction Publishers reprint, 1983, New Brunswick NJ & London; originally published by Harvard University Press, trans. from the 2nd German edition of 1926 by Redvers Opie, lxiv + 255 pp.

Schumpeter, J.A., (1950) Capitalism, Socialism and Democracy, 3rd Edition; Harper, New York, xiv + 431 pp.

Steedman, I., (2001) Consumption Takes Time: Implications for Economic Theory, Graz Schumpeter Lectures, 4; Routledge, London, 184 pp.

Tesfatsion, L. and Judd, K.L. (Eds.), (2006) Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics, North-Holland, Amsterdam, Boston & London, xxx + pp. 829-1660 pp.

Velupillai, K.V., (2000) Computable Economics, The Arne Ryde Memorial Lecture Series; Oxford University Press, Oxford and New York, xi + 222 pp.

Velupillai, K.V. (Ed.) (2005) Computability, Complexity and Constructivity in Economic Analysis, Blackwell, Oxford & Malden, MA, viii + 324 pp.

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Papers & Chapters

** Highly recommended.

Ackerman, F., (2002) “Still Dead after All These Years: Interpreting the Failure of General Equilibrium Theory”, Journal of Economic Methodology, Vol. 9, No. 2, June, pp. 119-139.

Akerlof, G.A. and Yellen, J., (1985) “Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?” American Economic Review, Vol. 75, No. 4, September, pp. 708-720. [Answer: Yes]

** Arrow, K.J., (1987) “Economic Theory and the Hypothesis of Rationality”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; MacMillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 2 pp. 69-75. Reprinted from Journal of Business, 1986, Vol. 59, No. 4, Pt. 2.

Arthur, W.B., (1990) “Positive Feedbacks in Economics”, Scientific American, Vol. 262, No. 2, February, pp. 80-85.

Arthur, W.B., (1991) “Designing Economic Agents that Act Like Human Agents: A Behavioral Approach to Bounded Rationality”, American Economic Review, Vol. 81, No. 2, May, pp. 353-359.

** Boulanger, P.-M. and Bréchet, T., (2005) “Models for Policy-Making in Sustainable Development: The State of the Art and Perspectives for Research”, Ecological Economics, Vol. 55, No. 3, 15 November, pp. 337-350.

Bowles, S. and Gintis, H., (1988) “Contested Exchange: Political Economy and Modern Economic Theory”, American Economic Review, Vol. 78, No. 2, May, pp. 145-150.

Bowles, S. and Gintis, H., (1992) “Power and Wealth in a Competitive Capitalist Economy”, Philosophy and Public Affairs, Vol. 21, No. 4, Autumn, pp. 324-353.

Bowles, S. and Gintis, H., (1993) “The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy”, Journal of Economic Perspectives, Vol. 7, No. 1, Winter, pp. 83-102.

Bowles, S. and Gintis, H., (2000) “Walrasian Economics in Retrospect”, Quarterly Journal of Economics, Vol. 115, No. 4, November, pp. 1411-1439.

Blundell, R. and Stoker, T.M., (2005) “Heterogeneity and Aggregation”, Journal of Economic Literature, Vol. 43, No. 2, June, pp. 347-391.

Clower, R.W., (1994) “Economics as an Inductive Science”, Southern Economic Journal, Vol. 60, No. 4, April, pp. 805-814.

** Clower, R.W., (1995) “Axiomatics in Economics”, Southern Economic Journal, Vol. 62, No. 2, October, pp. 307-319.

Colander, D., Holt, R.P.F. and Rosser, J.B., Jr., (2004) “The Changing Face of Mainstream Economics”, Review of Political Economy, Vol. 16, No. 4, October, pp. 485-499.

** Cohen, A.J. and Harcourt, G.C., (2003) “Whatever Happened to the Cambridge Capital Theory Controversies?” Journal of Economic Perspectives, Vol. 17, No. 1, Winter, pp. 199-214.

** Cohen, A.J. and Harcourt, G.C., (2005) “Capital Theory Controversy: Scarcity, Production, Equilibrium and Time”, In Capital Theory ed. Bliss, C., Cohen, A.J. and Harcourt, G.C.; Edward Elgar, Cheltenham & Northampton, MA, Vol. 1, pp. xxvii-lx.

Conlisk, J., (1996) “Why Bounded Rationality?” Journal of Economic Literature, Vol. 34, No. 2, June, pp. 669-700.

da Costa, N.C.A. and Doria, F.A., (1994) “Gödel Incompleteness in Analysis, with an Application to the Forecasting Problem in the Social Sciences”, Philosophia Naturalis, Vol. 31, pp. 1-24.

Debreu, G., (1974) “Excess Demand Functions”, Journal of Mathematical Economics, Vol. 1, No. 1, March, pp. 15–23.

Dillard, D., (1988) “The Barter Illusion in Classical and Neoclassical Economics”, Eastern Economic Journal, Vol. 14, No. 4, October-December, pp. 299-318.

Dorman, P., (2001) “Waiting for an Echo: The Revolution in General Equilibrium Theory and the Paralysis in Introductory Economics”, Review of Radical Political Economics, Vol. 33, No. 3, Summer, pp. 325-333.

Fehr, E. and Tyran, J.-R., (2005) “Individual Irrationality and Aggregate Outcomes”, Journal of Economic Perspectives, Vol. 19, No. 4, Fall, pp. 43-66.

Felipe, J. and Holz, C.A., (2001) “Why do Aggregate Production Functions Work? Fisher’s Simulations, Shaikh’s Identity and Some New Results”, International Review of Applied Economics, Carfax Publishing Company, July, Vol. 15 261-285 pp.

Felipe, J. and McCombie, J.S.L., (2001) “The CES Production Function, the Accounting Identity, and Occam’s Razor”, Applied Economics, Vol. 33, No. 10, August, pp. 1221-1232.

** Felipe, J. and Fisher, F.M., (2003) “Aggregation in Production Functions: What Applied Economists Should Know”, Metroeconomica, Vol. 54, No. 2-3, May-September, pp. 208-262.

Felipe, J. and McCombie, J.S.L., (2004) “To Measure or Not To Measure TFP Growth? A Reply to Mahadevan”, Oxford Development Studies, Vol. 32, No. 2, June, pp. 321-327.

Felipe, J. and McCombie, J.S.L., (2006) “The Tyranny of the Identity: Growth Accounting Revisited”, International Review of Applied Economics, Vol. 20, No. 3, July, pp. 283-299.

** Fisher, F.M., (1987) “Adjustment Processes and Stability”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; MacMillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 1, pp. 26-29.

** Fisher, F.M., (1987) “Aggregation Problem”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; MacMillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 1, pp. 53-55.

Fisher, F.M., (1989) “Stability Analysis in Micro and Macro Theory: An Interview”, In Joan Robinson and Modern Economic Theory ed. Feiwel, G.R.; New York University Press, New York, pp. 311-322.

Fisher, F.M., (2003) “Disequilibrium and Stability”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 74-94.

** Foster, J., (1998) “Abstraction in Economics: Incorporating the Time Dimension”, International Journal of Social Economics, Vol. 25, No. 2-4, pp. 146-167.

** Foster, J., (2005) “From Simplistic to Complex Systems in Economics”, Cambridge Journal of Economics, Vol. 29, No. 6, November, pp. 873-892.

Frey, B.S. and Stutzer, A., (2002) “What Can Economists Learn from Happiness Research?” Journal of Economic Literature, Vol. 40, No. 2, June, pp. 402-435.

Greenwald, B.C. and Stiglitz, J.E., (1986) “Externalities in Economies with Imperfect Information and Incomplete Markets”, Quarterly Journal of Economics, Vol. 101, No. 2, May, pp. 229-264.

** Hahn, F.H., (1982) “Reflections on the Invisible Hand”, Lloyds Bank Review, No. 144, April, pp. 1-21.

** Hahn, F.H., (1991) “The Next Hundred Years”, Economic Journal, Vol. 101, No. 404, January, pp. 47-50.

Hahn, F.H., (1994) “An Intellectual Retrospect”, Banca Nazionale del Lavoro Quarterly Review, Vol. 47, No. 190, September, pp. 245-258.

Harper, D.A. and Endres, A.M., (2010) “Capital as a Layer Cake: A Systems Approach to Capital and its Multi-Level Structure”, Journal of Economic Behavior & Organization, Vol. 74, No. 1-2, May, pp. 30-41.

** Hayek, F.A., (1937) “Economics and Knowledge”, Economica, Vol. 4, No. 13, February, pp. 33-54.

** Hayek, F.A., (1945) “The Use of Knowledge in Society”, American Economic Review, Vol. 35, No. 4, September, pp. 519-530.

** Kaldor, N., (1972) “The Irrelevance of Equilibrium Economics”, Economic Journal, Vol. 82, No. 328, December, pp. 1237-1255.

** Kaldor, N., (1975) “What Is Wrong with Economic Theory”, Quarterly Journal of Economics, Vol. 89, No. 3, August, pp. 347-357.

Keen, S., (1993) “Use-Value, Exchange Value, and the Demise of Marx’s Labor Theory of Value”, Journal of the History of Economic Thought, Vol. 15, No. 1, Spring, pp. 107-121.

Keen, S., (1995) “Finance and Economic Breakdown: Modeling Minsky”, Journal of Post Keynesian Economics, Vol. 17, pp. 607–635.

Keen, S., (1997) “From Stochastics to Complexity in Models of Economic Instability”, Nonlinear Dynamics, Psychology, and Life Sciences, Vol. 1, No. 2, April, pp. 151-172.

Kehoe, T.J., (1985) “Multiplicity of Equilibria and Comparative Statics”, Quarterly Journal of Economics, Vol. 100, No. 1, February, pp. 119-147.

** Kehoe, T.J., (1987) “Comparative Statics”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; MacMillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 1 pp. 517-521.

Kehoe, T.J., (1998) “Uniqueness and Stability”, In Elements of General Equilibrium Analysis ed. Kirman, A.P.; Blackwell Publishers, Oxford, pp. 38-87.

Kehoe, T.J., (2005) “An Evaluation of the Performance of Applied General Equilibrium Models on the Impact of NAFTA”, In Frontiers in Applied General Equilibrium Modeling: In Honor of Herbert Scarf ed. Kehoe, T.J., Srinivasan, T.N. and Whalley, J.; Cambridge University Press, Cambridge & New York, pp. 341-377.

Keynes, J.M., (1937) “The General Theory of Employment”, Quarterly Journal of Economics, Vol. 51, No. 2, February, pp. 209-223.

** Kirman, A.P., (1989) “The Intrinsic Limits of Modern Economic Theory: The Emperor Has No Clothes”, Economic Journal, Vol. 99, No. 395, Supplement, pp. 126-139.

** Kirman, A.P., (1992) “Whom or What Does the Representative Individual Represent?” Journal of Economic Perspectives, Vol. 6, No. 2, Spring, pp. 117-136.

Kirman, A.P., (1997) “The Economy as an Evolving Network”, Journal of Evolutionary Economics, Vol. 7, No. 4, December, pp. 339-353.

Kirman, A.P., (1997) “The Economy as an Interactive System”, In The Economy as an Evolving Complex System II ed. Arthur, W.B., Durlauf, S.N. and Lane, D.A.; Westview Press, Boulder, pp. 491-531.

