Wednesday, January 07, 2009

The Meaning Of A Word Is Its Use In The Language









Anonymous said...

The big question is, if we assume that an economy is not in equilibrium then where does that leave arguments which blame, say, unemployment on wages being too high (i.e., not at their equilibrium price) or, dare I say it, interest rates not being at their "natural" rate?

Take this quote from Hayek ""cause of unemployment . . . is a deviation of prices and wages from their equilibrium position which would establish itself with a free market and stable money. But we can never know at what system of relative prices and wages such an equilibrium would establish itself." Therefore, "the deviation of existing prices from that equilibrium position . . . is the cause of the impossibility of selling part of the labour supply."

If equilibrium is a meaningless concept, where does that leave this argument? Unemployment may be unrelated to high wages and cutting them may have the opposite effect than equilibrium analysis suggests (as Keynes suggested back in 1936).

So it would be interesting to see how this pans out, but I'm not sure whether mainstream economics will be able to reject the lure of equilibrium. As can be seen, even the Austrians (who pay lip-service to opposing equilibrium analysis) appeal to it when necessary...

An Anarchist FAQ

Anonymous said...

Actually, Garegnani (1976) is a very cleaver insight on the concept of equilibrium. According to him, first-generation neoclassicals (like Walras, Marshall and Wicksell) shared the same idea that Ricardo, Smith and Marx; i.e., "natural" values as a centre of gravitation of "actual" values. The content of both theories (Classical and Neoclassical) are different, but the method is esencially the same.
Mises ideas are more or less the same.

Some difficulties with the treatment of capital as an homogenous quantity of a given magnitud but of variable form, which was the predominant idea of Marshall, Walras and Wicksell, led Hicks, Hayek and Lindhal to formulate concepts like temporal and intertemporal equilibrium. Value and Capital is the most important piece o work of this tradition, where capital is no more a amount of exchangeable value, but a vector of heterogeneous goods.

The fact that the economy is never in equilibrium wasn´t a big deal before Hicks´s book, but nowadays Arrow-Debreu disaggregated model needs perpetual equilibrium in order to "work".

Best regards (and sorry for very a poor translation),

Robert Vienneau said...

Hayek seems mistaken. Iain, where is that quote from?

Guala, one of my objections to the Cowen and Fink paper is that they do not reference that Garegnani paper. One cannot simply replace the Arrow-Debreu intertemporal equilibrium with Mises' Evenly Rotating Economy, or vice versa, without thinking more about stability arguments.

Apparently, Garegnani's most recent statement of his thesis is from last week's AEA meeting. I found Christopher Bliss's response often misdirected. The inability of most mainstream economists to competently evaluate logical criticism is irrelevant to the validity of that criticism.

Others, such as Harvey Gram, emphasize that any time to get in an Arrow-Debreu equilibrium is too much time.