As long-suffering readers know, I don't have time for a lot of the public intellectual economists, life's too short for political and policy preferences gussied up in fancy-dress math. There are a handful of names I make time for, Nordhaus and Shiller among the heavyweights and Timothy Taylor* and Pilkington among the lesser (but brighter than I) lights.
Pilkington's book The Reformation in Economics, aims directly at the heart of the question, "How much of economics is ideological?" He hangs his academic hat at Kingston University and grubs his living as a member of the Grantham Mayo Van Otterloo Asset Allocation team.
From Inference Review:
General equilibrium theory, or GET, is the metatheory on which all of mainstream economics rests; it remains very abstract, and it has been carefully studied by only a small number of economists. Invented by the French economist Leon Walras in 1899, GET was neglected for half a century as economists dealt with the intensifying business cycle, the emergence of central banks, and the Great Depression. The economists who began to take notice of it in the 1950s tended to be applied mathematicians, or, at least, economists with strongly analytical gifts.1 In the 1960s, a debate arose between John Maynard Keynes’s students at Cambridge University and mathematical economists at MIT. Known as the Cambridge capital controversies, the debate called into question the presumption that aggregation functions defined over microeconomic models could coherently yield a macroeconomic model of the economy.2
Controversy and critique led economists to micro-founded models in which micro and macroeconomic theories were, at least, presumptively consistent. The standard micro-founded economic model, used by many central banks and presented to graduate students, is the dynamic stochastic general equilibrium model.3 It is available in two forms or flavors: the New Classical and the New Keynesian. Both sides see the economy tending toward a perfectly efficient outcome. They disagree only on how difficult it is to get there. New Classicals think it easy. They see economic laws operating in a vacuum, with little or no resistance from non-market actors. New Keynesians think it difficult. They see unavoidable rigidities in the real world—wages that do not fall fast enough—or factors internal to the market itself, such as the cost of changing price lists when prices change. For this reason, the New Keynesians often appeal to what they term short and long periods, times in which the economy’s general equilibrium is off and times in which it is on.
For all that, there is little disagreement about the general framework. Neither side doubts that markets move toward general equilibrium, if only because all neoclassical models assume that they do. The point is still more general: any model that invokes a market-clearing mechanism is committed to some sort of general equilibrium—an equilibrium in all markets simultaneously. This commitment is a matter of faith, and if ever questions are raised about GET, they remain within GET.4 Joan Robinson once said of economic models that they must abstract from the real economy. A map on a one-to-one scale is useless. She was right of course, but a map that does not accurately reflect the terrain is useless, no matter the scale. If the GET really does underpin the models that economists use to examine market economies, then surely we must be interested in how closely these models match the real world?
Groping and Auctions
In Éléments d’économie politique pure (Elements of Pure Economics), Walras introduced economists to the notion of tâtonnement:
What must we do in order to prove that the theoretical solution is identically the solution worked out by the market? Our task is very simple: we need only show that the upward and downward movement of prices solve the system of equations of offer and demand by the process of groping [‘par tâtonnement’].5Two words stand out in this paragraph: “identically” and “simple.” Walras is not shy about making large claims for the theory that he is expounding: the theoretical solution to his system of equations is “identically the solution worked out by the market.” Did Walras have any proof of this? Not obviously. All we are told is that the “task is very simple.”
On the contrary, the task is not simple at all.....MUCH MORE
Within the literature of GET, background assumptions are sometimes encompassed by the figure of the Walrasian auctioneer.6 Imagine that all economic transactions take place at auction. The participants are highly numerate agents whose preferences are transparent and assigned exact prices. A is willing to pay $1 for a banana, but not one cent more; B, $275 million for a superyacht, but not one dollar more. The auctioneer collects the offers for all products at all their potential prices. These serve as inputs to Walras’s system of equations. G. L. S. Shackle sets out the underlying assumptions:
Equilibrium is a means by which all persons in choosing their acts can be supposed to have equal and perfect relevant knowledge and equal freedom. Given a list of persons, besides himself, composing the society, and given for each of these persons a list of all the acts possible to that person, each person can be supposed to draw up a list of all the distinct combinations of acts, one or other of which combinations will constitute the circumstances surrounding his own act. For each of these combinations he can be supposed to specify the act that he himself would choose, in case he were assured that the combination in question would prevail. The conditional promises, one for each person, thus derived, can now be supposed to be treated as a system to be simultaneously solved.7That system of equations solved, the result is a general equilibrium at which the market is settled.
So much for the high-level view, but in the real world, one might think, an auction such as this would be asking a lot. Given an auctioneer recording prices, every market participant would be required to perform an enormous number of calculations and, what is more, generally without access to the thoughts of others. Walras’s auctioneer is obviously an imaginary figure, an aide to thought.8
This Walras knew.
If general equilibrium is not reached by means of a simultaneous comparison of prices, plans, and intentions, convergence to general equilibrium happens anyway, Walras argued, through trial and error, a kind of controlled groping....
Recently from Inference Review:
Emanuel Derman: "Trading Volatility"And many more, use the 'Search blog' box, upper left, if interested.
Review: "The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century"
The BIS and the Rise of Secular Stagnation
*In addition to his blog, Conversable Economist, Mr. Taylor is managing editor of the Journal of Economic Perspectives which fhas a couple pieces on antitrust in the most recent volume, e.g.
The Problem of Bigness: From Standard Oil to Google