Kirman, A.P., (2003) “General Equilibrium: Problems, Prospects and Alternatives: An Attempt at Synthesis”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 468-485.

Kirman, A.P., (2004) “Economics and Complexity”, In Industry and Labor Dynamics: The Agent-Based Computational Approach, Proceedings of the Wild@Ace2003 Workshop, Torino, Italy, 3-4 October, 2003 ed. Leombruni, R. and Richiardi, M.; World Scientific, Singapore, Hackensack, NJ & London, pp. 3-21.

Kirman, A.P. and Koch, K.J., (1986) “Market Excess Demand in Exchange Economies with Identical Preferences and Collinear Endowments”, Review of Economic Studies, Vol. 53, No. 3, July, pp. 457-463.

Lee, F.S. and Keen, S., (2004) “The Incoherent Emperor: A Heterodox Critique of Neoclassical Microeconomic Theory”, Review of Social Economy, Vol. 62, No. 2, June, pp. 169-199.

** Leijonhufvud, A., (1973) “Life Among the Econ”, Western Economic Journal, Vol. 11, No. 3, September, pp. 327-337.

Leijonhufvud, A., (1999) “Microfoundations: Adaptive or Optimizing?” In Money, Markets and Method: Essays in Honour of Robert W. Clower ed. Howitt, P., de Antoni, E. and Leijonhufvud, A.; Edward Elgar, Cheltenham, UK & Northampton, MA, pp. 23-36.

Lewis, A.A., (1985) “On Effectively Computable Realizations of Choice Functions”, Mathematical Social Science, Vol. 10, No. 1, August, pp. 43-80.

Lewis, A.A., (1992) “On Turing Degrees of Walrasian Models and a General Impossibility Result in the Theory of Decision-Making”, Mathematical Social Sciences, Vol. 24, No. 2-3, November, pp. 141-171.

Lewis, A.A., (1992) “Some Aspects of Effectively Constructive Mathematics That Are Relevant to the Foundations of Neoclassical Mathematical Economics and the Theory of Games”, Mathematical Social Sciences, Vol. 24, No. 2-3, November, pp. 209-235.

Little, D., (1995) “Economic Models in Development Economics”, In On the Reliability of Economic Models: Essays in the Philosophy of Economics ed. Little, D.; Kluwer Academic Publishers, Boston, Dordrecht & London, pp. 243-270.

** Lipsey, R.G. and Lancaster, K., (1956-1957) “The General Theory of Second Best”, Review of Economic Studies, Vol. 24, No. 1, pp. 11-32.

Mantel, R.R., (1974) “On the Characterization of Aggregate Excess Demand”, Journal of Economic Theory, Vol. 7, No. 3, March, pp. 348–353.

Mantel, R.R., (1976) “Homothetic Preferences and Community Excess Demand Functions”, Journal of Economic Theory, Vol. 12, No. 2, April, pp. 197-201.

McCauley, J.L., (2000) “The Futility of Utility: How Market Dynamics Marginalize Adam Smith”, Physica A, Vol. 285, No. 3-4, 1 October, pp. 506-538.

McCauley, J.L., (2001) “Neo-Classical Theory of Competition or Adam Smith’s Hand as Mathematized Ideology”, Physica A, Vol. 299, No. 1-2, 1 October, pp. 294-298.

McCauley, J.L., (2002) “Adam Smith’s Invisible Hand is Unstable: Physics and Dynamics Reasoning Applied to Economic Theorizing”, Physica A, Vol. 314, No. 1-4, 1 November, pp. 722-727.

McCloskey, D.N. and Ziliak, S.T., (1996) “The Standard Error of Regressions”, Journal of Economic Literature, Vol. 34, No. 1, March, pp. 97-114.

Metcalfe, J.S., Foster, J. and Ramlogan, R., (2006) “Adaptive Economic Growth”, Cambridge Journal of Economics, Vol. 30, No. 1, January, pp. 7-32.

Minsky, H.P., (1978) “The Financial Instability Hypothesis: A Restatement”, Thames Papers in Political Economy, Autumn; Reprinted in Minsky, H.P., (1982) Can “It” Happen Again? Essays on Instability and Finance, ME Sharpe, New York, pp. 90-116.

Minsky, H.P., (1986) “The Evolution of Financial Institutions and the Performance of the Economy”, Journal of Economic Issues, Vol. 20, No. 2, June, pp. 345-353.

Minsky, H.P., (1990) “Schumpeter: Finance and Evolution”, In Evolving Technology and Market Structure: Studies in Schumpeterian Economics ed. Heertje, A. and Perlman, M.; Michigan University Press, Ann Arbor, MI, pp. 51-74.

Minsky, H.P., (1992) “The Financial Instability Hypothesis“, Working Paper No. 74, Jermoe Levy Economics Institute, May, 9 pp.

Minsky, H.P., (1996) “Uncertainty and the Institutional Structure of Capitalist Economies”, Journal of Economic Issues, Vol. 30, No. 2, June, pp. 357-368.

Mirowski, P., (1989) “The Measurement Without Theory Controversy: Defeating Rival Research Programs by Accusing them of Naive Empiricism”, Économies et Sociétés, Série Oeconomia, No. 11, June, pp. 65-87.

Mirowski, P., (1989) “The Probabilistic Counter-Revolution, or How Stochastic Concepts Came to Neoclassical Economic Theory”, Oxford Economic Papers, Vol. 41, No. 1, January, pp. 217-235.

** Mirowski, P., (1989) “The Rise and Fall of the Concept of Equilibrium in Economic Analysis”, Recherches Economiques de Louvain, Vol. 55, No. 4, pp. 447-468.

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** Radner, R., (1968) “Competitive Equilibrium Under Uncertainty”, Econometrica, Vol. 36, No. 1, January, pp. 31-58.

Radner, R., (1970) “Problems in the Theory of Markets under Uncertainty”, American Economic Review, Vol. 60, No. 2, May, pp. 454-460.

Radner, R., (1996) “Bounded Rationality, Indeterminacy, and the Theory of the Firm”, Economic Journal, Vol. 106, No. 438, September, pp. 1360-1373.

** Rizvi, S.A.T., (1994) “The Microfoundations Project in General Equilibrium Theory”, Cambridge Journal of Economics, Vol. 18, No. 4, August, pp. 357-377.

Rizvi, S.A.T., (1994) “Game Theory to the Rescue?” Contributions to Political Economy, Vol. 13, pp. 1-28.

Romer, P., (2016) “The Trouble With Macroeconomics“, Unpublished Paper, New York, Stern School of Business, New York University, 14th September, 25 pp.

Rosser, J.B., Jr., (1999) “On the Complexities of Complex Economic Dynamics”, Journal of Economic Perspectives, Vol. 13, No. 4, Fall, pp. 169-192.

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** Young, A., (1928) “Increasing Returns and Economic Progress”, Economic Journal, Vol. 38, pp. 527-542.

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Quotes

General

Is economics a ‘science’?
“In a subject where there is no agreed procedure for knocking out errors, doctrines have a long life.”
Joan Robinson in Robinson, J., (1962) Economic Philosophy, Pelican Edition, Harmondsworth, 1964, first published by C. A. Watts, London, 140 pp.

On the real-world robustness of the efficient-market ‘invisible-hand’ theorem from a Nobel-prize winning economist
“The general educated and interested public thinks that economics has “proved” that “the free market is efficient”, perhaps even the best of all possible worlds. Not one reader in a thousand of the Wall Street Journal has any grasp of the qualifications without which the theorem, as a theorem, is simply false. That would hardly matter if the necessary assumptions were self-evidently true or even genuinely plausible to any open-minded observer. They are neither. Nor do even sophisticated economists have any real grasp of the robustness of the theorem: I do not know of any convincing story, either way, about whether an economy that differs from the abstract economy about as much as ours does comes even close to satisfying the conclusion of the Invisible Hand Theorem.”
Nobel Prize winning economist Robert Solow in Solow, R.M., (1989) “How Economic Ideas Turn to Mush”, In The Spread of Economic Ideas ed. Colander, D. and Coats, A.W.; Cambridge University Press, Cambridge & New York, pp. 75-83; p. 77.

The invisible hand theorem is fragile in the presence of market power
“When market power is present the Smithian vision of the invisible hand is lost. Instead of the machine-like responses of agents to prices, the agents will find themselves engaged in a game. … Here economists are not agreed even what the appropriate notion of an equilibrium should be. … In short, there is no accepted theory of the invisible hand when the no surplus condition is not satisfied. One must conclude that one cannot invoke the classical theory of the invisible hand in dealing with economies in which agents have market power.”
Frank Hahn, one of the architects of general equilibrium theory, in: Hahn, F.H., (1982) “Reflections on the Invisible Hand”, Lloyds Bank Review, No. 144, April, pp. 1-2; p. 6.

On the potential trade-off between allocation-efficiency and stabilisation-efficiency
“I accept Henry Simon’s view that the aim of economic policy is not narrowly economic. The aim of policy is to assure that the economic prerequisites for sustaining the civil and civilized standards of an open liberal society exist. If amplified uncertainty, extremes of income distribution, and social inequality attenuate the economic underpinnings of democracy, then the market behavior that creates these conditions should be constrained. If it is necessary to give up a bit of market efficiency, or a bit of aggregate income, in order to contain democracy-threatening uncertainty, then so be it.”
Hyman Minsky in Minsky, H.P., (1986) Stabilizing an Unstable Economy, Yale University Press, New Haven, CN, xiv + 353 pp.

On the usefulness of the competitive general equilibrium theory as a description of real economies
“Early in my career I felt it was very important to get the competitive equilibrium theory right. … I wanted to clear up what the theory was, but that doesn’t mean I found it a useful description of the economy. As I think more about complexity theory, I become more convinced that there is some sense in which we will never know how the economy operates.”
Nobel Prize winning economist Ken Arrow who helped develop general equilibrium theory in: Colander, D., Holt, R.P.F. and Rosser, J.B., Jr., (2004) The Changing Face of Economics: Conversations with Cutting Edge Economists, University of Michigan Press, Ann Arbor, x + 358 pp; p. 298.

Why macroeconomics is so difficult …
“For some physical systems, the macrovariables are so interconnected as to acquire their own laws, as in classical mechanics, thermodynamics, and hydrodynamics. Most biological and social systems are too complicated to have complete sets of macrovariables. They can be described by some macrovariables but these variables are too sparse to constitute laws. Even macroeconomics, which succeeds in defining many powerful macrovariables, falls short of providing satisfactory macroeconomic laws.”
Physicist Sunny Auyang in Auyang, S.Y., (1998) Foundations of Complex System Theories: In Economics, Evolutionary Biology and Statistical Physics, Cambridge University Press, Cambridge, New York, Melbourne & Madrid, xii + 404 pp.; p. 63.

… and a Nobel Prize winning economist agrees
“Well, I’ve got to tell you: I’ve never really understood macro. What I mean by this is that my idea of understanding is having a model that captures what is going on. In macro we don’t have that; instead we have empirical generalizations, and those generalizations tend to break down quite quickly.”
Nobel Prize winning economist Ken Arrow in Colander, D., Holt, R.P.F. and Rosser, J.B., Jr., (2004) The Changing Face of Economics: Conversations with Cutting Edge Economists, University of Michigan Press, Ann Arbor, x + 358 pp; p. 301.

The subject matter of economics is inherently interdisciplinary

“[T]ransaction costs depend … on the working of the legal system (the system of property rights, the enforcement of property rights, the ability to foresee what the legal decisions will be, and so on). They also depend on the political system, they depend on the educational system, and they are interrelated with other social systems. And in consequence, economists should enlist the support of lawyers, sociologists, anthropologists, and others in our work in order to understand why transaction costs are what they actually are. It’s the opposite of economic imperialism. We should invite these other practitioners in these other fields into our realm to help us in understanding how the economic system actually operates.”
Nobel Prize winning economist Ronald Coase in: Coase, R.H., (2002) “Why Economics Will Change: Remarks at the University of Missouri, Columbia, Missouri, April 4, 2002”, ISNIE Newsletter, Vol. 4, No. 1, Summer, pp. 1, 4-7; Quote pp. 5-6.

On the usefulness of armchair theorising
“To discuss and analyse how the economy works, it may be necessary to go and look.”
Frank Hahn, one of the architects of general equilibrium theory in: Hahn, F.H., (1970) “Some Adjustment Problems”, Econometrica, Vol. 38, No. 1, January, pp. 1-17; p. 1.

On ‘blackboard economics’
“What is studied is a system that lives in the minds of economists but not on earth. I have called the result “blackboard economics”. The firm and the market appear by name but they lack any substance. The firm in mainstream economic theory has often been described as a “black box”. And so it is. … Even more surprising, given their interest in the pricing system, is the neglect of the market or more specifically the institutional arrangements which govern the process of exchange. As these institutional arrangements determine to a large extent what is produced, what we have is a very incomplete theory.”
Nobel Prize winning economist Ronald Coase in: Coase, R.H., (1992) “The Institutional Structure of Production“, American Economic Review, Vol. 82, No. 4, September, pp. 713-719.

On the need to study institutional arrangements to develop sound theory
“The theory of saving and the rate of interest can – or at any rate should – never be independent of the state of development of financial institutions.”
Economist Victoria Chick in: Chick, V., (1986) “The Evolution of the Banking System and the Theory of Saving, Investment and Interest”, Economies et Sociétés, Série Monnaie et Production n. 3, Vol. 20, No. 8-9, August – September, pp. 111-126; p. 112.

The age of simulation
“[A]n economy-wide picture still seems in the far future. My guess is that the age of theorems may be passing and that of simulation is approaching. Of course there will always be logical matters to sort out, and our present expertise will not be totally obsolete. But the task which we set ourselves after the last war, to deduce all that was required from a number of axioms, has almost been completed, and while not worthless has only made a small contribution to our understanding.”
Frank Hahn, one of the architects of general equilibrium theory, in Hahn, F.H., (1994) “An Intellectual Retrospect”, Banca Nazionale del Lavoro Quarterly Review, Vol. 47, No. 190, September, pp. 245-258; p. 258.

Complex systmes theory takes distribution seriously
“[C]omplex systems theory departs in a fundamental way from neoclassical economics in indicating that the distribution of income and wealth is important in coming to an understanding of how an economic system works.”
John Foster in Foster, J., (2005) “From Simplistic to Complex Systems in Economics”, Cambridge Journal of Economics, Vol. 29, No. 6, November, pp. 873-892; p. 888.

The implications of the second-best
“[T]here is a well-known Lipsey-Lancaster theorem which says that when an economy is not in a first-best optimum, say because of taxes or tariffs, there is no way of distinguishing a third-best from a second-best situation, and no way of telling whether a given change takes us nearer or further away from the first-best optimum. This theorem is widely acknowledged in all the textbooks and yet this has done nothing to displace the notion that perfect competition is an ideal that somehow casts light on the admittedly imperfect competition all around us.”
Economic methodologist Mark Blaug in Blaug, M., (2002) “Ugly Currents in Modern Economics”, In Fact and Fiction in Economics: Models, Realism, and Social Construction ed. Mäki, U.; Cambridge University Press, Cambridge, New York & Melbourne, pp. 35-56; p. 38. referring to: Lipsey, R.G. and Lancaster, K., (1956-1957) “The General Theory of Second Best”, Review of Economic Studies, Vol. 24, No. 1, pp. 11-32.

Still modelling without transaction costs?
“[W]hile consideration of what would happen in a world of zero transaction costs can give us valuable insights, these insights are, in my view, without value except as steps on the way to the analysis of the real world of positive transaction costs. We do not do well to devote ourselves to a detailed study of the world of zero transaction costs, like augurs divining the future by the minute inspection of the entrails of a goose.”
Nobel Prize winning economist Ronald Coase in Coase, R.H., (1981) “The Coase Theorem and the Empty Core: A Comment”, Journal of Law and Economics, Vol. 24, No. 1, April, pp. 183-187; p. 187.

Did neoclassical economic theory address the real questions?
“[W]e have seen economists abandoning attempts to understand the central question of our subject, namely: how do decentralised choices interact and perhaps get coordinated [?] in favour of a theory according to which an economy is to be understood as the outcome of the maximisation of a representative agent’s utility over an infinite future … Apart from purely theoretical objections it is clear that this sort of thing heralds the decadence of endeavour just as clearly as Trajan’s column heralded the decadence of Rome. It is the last twitch of a dying method. It rescues rational choice by ignoring every one of the questions pressing for attention.”
Frank Hahn in Hahn, F.H., (1991) “The Next Hundred Years”, Economic Journal, Vol. 101, No. 404, January, pp. 47-50; p. 49.

On the gap between economic theory and the real world, from a Nobel Laureate
“I think the textbooks are a scandal. I think to expose young impressionable minds to this scholastic exercise as though it said something about the real world, is a scandal. The most widely used textbooks use the old long-run and short-run cost curves to illustrate the theory of the firm. I find that inexcusable. … I don’t know of any other science that purports to be talking about real world phenomena, where statements are regularly made that are blatantly contrary to fact.”
Nobel Prize-winning economist Herbert Simon, H.A., (1986) “The Failure of Armchair Economics”, Challenge, Vol. 29, No. 5, November – December, pp. 18-25; p. 23

We need to study the economy as a system
“What I think is important is that economists don’t study the working of the economic system. That is to say, they don’t think they’re studying any system with all its interrelationships. It is as if a biologist studied the circulation of the blood without the body. … You wouldn’t be able to discuss the circulation of the blood in a sensible way. And that’s what happens in economics. In fact the economic system is extremely complicated. … But how one part impinges on the other, how they are interrelated, how it actually works – that is not what people study. What is wrong is the failure to look at the system as the object of study.”
Nobel Prize winning economist Ronald Coase in Coase, R.H., (2002) “Why Economics Will Change: Remarks at the University of Missouri, Columbia, Missouri, April 4, 2002”, ISNIE Newsletter, Vol. 4, No. 1, Summer, pp. 1, 4-7.

On the state of macroeconomics
“For more than three decades, macroeconomics has gone backwards. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes.”
Paul Romer in Romer, P., (2016) “The Trouble With Macroeconomics“, Unpublished Paper, New York, Stern School of Business, New York University, 14th September, 25 pp.

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The Sonnenschein-Mantel-Debreu results

The implications of the Sonnenschein-Mantel-Debreu (SMD) results
“The impact of SMD theory is quite general … Its chief implication … is that the hypothesis of individual rationality, and the other assumptions made at the micro-level, gives no guidance to an analysis of macro-level phenomena: the assumption of rationality or utility maximization is not enough to talk about social regularities. This is a significant conclusion and brings the microfoundations project in GET [General Equilibrium Theory] to an end. Of course, if one does not want to look for regularities at the macro level, the SMD results pose no problem; but every theorist who wants to argue that a change in some price variable … affects a corresponding quantity aggregate in a definite direction, cannot base this argument on GET.”
S. Abu Turab Rizvi in Rizvi, S.A.T., (1994) “The Microfoundations Project in General Equilibrium Theory”, Cambridge Journal of Economics, Vol. 18, No. 4, August, pp. 357-377.

The SMD results refer to:

  • Sonnenschein, H.F., (1972) “Market Excess Demand Functions”, Econometrica, Vol. 40, No. 3, May, pp. 549-563.
  • Sonnenschein, H.F., (1973) “Do Walras’ Identity and Continuity Characterize the Class of Community Excess Demand Functions?” Journal of Economic Theory, Vol. 6, No. 4, August, pp. 345-354.
  • Mantel, R.R., (1974) “On the Characterization of Aggregate Excess Demand”, Journal of Economic Theory, Vol. 7, No. 3, March, pp. 348–353.
  • Mantel, R.R., (1976) “Homothetic Preferences and Community Excess Demand Functions”, Journal of Economic Theory, Vol. 12, No. 2, April, pp. 197-201.
  • Debreu, G., (1974) “Excess Demand Functions”, Journal of Mathematical Economics, Vol. 1, No. 1, March, pp. 15–23.

The implications of the SMD results for the general equilibrium model
“The full force of the Sonnenschein, Mantel, Debreu result is often not appreciated. They show that standard and restrictive assumptions on the preferences of individuals cannot guarantee stability. Yet without this, the intrinsic interest of economic analysis based on the General Equilibrium model is extremely limited.”
Alan Kirman in Kirman, A.P., (2004b) “General Equilibrium”, In Cognitive Economics: An Interdisciplinary Approach ed. Bourgine, P. and Nadal, J.-P.; Springer-Verlag, Berlin, Heidelberg & New York, pp. 33-53; p. 47.

As early as 1982, the Handbook of Mathematical Economics explained the implications of the SMD results

“The importance of the [SMD] results is clear: strong restrictions are needed in order to justify the hypothesis that a market demand function has the characteristics of a consumer demand function. Only in special cases can an economy be expected to act as an ‘idealized consumer’. The utility hypothesis tells us nothing about market demand unless it is augmented by additional requirements.”
Wayne Shafer & Hugo Sonnenschein in Shafer, W. and Sonnenschein, H.F., (1982) “Market Demand and Excess Demand Functions”, In Handbook of Mathematical Economics ed. Arrow, K.J. and Intriligator, M.D.; North-Holland, Amsterdam, Vol. II pp. 671-693.

One famous economist confessed to his temptation to ignore the SMD results
“When I read in the seventies the publications of Sonnenschein, Mantel and Debreu on the structure of the excess demand function of an exchange economy, I was deeply consternated. Up to that time I had the naïve illusion that the microeconomic foundation of the general equilibrium model, which I had admired so much, does not only allow us to prove that the models and the concept of equilibrium are logically consistent, but also allows us to show that the equilibrium is well determined. This illusion, or should I say rather, this hope, was destroyed once and for all, at least for the traditional model of exchange economies. I was tempted to repress this insight and continue to find satisfaction in proving existence of equilibrium for more general models under still weaker assumptions. However, I did not succeed in repressing the newly gained insight because I believe that a theory of economic equilibrium is incomplete if the equilibrium is not well determined.”
Werner Hildenbrand in Hildenbrand, W., (1994) Market Demand: Theory and Empirical Evidence, Princeton University Press, Princeton, NJ, x + 205 pp.


The impact of the SMD results on the supposed link between rationality at the individual and aggregate levels

“In the aggregate, the hypothesis of rational behaviour has in general no implications; that is, for any set of aggregate excess demand functions, there is a choice of preference maps and of individual endowments, one for each individual in the economy, whose maximization implies the given excess demand functions.”
Nobel Prize winning economist Ken Arrow in Arrow, K.J., (1987) “Economic Theory and the Hypothesis of Rationality”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; MacMillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 2 pp. 69-75; p. 70. Reprinted from Journal of Business, 1986, Vol. 59, No. 4, Pt. 2.

The blunt assessment of the implications of the SMD results by the lead author of a popular graduate microeconomics textbook
“[B]ut for the obvious restrictions, (e.g. Walras Law) literally anything can be the excess demand of a well-behaved exchange economy.”
Andreu Mas-Collel in Mas-Colell, A., (1989) “Capital Theory Paradoxes: Anything Goes”, In Joan Robinson and Modern Economic Theory ed. Feiwel, G.R.; New York University Press, New York, pp. 505-520; p. 506.

The SMD results have very serious implications for the dynamics of general equilibrium models
“[I]n general, the excess demand functions only satisfy Walras’ Law! Consequently, all forms of chaotic behaviour can occur, but even a single locally stable equilibrium need not! Much more is possible. With the same preferences and just by changing initial endowments, the price dynamics can jump from any specified kind of behaviour to any other kind.”
Mathematician Don Saari in Saari, D.G., (1996) “The Ease of Generating Chaotic Behavior in Economics”, Chaos, Solitons & Fractals, Vol. 7, No. 12, December, pp. 2267-2278; p. 2274.

The implications of the SMD results for the dynamics of general equilibrium models
“[A]lmost any continuous pattern of price movements can occur in a general equilibrium model, so long as the number of consumers is at least as great as the number of commodities. Cycles of any length, chaos, or anything else you can describe, will arise in a general equilibrium model for some set of consumer preferences and initial endowments. Not only does general equilibrium fail to be reliably stable; its dynamics can be as bad as you want them to be.”
Frank Ackerman in Ackerman, F., (2002) “Still Dead after All These Years: Interpreting the Failure of General Equilibrium Theory”, Journal of Economic Methodology, Vol. 9, No. 2, June, pp. 119-139.

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The pitfalls of aggregation

The choice of levels of aggregation is a vital but much-neglected area of model building
“[A] major part of the value-theoretical content of a macromodel will often be hidden in the aggregates from which the explicit analysis starts. … we habitually concentrate on making those assumptions explicit which specify the relationships between the variables actually appearing in the model. The immediately antecedent stage in model-construction, i.e. the selection of aggregates, is often the stage where implicit theorizing enters in. The behavioral assumptions underlying a particular mode of aggregation are, however, just as important as the behavioral relationships assumed to hold between the variables defined. The first type of assumption is often left implicit and particular aggregative structures are thus left to develop into undisputed conventions while at the same time controversies rage over the second type of assumption.”
Axel Leijonhufvud in: Leijonhufvud, A., (1968) On Keynesian Economics and the Economics of Keynes, Oxford University Press, New York & London, xiv + 431 pp; p. 141.

How economists forgot about aggregation problems
“I have this feeling … that the Cambridge U.K. side won the debate with Cambridge U.S., but somehow afterwards all the difficulties with aggregate capital and its use in an aggregate production function were just swept under the rug by modern macroeconomists.”
Alan Kirman in Petri, F. and Hahn, F., (2003) “General Equilibrium: Problems, Prospects and Alternatives – Final Discussion”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 486-520; p. 494.

Aggregation again
“[I]n the presence of non-linearities, it is almost impossible to perform mathematical aggregation from the microeconomic to the macroeconomic level…”
John Foster in Foster, J., (1998) “Abstraction in Economics: Incorporating the Time Dimension”, International Journal of Social Economics, Vol. 25, No. 2-4, pp. 146-167; p. 158.

Representative agents?
“[A]ggregate behaviour is not the behaviour of a representative individual and trying to test models based on this idea leads to erroneous conclusions. Such an idea is so familiar to physicists and biologists that it seems banal. Nevertheless it is still far from being generally accepted in economics.”
Alan Kirman in Kirman, A.P., (2004a) “Economics and Complexity”, In Industry and Labor Dynamics: The Agent-Based Computational Approach, Proceedings of the Wild@Ace2003 Workshop, Torino, Italy, 3-4 October, 2003 ed. Leombruni, R. and Richiardi, M.; World Scientific, Singapore, Hackensack, NJ & London, pp. 3-21; pp. 5-6.

Aggregate capital?
“There is nearly universal agreement that aggregate capital considered as a factor in an aggregate production function exists only under extraordinarily special circumstances. This is a technical result long ago proved by myself, Gorman, and others. Nevertheless, the implications of that result do not always seem to have been fully realised. One of those implications, in particular, is that if one attempts to use aggregate capital as though it were a factor in a production function, there will be a paradox somewhere, something will go wrong. One cannot depend on any intuition that comes from considering aggregate relationships as production functions. … [However] … Neoclassical general equilibrium theory does not require the existence of aggregate capital as a factor in an aggregate production function.”
Frank Fisher in Petri, F. and Hahn, F., (2003) “General Equilibrium: Problems, Prospects and Alternatives – Final Discussion”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 486-520; p. 498.

Why using representative agents is inadequate for a complex system
“The standard approach to modern macroeconomics is that, provided we start with sound micro-foundations, we need not be concerned with the problem of aggregation as such. Reducing an economy to “representative agents” enables us to move smoothly between the micro- and macro-level. In fact, this is illegitimate and leads to false conclusions about macro-behaviour (see e.g. Kirman, 1993). As Frank Hahn points out in this volume, the situation is far from being simple. There are feedbacks from aggregate variables to individual behaviour which cannot and should not be overlooked. Furthermore, the behaviour of an interactive system cannot be reduced to the behaviour of its average member. Thus, the general equilibrium model in full generality is nothing more than an extreme case and to deduce macroeconomic relationships from it is an exercise which is doomed to failure.”
Alan Kirman in Kirman, A.P., (2003) “General Equilibrium: Problems, Prospects and Alternatives: An Attempt at Synthesis”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 468-485; p. 470.

Heterogeneity matters
“You can simulate a model with a few actors and pretend that it is realistic, but there is nothing in casual observation or empirical data or economic theory that suggests that such a stance is valid. … The conditions under which one can ignore a great deal of the evidence of individual heterogeneity are so severe as to make them patently unrealistic. … The practice of ignoring or closeting aggregation problems as “just too hard” is no longer appropriate.”
Richard Blundell & Thomas Stoker in Blundell, R. and Stoker, T.M., (2005) “Heterogeneity and Aggregation”, Journal of Economic Literature, Vol. 43, No. 2, June, pp. 347-391.

Aggregate production functions require extraordinarily stringent conditions to hold
“[T]he conditions under which the production possibilities of a technologically diverse economy can be represented by an aggregate production function are far too stringent to be believable.”
Franklin Fisher in Fisher, F.M., (1971a) “Aggregate Production Functions and the Explanation of Wages: A Simulation Experiment”, Review of Economics and Statistics, Vol. 53, No. 4, November, pp. 305-325; p. 305.

Many commonly used aggregates have very questionable theoretical foundations
“[T]he analytic use of such aggregates as ‘capital’, ‘output’, ‘labour’ or ‘investment’ as though the production side of the economy could be treated as a single firm is without sound foundation. This has not discouraged macroeconomists from continuing to work in such terms.”
Franklin Fisher in Fisher, F.M., (1987) “Aggregation Problem”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; Macmillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 1, pp. 53-55; p. 55.

Some commonly used aggregates cannot be meaningfully defined
A reasonable interpretation of this work is that aggregate production functions – and other aggregate quantities such as capital, investment and ‘the’ input of labour – cannot be meaningfully defined in any circumstances that might apply to a real-world economy. This must also be true of ‘the’ marginal products and ‘the’ elasticity of substitution. Put simply, they do not exist. … Overall the critique has some force. It deserves to be more widely known …
Jonathan Temple in Temple, J., (2006) “Aggregate Production Functions and Growth Economics”, International Review of Applied Economics, Vol. 20, No. 3, July, pp. 301–317; pp. 302 & 307.

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Total Factor Productivity (TFP)

TFP calculations rely on prior assumptions about the production function
One of the fundamental difficulties with TFP estimations is that, “it is impossible to calculate the technological ‘residual’ without taking a stand on the form of the underlying production function (and its change over time).”
Dani Rodrik in Rodrik, D., (1998) “TFPG Controversies, Institutions and Economic Performance in East Asia”, In The Institutional Foundations of East Asian Economic Development: Proceedings of the IEA Conference held in Tokyo, Japan ed. Hayami, Y. and Aoki, M.; St. Martin’s Press & Macmillan in association with International Economic Association, New York & Basingstoke, pp. 79-101; p. 79.

The notion of TFP has major theoretical problems
“[T]the theoretical problems underlying the notion of TFP are so significant that the whole concept should be seriously questioned.”
Jesus Felipe in Felipe, J., (1999) “Total Factor Productivity Growth in East Asia: A Critical Survey”, Journal of Development Studies, Vol. 35, No. 4, April, pp. 1-41; p. 1.

Just because a statistical agency publishes data doesn’t mean it’s sound
“There may be a tendency among students new to this area to think that because the Bureau of Labor Statistics publishes data on multifactor productivity, this accounting device is as unproblematic as, say, value-added accounting for national income, when in fact it is heavily dependent upon the hypothesis of an aggregate neoclassical production function with specific neoclassical features.”
Duncan Foley & Thomas Michl in Foley, D.K. and Michl, T.R., (2001) “Comment: The Production Function and Productivity”, Journal of Economic Perspectives, Vol. 15, No. 3, Summer, pp. 257-258; p. 257.

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Perfect competition

Perfect competition – when is ‘economics’ not really economics?
“In my view the perfect competition simplification has had rather disastrous effects on macro-economics. This is particularly true when it comes to the labour market where setting the money wage is equivalent to setting the product wage. While I could not resist the ease of perfect competition theorising, I think that I never took the results as applicable economics.”
Frank Hahn, one of the architects of general equilibrium theory, in Hahn, F.H., (1994) “An Intellectual Retrospect”, Banca Nazionale del Lavoro Quarterly Review, Vol. 47, No. 190, September, pp. 245-258; p. 252.

On the gap between idealised models of perfect competition and the real world
“Perfect competition never did exist and never could exist because even when firms are small, they do not just take the price as given but strive to make the price. All current textbooks say as much but then they immediately go on to say that the cloud-cuckoo-land of perfect competition is the benchmark against which economists may say something significant about real world competition … But how can an idealized state of perfection be a benchmark when we are never told how to measure the gap between it and real-world competition? It is implied that all real-world competition is “approximately” like perfect competition, but the degree of the approximation is never specified, even vaguely.”
Economic methodologist Mark Blaug in Blaug, M., (2002) “Ugly Currents in Modern Economics”, In Fact and Fiction in Economics: Models, Realism, and Social Construction ed. Mäki, U.; Cambridge University Press, Cambridge, New York & Melbourne, pp. 35-56.

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Equilibrium & General Equilibrium Theory

General equilibrium theory undergirds computable general equilibrium (CGE) models
“[W]hen we consider general equilibrium models, it is clear that a central part of the overall warrant of the models is the confidence that we have in the approximate truth of general equilibrium theory. If we were to doubt this theory, then we would have no reason whatsoever to rely on CGE models.”
Daniel Little in Little, D., (1995) “Economic Models in Development Economics”, In On the Reliability of Economic Models: Essays in the Philosophy of Economics ed. Little, D.; Kluwer Academic Publishers, Boston, Dordrecht & London, pp. 243-270; p. 260.

On the competitive equilibrium theory as a foundation for applied economics
“I do not in any way mean to denigrate the intellectual excellence of neowalrasian proofs of competitive equilibrium; I intend only to suggest that this work is more accurately categorized as set-theoretic logic than economics. … I find no logical flaw in any aspect of Arrow-Debreu theory; I argue, however, that as a foundation for applied economics, Arrow-Debreu theory is empirically vacuous and conceptually incoherent.”
Robert Clower in Clower, R.W., (1995) “Axiomatics in Economics”, Southern Economic Journal, Vol. 62, No. 2, October, pp. 307-319; p. 317.

General equilibrium gives a misleading impression of economic forces
“My basic objection to the theory of general equilibrium is not that it is abstract; … but that it starts from the wrong kind of abstraction and therefore … it gives a misleading impression of the nature and the manner of operation of economic forces.”
Nicholas Kaldor in Kaldor, N., (1975) “What Is Wrong with Economic Theory”, Quarterly Journal of Economics, Vol. 89, No. 3, August, pp. 347-357; p. 348.

On the gap between what economists know and what is taught
“[E]conomists … consistently choose textbooks that teach material that they know is false and/or completely out of date. … there’s still this incredible tension in what we teach. I am so displeased at the way undergraduate and even graduate economics is taught. Undergraduate economics is a joke – macro is okay, but micro is a joke because they teach this stuff you know is not true. They know the general equilibrium model is not true. The model has no good stability properties and it doesn’t predict anything interesting but they teach it. The production theory that is taught is also a joke. They use this old Marshallian production with long-run average cost curves and the like to determine firm size. This doesn’t determine firm size; it determines plant size. Totally different things determine firm size. So why do we teach undergraduates this?”
Herbert Gintis, emeritus professor at the University of Massachusetts and author of Game Theory Evolving in: Colander, D., Holt, R.P.F. and Rosser, J.B., Jr., (2004) The Changing Face of Economics: Conversations with Cutting Edge Economists, University of Michigan Press, Ann Arbor, x + 358 pp; pp. 92-93.

Timeless equilibria?
“[I]t is obvious that the passage of time is essential to give the concept of equilibrium any meaning. This deserves mention since many economists appear to have been unable to find a place for time in equilibrium analysis and consequently have suggested that equilibrium must be conceived as timeless. This seems to me to be a meaningless statement.”
Nobel Prize winning economist Friedrich Hayek in Hayek, F.A., (1937) “Economics and Knowledge”, Economica, Vol. 4, No. 13, February, pp. 33-54; pp. 36-37.

Is equilibrium meaningful in the presence of increasing returns?
“[T]he counter forces which are continually defeating the forces which make for economic equilibrium are more pervasive and more deeply rooted than we commonly realize. … The whole issue, as Young said [p. 535], is whether an “equilibrium of costs and advantages” is a meaningful notion in the presence of increasing returns. When every change in the use of resources – every reorganization of production activities – creates an opportunity for a further change which would not have existed otherwise, the notion of an ‘optimum’ allocation of resources … becomes a meaningless and contradictory notion: the pattern of the use of resources at any one time can be no more than a link in the chain of an unending sequence and the very distinction, vital to equilibrium economics, between resource-creation and resource allocation loses its validity.”
Nicholas Kaldor in Kaldor, N., (1972) “The Irrelevance of Equilibrium Economics”, Economic Journal, Vol. 82, No. 328, December, pp. 1237-1255; p. 1245. Referring to: Young, A., (1928) “Increasing Returns and Economic Progress”, Economic Journal, Vol. 38, pp. 527-542.

The danger of the unseen influence of equilibrium economics on policy recommendations
“The achievements of economic theory in the last two decades are both impressive and in many ways beautiful. But it cannot be denied that there is something scandalous about the spectacle of so many people refining the analyses of economic states which they give no reason to suppose will ever, or have ever, come about. It is probably also dangerous. Equilibrium economics, because of its well known welfare economics implication, is easily convertible into an apologia for existing economic arrangements and it is frequently so converted.”
Frank Hahn, one of the architects of general equilibrium theory, in Hahn, F.H., (1970) “Some Adjustment Problems”, Econometrica, Vol. 38, No. 1, January, pp. 1-17; p. 1.

Proofs of equilibrium are essentially tautological

“In the usual presentations of equilibrium analysis, it is generally made to appear as if these questions of how the equilibrium comes about were solved. But … these apparent demonstrations amount to no more than the apparent proof of what is already assumed. … the whole economic system must be assumed to be one perfect market in which everybody knows everything. The assumption of the perfect market then means nothing less than that all the members of the community, even if they are not supposed to be strictly omniscient, are at least supposed to know automatically all that is relevant for their decisions. … The statement that, if people know everything, they are in equilibrium is true simply because that is how we define equilibrium.”
Nobel Prize winning economist Friedrich Hayek in Hayek, F.A., (1937) “Economics and Knowledge”, Economica, Vol. 4, No. 13, February, pp. 33-54; pp. 44-45.

General equilibrium theory & production
“General equilibrium theory has remarkably little to say about production. Our definition of technologies and profit maximisation seem to me in no way to capture the reality of firms. … Adding production actually adds force to the Sonnenschein-Mantel-Debreu problem. Furthermore, efforts to add more realism by introducing increasing returns … have met with little success … we need extremely restrictive assumptions on production to obtain existence in infinite dimensional economies. Thus, in standard theory, production is not only trivial but also somewhat troublesome.”
Alan Kirman in Kirman, A.P., (2003) “General Equilibrium: Problems, Prospects and Alternatives: An Attempt at Synthesis”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 468-485; pp. 474-5

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Disequilibrium & approaching equilibrium

Disequilibrium models are needed for an adequate theory of value
“[D]ynamic, disequilibrium analysis is always required if we are truly to have a satisfactory theory of value. Certainly, if the economy does not spend most of its time near equilibrium, disequilibrium analysis is the only useful kind. … multiplicity of equilibria is the rule rather than the exception … [and] … the analysis of disequilibrium shows that the dynamic behaviour involved often changes the equilibrium that is eventually reached.”
Frank Fisher in Fisher, F.M., (2003) “Disequilibrium and Stability”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 74-94; p. 75.

The super-invisible hand
“[T]he proposition that, in certain circumstances, there is a set of prices which ensures equality between demand and supply in all markets tells us nothing of whether these prices will indeed be established by a market economy. On this central question neither economic theory nor evidence is at all satisfactory. … I want to stress what a significant lacuna this represents and how dangerously it can be ignored by policy advocates. Seeing our ignorance, a number of Chicago and other economists have decided that the best way to proceed is to pretend that it isn’t really there. … they simply assume that the invisible hand performs its task instantaneously and, as it were, super-invisibly.”
Frank Hahn, one of the architects of general equilibrium theory, in Hahn, F.H., (1982) “Reflections on the Invisible Hand”, Lloyds Bank Review, No. 144, April, pp. 1-21; p. 13.

Is there really a ‘tendency’ towards ‘equilibrium’?
“I am afraid I am now getting to a stage where it becomes exceedingly difficult to say what exactly are the assumptions on the basis of which we assert that there will be a tendency towards equilibrium, and to claim that our analysis has an application to the real world. I cannot pretend that I have as yet got much further on this point.”
Nobel prize winning economist Friedrich Hayek in Hayek, F.A., (1937) “Economics and Knowledge”, Economica, Vol. 4, No. 13, February, pp. 33-54.

The most striking failure of general equilibrium theory?
“Perhaps, the most striking failure of general equilibrium theory, particularly in its purest form, has been that of establishing any tendency towards an equilibrium. … My impression is that those most involved in the formalisation of general equilibrium theory were far from convinced that there was any sort of natural stability. Indeed, Gerard Debreu never skated on this thin ice whilst many of his distinguished contemporaries such as Frank Hahn, Takashi Negishi, Ken Arrow and Leo Hurwicz ventured into the analysis of the problem without much success in the end.”
Alan Kirman in Kirman, A.P., (2003) “General Equilibrium: Problems, Prospects and Alternatives: An Attempt at Synthesis”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 468-485; p. 473.

‘Equilibrium’ implies ‘disequilibrium’ to have any meaning
“Certainly, there is a sense in which the disequilibrium behaviour of any given system can be represented as the equilibrium behaviour of a larger system in which the original one is embedded. To say this, however, is only to say that there is some definite outcome out-of-equilibrium in the smaller system. To insist that therefore there is no such thing as disequilibrium is to rob the term “equilibrium” and all equilibrium analysis of meaning. For if “equilibrium” is to be a useful concept in analyzing a particular system, then one must contemplate the possibility of points that are not equilibria of that system. The fact that such points can be represented as equilibria in some larger system does not change this.”
Franklin Fisher in Fisher, F.M., (2003) “Disequilibrium and Stability”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 74-94; p. 76.

How can equilibrium be established?
“How can equilibrium be established? The attainment of equilibrium requires a disequilibrium process. What does rational behaviour mean in the presence of disequilibrium? Do individuals speculate on the equilibrating process? If they do, can the disequilibrium be regarded as, in some sense, a higher-order equilibrium process? Since no one has market power, no one sets prices; yet they are set and changed. There are no good answers to these questions, and I do not pursue them.”
Nobel Prize winning economist Ken Arrow in Arrow, K.J., (1987) “Economic Theory and the Hypothesis of Rationality”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; Macmillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 2, pp. 69-75; p. 70. Reprinted from Journal of Business, 1986, Vol. 59, No. 4, Pt. 2.

How to agents behave out of equilibrium when their plans are frustrated?
“[T]he very power and elegance of equilibrium analysis often obscures the fact that it rests on a very uncertain foundation. We have no similarly elegant theory of what happens out of equilibrium, or how agents behave when their plans are frustrated. As a result we have no rigorous basis for believing that equilibria can be achieved or maintained if disturbed.”
Franklin Fisher in Fisher, F.M., (1987) “Adjustment Processes and Stability”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; MacMillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 1, pp. 26-29; p. 26.

How does adjustment take place when plans are frustrated?
We need “detailed analysis of how disequilibrium adjustment takes place when plans are frustrated. Equilibrium techniques will not succeed here, and new modes of analysis are needed if equilibrium economic theory is to have a satisfactory foundation.”
Franklin Fisher in Fisher, F.M., (1987) “Adjustment Processes and Stability”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; MacMillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 1, pp. 26-29; p. 28.

We do not actually know how the price system really works
“I think that stability and disequilibrium dynamics is the principal unsolved problem of economic theory. … We do not actually know how the price system really works in time.”
Franklin Fisher in Fisher, F.M., (1989) “Stability Analysis in Micro and Macro Theory: An Interview”, In Joan Robinson and Modern Economic Theory ed. Feiwel, G.R.; New York University Press, New York, pp. 311-322; p. 313.

Will agents in disequilibrium push the system towards equilibrium?
“[I]f you have an economy characterized by sensible agents (possibly rational agents) who understand that they are in disequilibrium and take advantage of arbitrage opportunities, is it or is it not true that the actions of those agents will push the economy towards an equilibrium? … that is the central question because all of economic theory (at least all of microeconomic theory) presumes that the answer to that question is yes.”
Franklin Fisher in Fisher, F.M., (1989) “Stability Analysis in Micro and Macro Theory: An Interview”, In Joan Robinson and Modern Economic Theory ed. Feiwel, G.R.; New York University Press, New York, pp. 311-322; p. 313.

Tâtonnement?
Tâtonnement stability requires extremely strong special assumptions. This has extremely important implications. Indeed, it is not too strong to say that the entire theory of value is at stake. If stability requires trading (or production or consumption) to take place before equilibrium is reached, then the adjustment process itself changes the givens of the equilibrium problem (the endowments of agents for example). This makes the set of equilibria also change in the course of adjustment, so that the equilibrium finally reached (assuming stability) differs from that computed by algorithms taking the initial situation as fixed. Moreover, comparative statics will miscompute the effects of a displacement of equilibrium, for the equilibrium reached will depend on the adjustment process and not merely on the displacement itself. While such effects may be small, they are certainly not known to be small. The argument that they are likely to be negligible because prices adjust much faster than quantities is unconvincing. The limiting case of such relative speeds of adjustment is tâtonnement and is known to lack general convergence properties.”
Franklin Fisher in Fisher, F.M., (1987) “Adjustment Processes and Stability”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; MacMillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 1, pp. 26-29; p. 27.

There is a gaping hole in the center of what economists know – what happens out of equilibrium
“[T]here is a tendency to confuse the view that if one is not at an equilibrium, one will not stay where one is, with the view that one must approach equilibrium – and that is a quite different and much harder proposition. … there is a big gaping hole in the center of what economists know, namely, the question of what happens out of equilibrium and whether we ever get close to equilibrium. … most of what we do depends on assuming that it is not a problem. And we really have very little basis for that.”
Franklin Fisher in Fisher, F.M., (1989) “Stability Analysis in Micro and Macro Theory: An Interview”, In Joan Robinson and Modern Economic Theory ed. Feiwel, G.R.; New York University Press, New York, pp. 311-322; p. 320.

Convergence to an equilibrium requires infinite information – Walrasian equilibrium is really a static notion
“In showing that our standard assumptions on individual preferences in no way restrict the form of aggregate excess demand … [the Sonnenschein-Mantel-Debreu results] … also showed that without very different assumptions there is no hope for stability. … the results of Saari and Simon (1978) show that if one is to guarantee convergence to equilibrium from any initial prices, then one needs an infinite amount of information. … Walrasian equilibrium is really a static notion and we have little to say about “The Invisible Hand Process”.”
Alan Kirman in Kirman, A.P., (2003) “General Equilibrium: Problems, Prospects and Alternatives: An Attempt at Synthesis”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 468-485; p. 473. Referring to: Saari, D.G. and Simon, C.P., (1978) “Effective Price Mechanisms”, Econometrica, Vol. 46, No. 5, September, pp. 1097-1125.

The ‘invisible hand’ must operate in disequilibrium
“To understand the workings of the “Invisible Hand” it is not enough to understand what the world looks like when the “Invisible Hand” has nothing to do. The present state of general equilibrium theory must therefore be regarded as unsatisfactory or incomplete when it comes to the provision of a positive theory of value.”
Franklin Fisher in Fisher, F.M., (2003) “Disequilibrium and Stability”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 74-94; p. 91.

General equilibrium theory does not have enough structure to provide a framework to establish the stability of equilibrium under standard adjustment processes
“Despite the intensive and often justified criticism to which it has been subjected, the general equilibrium model provides the underpinning for most modern economic reasoning. … Analysis of the model, culminating in the work of Sonnenschein (1972), Mantel (1974), and Debreu (1974), has shown that it does not have enough structure to provide a framework to establish the stability of equilibrium under standard adjustment processes. All the weight of this book, therefore is put on the characteristics of the equilibrium states of the economy, and none on how those equilibria are achieved.”
Alan Kirman in Kirman, A.P., (1998) “Introduction”, In Elements of General Equilibrium Analysis ed. Kirman, A.P.; Blackwell Publishers, Oxford, pp. 1-9; p. 1.

Development happens out of equilibrium
“Development in our sense is a distinct phenomenon, entirely foreign to what may be observed in the circular flow or in the tendency towards equilibrium. It is spontaneous and discontinuous change in the channels of the flow, disturbance of equilibrium, which forever alters and displaces the equilibrium state previously existing.”
Joseph Schumpeter in Schumpeter, J.A., (1934) The Theory of Economic Development: An Enquiry into Profits, Capital, Credit, Interest and the Business Cycle, Transaction Publishers reprint, 1983, New Brunswick NJ & London; originally published by Harvard University Press, trans. from the 2nd German edition of 1926 by Redvers Opie, lxiv + 255 pp; p. 64.

Development often takes place in discontinuous qualitative jumps, unsuited to the methods of equilibrium analysis
“[W]hat we are about to consider is that kind of change arising from within the system which so displaces its equilibrium point that the new one cannot be reached from the old one by infinitesimal steps. Add successively as many mail coaches as you please, you will never get a railway thereby.”
Joseph Schumpeter in Schumpeter, J.A., (1934) The Theory of Economic Development: An Enquiry into Profits, Capital, Credit, Interest and the Business Cycle, Transaction Publishers reprint, 1983, New Brunswick NJ & London; originally published by Harvard University Press, trans. from the 2nd German edition of 1926 by Redvers Opie, lxiv + 255 pp; p. 64, footnote 1. Emphasis in original.

Ruling out disequilibrium and non-optimal paths by definition in the modelling leads to policy based on circular reasoning
“[I]t cannot be that I am alone in believing that these authors have “simplified” economics away so that very many – perhaps most – of the problems which have engaged our subject cannot even be considered with this simplification. … Having modelled an economy as following an optimum path, they then announce as a separate discovery that public policy cannot improve it!”
Frank Hahn, one of the architects of general equilibrium theory, in Hahn, F.H., (1994) “An Intellectual Retrospect”, Banca Nazionale del Lavoro Quarterly Review, Vol. 47, No. 190, September, pp. 245-258; p. 258.

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Multiple equilibria

Multiple equilibria are inevitable in remotely realistic analytic models
“What we now know … is that multiple equilibria cannot be ruled out except by extremely strong and unjustifiable assumptions about individual preferences and technologies or by making assumptions about the distribution of characteristics. This last approach moves away from the basic tradition of general equilibrium theory, which was to make assumptions only about individual characteristics, not about their distribution.”
Alan Kirman in Kirman, A.P., (1998) “Introduction”, In Elements of General Equilibrium Analysis ed. Kirman, A.P.; Blackwell Publishers, Oxford, pp. 1-9; p. 4

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Comparing equilibria vs. modelling disequilibrium dynamics

Confusion between comparative equilibria versus a dynamic evolutionary process of accumulation
“The long wrangle about “measuring capital” has been a great deal of fuss over a secondary question. The real source of trouble is the confusion between comparisons of equilibrium positions and the history of a process of accumulation.”
Joan Robinson in Robinson, J. (1974) “History versus Equilibrium”, Indian Economic Journal, Vol. 21, No. 3, January – March, pp. 202-213; p. 211.

It is not legitimate to introduce an event into a system of simultaneous equations
“It is not legitimate to introduce an event into a system of simultaneous equations. On a two-dimensional diagram, time lies at right angles to the plane on which the diagram is drawn, with the past behind it and the future in front. Suppose that [an] economy has been living through history on a path passing through one equilibrium point and that, at some date, a change in taste occurs. Then the pattern is no longer one of equilibrium. A change in the pattern of production must involve investment and disinvestment, at least in work in progress, and windfall losses and gains on stocks that have become inappropriate. To say how long it will take, or by what path, to find a new equilibrium we have to fill in a whole story about the behaviour of the economy when it is out of equilibrium, including the effect of disappointed expectations on decisions being taken by its inhabitants.”
Joan Robinson in Robinson, J. (1974) “History versus Equilibrium”, Indian Economic Journal, Vol. 21, No. 3, January – March, pp. 202-213; p. 206.

Snapshots of equilibria don’t constitute a process of accumulation in historical time
“Let us suppose that we can take a number of still photographs of economies each in stationary equilibrium; … This is an allowable thought experiment. But it is not allowable to flip the stills through a projector to obtain a moving picture of a process of accumulation.”
Joan Robinson in Robinson, J. (1974) “History versus Equilibrium”, Indian Economic Journal, Vol. 21, No. 3, January – March, pp. 202-213; p. 211-212.

We have no satisfactory axiomatic foundation for a theory of disequilibrium adjustment
“The conclusion of the ensuing survey will be this: a great deal of skilled and sophisticated work has gone into the study of processes by which an economy could attain an equilibrium. Some of the (mainly) technical work will surely remain valuable in the future. But the whole subject has a distressing ad hoc aspect. There is at present no satisfactory axiomatic foundation on which to build a theory of learning, of adjusting to errors and of delay times in each of these. It may be that in some intrinsic sense such a theory is impossible. But without it this branch of the subject can aspire to no more than the study of a series of suggestive examples.”
Frank Hahn, one of the architects of general equilibrium theory, in Hahn, F.H., (1982) “Stability”, In Handbook of Mathematical Economics ed. Arrow, K.J. and Intriligator, M.D.; North-Holland, Amsterdam, Vol. II pp. 745-793; p. 747.

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Comparative statics

The upshot of all this? Comparative statics is a dodgy methodology
“When trade takes place out-of-equilibrium (and even more when disequilibrium production and consumption occur), the very adjustment process alters the equilibrium set. This is easily seen even within the simplest model of pure exchange. In such as model, the equilibrium prices and allocations depend on endowments. If trade takes place out-of-equilibrium, those endowments change. Hence, even if the trading process is globally stable, the equilibrium reached will generally not be one of those corresponding to the initial endowments in the static sense of Walras correspondence. Rather the equilibrium reached will be path-dependent, dependent on the dynamics of the process taking place in disequilibrium. … the principal tool of equilibrium analysis – comparative statics – is called into question. Displacement of equilibrium will not be followed by convergence to the new equilibrium implied by comparative statics. Rather it will be followed by a dynamic adjustment process which, if stable, generally converges to a different equilibrium. … Out-of-equilibrium effects may, of course, be small. But we have no reason to believe that they are.”
Franklin Fisher in Fisher, F.M., (2003) “Disequilibrium and Stability”, In General Equilibrium: Problems and Prospects ed. Petri, F. and Hahn, F.; Routledge, London & New York, pp. 74-94; pp. 79-80.

Comparative statics presumes a unique equilibrium
“Consider an economist working with an applied general equilibrium model. This economist starts by calibrating, or statistically fitting, the parameters of the model so that it has an equilibrium that replicates transactions observed in the data. He or she then changes some of the parameters to simulate a change in policy, and computes an equilibrium to the perturbed model. The economist then uses the changes in the values of variables from the initial equilibrium to the new one as an indication of the changes that he or she would expect to see in the corresponding variables in the economy if the simulated policy change were to occur. This is the comparative statics method. If there is more than one possible equilibrium after the parameter change, the method becomes problematic. … As we shall see, useful conditions that guarantee the uniqueness of equilibrium are very restrictive.”
Timothy Kehoe in Kehoe, T.J., (1998) “Uniqueness and Stability”, In Elements of General Equilibrium Analysis ed. Kirman, A.P.; Blackwell Publishers, Oxford, pp. 38-87.

On the implications of the SMD results for uniqueness and stability, and hence for the method of comparative statics
“While the existence of equilibrium is guaranteed, under rather general conditions, nothing can be said about uniqueness or stability. These are not technical problems. Without uniqueness, comparative statics exercises, the economist’s standard tool for examining the consequences of change, are meaningless. Without stability, and therefore no guarantee that an economy out of equilibrium will move to one, the interest of the equilibrium concept itself is put into question.”
Alan Kirman in Kirman, A.P., (1999) “Interaction and Markets”, In Beyond the Representative Agent ed. Gallegati, M. and Kirman, A.P.; Edward Elgar, Cheltenham, UK & Northampton, MA, pp. 1-44; p. 3.

Comparative statics rests on very, very shaky ground
“[E]verything we know about stability says that one cannot get stability out of a dynamic system where only prices change. One gets stability where trade takes place out of equilibrium. And, if trade takes place out of equilibrium, it means that the place to which the economy goes, given initial conditions, is not the place to which static equilibrium theory would predict the economy would go. What that means in more general terms is that comparative statics – a major tool of static equilibrium theory – is on very, very shaky ground.”
Franklin Fisher in Fisher, F.M., (1989) “Stability Analysis in Micro and Macro Theory: An Interview”, In Joan Robinson and Modern Economic Theory ed. Feiwel, G.R.; New York University Press, New York, pp. 311-322; p. 317.

The root of the problem?
“Orthodox economists have exhibited a long-standing confusion between process optimisation in historical time and logical optimisation in commodity space.”
John Foster in Foster, J., (1998) “Abstraction in Economics: Incorporating the Time Dimension”, International Journal of Social Economics, Vol. 25, No. 2-4, pp. 146-167; pp. 162-163.

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Imperfect information

The need for models with imperfect information has long been recognised
“Certainly it is now widely agreed that it is undesirable to have an equilibrium notion in which information is as perfect and as costless as it is in Arrow-Debreu.”
Frank Hahn, one of the architects of general equilibrium theory, in Hahn, F.H., (1974) “On the Notion of Equilibrium in Economics”, Inaugural Lecture, Cambridge University Press, Cambridge; Reprinted in Hahn, F.H., (1984) Equilibrium and Macroeconomics, Basil Blackwell, Oxford, pp. 43-71; p. 53.

Economics in the real world
“There is not a complete set of markets; information is imperfect; the commodities sold in any market are not homogeneous in all relevant respects; it is costly to ascertain differences among the items; individuals do not get paid on a piece rate basis; and there is an element of insurance (implicit or explicit) in almost all contractual arrangements, in labor, capital and product markets. In virtually all markets there are important instances of signalling and screening. Individuals must search for the commodities they wish to purchase, firms must search for the workers who they wish to hire, and workers must search for the firm for which they wish to work. We frequently arrive at a store only to find that it is out of inventory; or at other times we arrive to find a queue waiting to be served. Each of these “small” instances, but their cumulative effects may indeed be large. We have constructed a model which shows that in all of these circumstances, Pareto improvements can be affected through government policies, such as commodity taxes.”
Bruce Greenwald & Nobel Prize winner Joseph Stiglitz in Greenwald, B.C. and Stiglitz, J.E., (1986) “Externalities in Economies with Imperfect Information and Incomplete Markets”, Quarterly Journal of Economics, Vol. 101, No. 2, May, pp. 229-264; pp. 259-260

Information and the acquisition of knowledge is critical for establishing causation in real-world economics
“[M]y main contention will be that the tautologies, of which formal equilibrium analysis in economics essentially consists, can be turned into propositions which tell us anything about causation in the real world only in so far as we are able to fill those formal propositions with definite statements about how knowledge is acquired and communicated.”
Nobel Prize winning economist Friedrich Hayek in Hayek, F.A., (1937) “Economics and Knowledge”, Economica, Vol. 4, No. 13, February, pp. 33-54; p. 33.

Markets don’t necessarily clear if information is imperfect
“[T]he notion that underlay much of competitive equilibrium analysis – that markets had to clear – was simply not true if information was imperfect.”
Joseph Stiglitz in his Nobel Lecture, published as Stiglitz, J.E., (2002) “Information and the Change in the Paradigm in Economics”, American Economic Review, Vol. 92, No. 3, June, pp. 460-501; p. 464.

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Uncertainty

Genuine uncertainty is different from quantifiable risk
“By “uncertain” knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatsoever. We simply do not know.”
John Maynard Keynes in Keynes, J.M., (1937b) “The General Theory of Employment”, Quarterly Journal of Economics, Vol. 51, No. 2, February, pp. 209-223; pp. 213-214.

Genuine uncertainty means intertemporal decisions can’t be coordinated
“The Rational Expectations hypothesis substitutes an internal and psychic hand for the market. Each individual somehow has learned how the invisible hand would have performed if it had been given markets in which to perform. If it is agreed that this is not of high descriptive merit, there is, in fact, no obvious mechanism by which inter-temporal decisions can be coordinated. This was Keynes’s view and I have yet to see it refuted.”
Frank Hahn, one of the architects of general equilibrium theory, in Hahn, F.H., (1982) “Reflections on the Invisible Hand”, Lloyds Bank Review, No. 144, April, pp. 1-21; p. 12.

Genuine uncertainty leads to instability in expecatations & investment and hence unemployment
“Fundamental uncertainty is seen as implying the possibility of long-run unemployment, even in a world of perfect competition and fully flexible prices and wages. Uncertainty leads to liquidity preference and the non-neutrality of money in the long run. Most importantly, uncertainty and the associated instability of expectations is seen as underpinning the instability of investment, which in turn is the main key to more general macroeconomic stability.”
Barkley Rosser in Rosser, J.B., Jr., (2001) “Alternative Keynesian and Post Keynesian Perspectives on Uncertainty and Expectations”, Journal of Post Keynesian Economics, Vol. 23, No. 4, Summer, pp. 545-566; p. 560.

Dynamic Stochastic General Equilibrium (DSGE) models no longer assume perfect information, having adding stochastic risk, but agents remain dynamic optimisers subject to rational expectations. But reducing uncertainty to stochastic risk of known probabilities abstracts away an essential feature of our economic system.
“Not only does it assume that everyone somehow converges on the same theory of the world, but the theory on which they are supposed to converge treats all uncertainty as merely exogenous risk with known probabilities. It is a theory that succeeds in taming the uncertain future merely by assuming that uncertainty is already tame.”
Perry Mehrling in Mehrling, P., (2006) “The Problem of Time in the DSGE Model and the Post Walrasian Alternative”, In Post Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model ed. Colander, D.; Cambridge University Press, Cambridge, pp. 70-79; p. 77.

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Incomplete markets

The incompleteness of markets has far-reaching implications
“The postulate of complete markets now implies, for instance, that there is given to the individual terms on which he can trade butter in Warwick tomorrow if cold, for bread in Warwick today when it is hot. That is, every good, as defined, has a price and so a market on which it is traded. The postulate is wildly at variance with the facts … but the postulate is crucial for some of the claims made on behalf of the invisible hand and its rejection has far-reaching consequences.”
Frank Hahn, one of the architects of general equilibrium theory, in Hahn, F.H., (1982) “Reflections on the Invisible Hand”, Lloyds Bank Review, No. 144, April, pp. 1-21; p. 3.

A complete general equilibrium system requires complete markets
“A complete general equilibrium system, as in Debreu (1959), requires markets for all contingencies in all future periods. Such a system could not exist. First, the number of prices would be so great that the search would become an insuperable obstacle … Second, markets conditional on privately observed events cannot exist by definition. In any case, we certainly know that many – in fact, most – markets do not exist. When a market does not exist, there is a gap in the information relevant to an individual’s decision, and it must be filled by some kind of conjecture, just as in the case of market power.”
Nobel Prize winning economist Ken Arrow in Arrow, K.J., (1987) “Economic Theory and the Hypothesis of Rationality”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; Macmillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 2, pp. 69-75; p. 72. Reprinted from Journal of Business, 1986, Vol. 59, No. 4, Pt. 2.

The field formalism of general equilibrium theory requires that every product, every agent, every place and every time is connected to every other through complete markets. However …
“[A] field does not describe the geometry of economic space.”
Jason Potts in Potts, J., (2000) The New Evolutionary Microeconomics: Complexity, Competence and Adaptive Behaviour, New Horizons in Institutional and Evolutionary Economics; Edward Elgar, Cheltenham, UK and Northampton, MA, xii + 239 pp; p. 43.

Acknowledging incomplete markets changes everything
“First, the usual continuity and convexity assumptions are not sufficient to ensure the existence of equilibrium. Secondly, an equilibrium may be Pareto-dominated by another allocation which can be achieved using the same markets. We have also seen that if we start off in a situation where markets are incomplete, opening new markets may make things worse rather than better. In this respect, an economy with incomplete markets is like a typical second best situation. Only if all imperfections are removed, that is, in this case all markets are opened, can we be sure that there will be any overall improvement.”
Hart, O., (1975) “On the Optimality of Equilibrium then the Market Structure is Incomplete”, Journal of Economic Theory, Vol. 11, No. 3, December, pp. 418-443; p. 442.

So-called GEI (General Equilibrium Incomplete) models routinely produce multiple equilibria

“[T]he existence of a continuum of equilibria seems to be characteristic of many models with incomplete markets. Extensive non-uniqueness in this sense means that the theory has relatively little power.”
Nobel Prize winning economist Ken Arrow in Arrow, K.J., (1987) “Economic Theory and the Hypothesis of Rationality”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; MacMillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 2 pp. 69-75; p. 73. Reprinted from Journal of Business, 1986, Vol. 59, No. 4, Pt. 2.

Sequential trading in incomplete market models can make the problem of multiple equilibria worse
“[A]s in the Arrow-Debreu model, multiplicity of equilibria seems to be the rule rather than the exception. With sequential trading however, this is an even more serious weakness of the model than it already is in the Arrow-Debreu model.”
Thorsten Hens in Hens, T., (1998) “Incomplete Markets”, In Elements of General Equilibrium Analysis ed. Kirman, A.P.; Blackwell Publishers, Oxford, pp. 139-210; p. 144.

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What kind of mathematics?

Not all core assumptions are made explicit
“[T]he notion that commodities exhibit a natural isomorphism to a real Euclidean vector space is the most deeply rooted unobtrusive postulate in modern economic theory.”
Phil Mirowski in Mirowski, P., (1991) “The When, the How and the Why of Mathematical Expression in the History of Economic Analysis”, Journal of Economic Perspectives, Vol. 5, No. 1, Winter, pp. 145-157; p. 153.

Real analysis isn’t the only kind of mathematics – and may not be the most appropriate for the integer problems of economics
“[S]et theory is only one of at least four sub-branches of mathematical logic; the others being: proof theory, recursion theory and model theory. Loosely speaking, but not entirely inaccurately, it is possible to associate one particular class of numbers with each of these sub-branches of logic: real numbers, constructive numbers, computable numbers and non-standard numbers, respectively. Analogously, each of these forms the subject matter of: real analysis, constructive analysis, computable analysis and non-standard analysis. Which of these numbers and, hence, which kind of analysis, is appropriate for economic analysis is almost never discussed in any form or forum of mathematical economics or mathematics in economics. It is taken for granted that real numbers and its handmaiden, real analysis, is the default domain. Why?”
Vela Velupillai in Velupillai, K.V., (2005) “The Unreasonable Ineffectiveness of Mathematics in Economics”, Cambridge Journal of Economics, Vol. 29, No. 6, November, pp. 849-872; p. 856.

An integer linear programming problem can’t be solved by simply calculating as if it were defined over the reals and then rounding off the results.
An integer linear programming “cannot, except for flukes, be solved by rounding the solution to the ‘corresponding’ linear programming (LP) problem … deciding whether it can be rounded – is just as hard as the original satisfiability problem.”
Vela Velupillai in Velupillai, K.V., (2004) “A Primer on the Tools and Concepts of Computable Economics“, Discussion Paper No. 5, Universita’ Degli Studi Di Trento – Dipartimento Di Economia, 20 July, 49 pp.

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Consumer preferences

Preferences aren’t exogenous to the economy
“Modern economics assumes that exogenous consumer preferences interact with ‘technologies’ and initial endowments to produce equilibrium prices and production levels. This analysis falls apart if preferences are themselves influenced by the very equilibrium states that they are presumed to create. Indeed, in the domain of economic decision-making, the most salient and potentially powerful anchors may well be the public parameters of the economy itself: the relative prices and scarcities of different commodities. … If prices and other economic parameters function as public anchors, then consumer tastes no longer exist independently of prices but are endogenous to the economy. In that case, the equilibrium price and production levels of the economy are no longer uniquely determined by its physical and human resources and characteristics. Rather, a certain price level may prevail because of collective anchoring, triggered by historical accidents or manipulations.”
Dan Ariely, George Loewenstein & Drazen Prelec in Ariely, D., Loewenstein, G. and Prelec, D., (2006) “Tom Sawyer and the Construction of Value”, Journal of Economic Behavior & Organization, Vol. 60, No. 1, May, pp. 1-10; pp. 9-10.

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The rationality & computational capacities of economic agents

Curious indeed
“We have the curious situation that scientific analysis imputes scientific behaviour to its subjects.”
Nobel Prize winning economist Ken Arrow in Arrow, K.J., (1987) “Economic Theory and the Hypothesis of Rationality”, In The New Palgrave: A Dictionary of Economics ed. Eatwell, J., Milgate, M. and Newman, P.; Macmillan Press, London; Stockton Press, New York & Maruzen Company, Tokyo, Vol. 2, pp. 69-75; p. 71. Reprinted from Journal of Business, 1986, Vol. 59, No. 4, Pt. 2.

Without the assumption of infinite computational capacity, Arrow-Debreu general equilibrium breaks down once an element of uncertainty is introduced
“The Arrow-Debreu world is strained to the limit by the problem of the choice of information. It breaks down completely in the face of limits on the ability of agents to compute optimal strategies.”
Radner, R., (1968) “Competitive Equilibrium Under Uncertainty”, Econometrica, Vol. 36, No. 1, January, pp. 31-58.

Information processing takes time

“Heterogeneity is closely tied to information and how information is diffused through the system. And it is also tied to individuals’ limited capacity to process information. This is where complexity theory comes in. The original problems were complex enough, but now you’re adding in multiple additional levels of complexity to the point where it is beyond any real analytic capability. Time also fits in here … even if you have a very simple information processing theory, you have a problem that the information has to be processed, and that takes time.”
Nobel Prize winning economist Ken Arrow in Colander, D., Holt, R.P.F. and Rosser, J.B., Jr., (2004) The Changing Face of Economics: Conversations with Cutting Edge Economists, University of Michigan Press, Ann Arbor, x + 358 pp; p. 301.

Why more choice isn’t always an unambiguous good
“Decision making itself is costly.”
Nobel Prize winning economist James Tobin in Tobin, J., (1980) “Are New Classical Models Plausible Enough to Guide Policy?” Journal of Money, Credit and Banking, Vol. 12, No. 4, Part 2, November, pp. 788-799; p. 796.

Bounded rationality has big implications for the abilities of economic agents to optimize
‘[B]ounded rationality cannot be thought of as rationality with costly information processing. The optimal solution to the problem of deciding optimal information processing can be a harder problem than information processing alone.”
Nobel Prize winning economist Ken Arrow in Colander, D., Holt, R.P.F. and Rosser, J.B., Jr., (2004) The Changing Face of Economics: Conversations with Cutting Edge Economists, University of Michigan Press, Ann Arbor, x + 358 pp; p. 301.

Mathematicians aren’t impressed with economists’ visions of perfectly rational optimizing agents
“[F]rom a mathematician’s point of view, the foundations of neoclassical economics are hopelessly non-effective computationally and therefore must be considered irrational from the standpoint of computational viability once we leave the discrete, finite combinatorial domain … where compactness exists but not convexivity.”
Alan Lewis in Lewis, A.A., (1985) “On Effectively Computable Realizations of Choice Functions”, Mathematical Social Science, Vol. 10, No. 1, August, pp. 43-80; p. 46.

Real-world human errors should be taken into account in policy analysis
“The possibilities that 15-year-olds, err in becoming tobacco addicts or that 25-year-olds err in borrowing heavily on their credit cards or that 35-year-olds err in too wildly playing the stock market with their retirement savings all strike us as profoundly plausible and of great policy relevance. It therefore seems to us that policy analysis that incorporates the substantive insights and methodological rigors of economics, while being more realistic about the nature of errors people make, should be enthusiastically and quickly embraced.”
Ted O’Donoghue & Matthew Rabin in O’Donoghue, T. and Rabin, M., (2003) “Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes”, American Economic Review, Vol. 93, No. 2, May, pp. 186-191; p. 191.

People are perfectly rational all the time?
“[N]europsychiatric conditions are the most important causes of disability, accounting for more than 37 percent of YLDs [Years Lived with a Disability] … among adults ages 15 and over. The disabling burden of neuropsychiatric conditions is almost the same for males and females, but the major contributing causes are different. While depression is the leading cause for both males and females, the burden of depression is 50 percent higher for females than for males, and females also have a higher burden from anxiety disorders, migraine, and senile dementias. In contrast, the male burden for alcohol and drug use disorders is nearly six times higher than that for females and accounts for one-quarter of the male neuropsychiatric burden.”
Lopez, A., Mathers, C., Ezzati, M., Jamison, D. and Murray, C. (Eds.), (2006) Global Burden of Disease and Risk Factors, Oxford University Press and the World Bank, Washington DC, xxix + 475 pp.; p. 85.

Do deviations from the assumption of perfect rationality matter for economic analysis? Yes.
“[S]mall deviations from rationality can have first-order consequences in microeconomic analysis. … the conclusions usually derived from models with strict maximising behavior are not very robust.”
George Akerlof & Janet Yellen in Akerlof, G.A. and Yellen, J., (1985) “Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?” American Economic Review, Vol. 75, No. 4, September, pp. 708-720; p. 708.

Relatively few occurrences of individual irrationality can have large aggregate effects
“[A] small amount of individual irrationality can have large aggregate effects under strategic complementarity whereas a small share of rational individuals may generate an aggregate outcome close to rational prediction under strategic substitutability. Thus the presumption that individual irrationality does not matter for the aggregate outcome of social interactions can be either true or false, which suggests three general lessons for economists. First, economists should routinely ask themselves which forms of irrational behaviour might play a role in the situations they analyze, instead of assuming full rationality of all agents. … Second, we suspect that in many cases economic models should assume that players differ in their degree of rationality … Third, whether the rational or irrational players dominate the aggregate outcome depends on the strategic environment. In particular it is likely to depend on whether strategic substitutability or complementarity prevails. … Thus there is little reason to assume that economic forces generally render individual irrationalities unimportant.”
Ernst Fehr & Jean-Robert Tyran in Fehr, E. and Tyran, J.-R., (2005) “Individual Irrationality and Aggregate Outcomes”, Journal of Economic Perspectives, Vol. 19, No. 4, Fall, pp. 43-66; p. 63.

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Increasing returns

Increasing returns aren’t just about technical production specifications
“What Young saw so clearly was that increasing returns create a reciprocal dependence in rates of technical progress within and between activities. This is not only a matter of what the modern student would label ‘spillovers’, but rather a question of the fruits of innovation in one sector raising per capita incomes and this influencing output growth and the accumulation of knowledge in other sectors.”
John Foster & Stanley Metcalse in Foster, J. and Metcalfe, J.S., (2001) “Modern Evolutionary Economic Perspectives: An Overview”, In Frontiers of Evolutionary Economics: Competition, Self-Organization and Innovation Policy ed. Foster, J. and Metcalfe, J.S.; Edward Elgar, Cheltenham, UK & Northampton, MA, pp. 1-16; p. 13. Referring to: Young, A., (1928) “Increasing Returns and Economic Progress”, Economic Journal, Vol. 38, pp. 527-542.

Can we ignore scale economies and imperfect competition?
“As a now extensive body of applied research demonstrates, these linkages can easily dominate in sign and/or magnitude the production and welfare effects estimated under the perfect competition paradigm. … At a minimum it is clear that the constant returns, perfect competition paradigm suppresses a number of potentially powerful mechanisms linking trade policy with industry performance.”
Joseph Francois & David Roland-Holst in Francois, J.F. and Roland-Holst, D.W., (1997) “Scale Economies and Imperfect Competition”, In Applied Methods for Trade Policy Analysis: A Handbook ed. Francois, J.F. and Reinert, K.A.; Cambridge University Press, Cambridge, pp. 331-363; pp. 360-361.

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Links

African Economic Research Consortium

Centre for Policy Development – “A new public interest think tank dedicated to promoting alternative voices in Australia’s public debate.”

Dani Rodrik’s blog Dani Rodrik is one of the most sensible international economists.

Initiative for Policy Dialogue at Columbia University – set up by Joseph Stiglitz.

Inomics is a useful site for economists with email alerts on jobs and conferences, among other things.

Institute for New Economic Thinking at the Oxford Martin School, Oxford University

John Quiggin’s blog. “Commentary on Australian & world events from a social-democratic perspective.”

Martin Wolf’s columns in London’s Financial Times, are always worth reading.

New Economics Foundation

Real-World Economics Review – For a critical view of some aspects of modern economics.

Steve Keen’s podcasts Steve has generously uploaded an enormous amount of lecture material on both the history of economic thought and complex dynamic systems modelling here. To view and support Steve’s research, see his Patreon page.

The Other Canon – “Reality and Production based economics”.

Reserve Bank of Australia

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Last updated: 22 July 2017 Copyright © Brett Parris, 2011-2017.