Tagged: Equilibrium

Quotes

Dierdre McCloskey, The Rhetoric of Economics (1985)

• If a 5 percent tax on gasoline is said by some congressman or journalist to be “designed” to fall entirely on producers the economist will complain, saying “It’s not an equilibrium.” “Not an equilibrium” is the economist’s way of saying that she disputes the ending proposed by some untutored person.#

F.A. Hayek, Individualism and Economic Order (1949)

• The concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the analysis of the action of a single person and we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interactions of a number of different individuals.#
• The real content of the assertion that a tendency toward equilibrium exists… can hardly mean anything but that, under certain conditions,… the expectations of the people and particularly of the entrepreneurs will become more and more correct.#Quoted in Israel Kirzner, How Markets Work (1997)
• [T]he assertion that a tendency toward equilibrium exists . . . can hardly mean anything but that, under certain conditions, the knowledge and intentions of the different members of society are supposed to come more and more into agreement.#
• Correct foresight is then not, as it has sometimes been understood, a precondition which must exist in order that equilibrium may be arrived at. It is rather the defining characteristic of a state of equilibrium.#

George Selgin, Praxeology and Understanding (1990)

• So long as people are neither completely dull nor completely content, they must necessarily act. To ask whether general equilibrium can ever be achieved is therefore to ponder the exhaustibility of people’s imaginations.#
• The only meaningful sense in which action can be said to be equilibrating is the dynamic one which assumes continually changing means and ends and the absence of equilibrium proper.#
• The process of price adjustment can only be comprehended by viewing it as a dynamic process of prices which are at once equilibrium prices in relation to those that they have replaced and disequilibrium prices in relation to those that will follow.#
• The continuing existence of action is proof that equilibrium proper is never achieved. It is equally proof that it is constantly being striven for.#

Israel Kirzner, How Markets Work (1997)

• Once one appreciates the Hayekian insight that an attained state of equilibrium means universal perfect knowledge, it becomes obvious that no model in which perfect knowledge is assumed can be of direct assistance in explaining how an equilibrating tendency might occur.#
• It is true that Mises did not draw special attention to the mutual learning that must occur during the entrepreneurially-driven process of equilibration. Nor did Hayek emphasise the speculative, entrepreneurial character of the market process. But . . . these two ways of articulating a theory of market process turn out to be two sides of the same coin.#
• A science of ‘human action’ must be a science of the equilibrative properties of entrepreneur-driven market processes.#
• the long-run equilibrium of perfect competition is not an appropriate policy target because it does not represent competition at all but an end-state in which competition has been exhausted. #

Jacob Frenkel, “Purchasing Power Parity: Doctrinal Perspective and Evidence from the 1920s” (1978)

• Those who advocate the use of traded good prices [in bringing about purchasing power parity] emphasize the role of commodity arbitrage as the mechanism which governs the relationship between prices and the exchange rate, while those who advocate the broader price index emphasize the role of equilibrium in asset markets as a major factor governing the relationship between prices and the exchange rate. #
• The relationship embodied in the traditional formulations of [purchasing power parity] should not be viewed as a theory of the determination of exchange rates. Rather, it describes an equilibrium relationship between two endogenous variables. As such, the PPP relationship should be viewed as a short-cut rather than a substitute for a complete model of the determination of prices and exchange rates. #

Jacob Viner, “Cost Curves and Supply Curves” (1931)

• The only significance of the equilibrium concept for realistic price theory is that it offers a basis for prediction of the direction of change when equilibrium is not established.#

Leland Yeager, “The Significance of Monetary Disequilibrium” (1986)

• In tackling questions about the long-run effects on prices and outputs of specified changes in wants, resources, technology, and legislation, one may legitimately neglect intervening disequilibrium to get on with the analysis. But when questions of macroeconomics are at issue—essentially, questions concerning disruptions or imperfections or delays in processes working to coordinate the plans and activities of many different people—then attention properly turns to how quickly and smoothly markets respond when disturbed, to transitional stages, and to the frictions of reality.#
• The very fact that no one sees himself as having any appreciable influence over the value of the money unit helps explain the sluggishness of the pressures working to correct a disequilibrium value.#

Ludwig Lachmann, Capital, Expectations, and the Market Process (1940)

• The merits of a particular model have to be judged by comparison with those of another model, actual or potential, not by comparison with “reality” which is, and always must remain, beyond our theoretical grasp. The common sense case for the equilibrium method is that if we wish to survey a constellation of diverse forces, the easiest method of doing so is to perform the mental experiment of imagining that state of affairs which would be reached when all these forces have unfolded all their implications.#
• The market process derives its rationale from, and has its place in, a world in which general equilibrium is impossible. But to deny the significance of general equilibrium is not to deny the significance of equilibrating forces. It is merely to demand that we must not lose sight of the forces of disequilibrium and make a comprehensive assessment of all the forces operating in the light of our general knowledge about the formation and dissemination of human knowledge.#

Ludwig Lachmann, Capital and Its Structure (1956)

• Process analysis, we may say, combines the equilibrium of the decision-making unit, firm or household, with the disequilibrium of the market.#
• [In equilibrium analysis,] while the failure of each successive plan conveys significant additional knowledge to the individuals concerned, it does not affect the shape of the demand and supply curves. It merely induces individual actors to choose other points on them for testing. It is usually assumed that as a result of the accumulating experience gained from a series of unsuccessful tests, a consistent solution is sure to be found in the end, in other words, that in the ‘real world’ there does exist a ‘tendency towards equilibrium’.#
• Equilibrium analysis can tell us whether courses of action are, or are not, consistent with each other. It cannot, except in rather special circumstances, explain how inconsistencies are removed.#

Nicholas Kaldor, “The Irrelevance of Equilibrium Economics” (1972)

• The very notion of “general equilibrium” carries the implication that it is legitimate to assume that the operation of economic forces is con- strained by a set of exogenous variables which are “given” from the outside and stable over time. It assumes that economic forces operate in an environment that is “imposed” on the system in a sense other than being just a heritage of the past-one could almost say an environment which, in its most significant characteristics, is independent of history.#

Peter Boettke, “Beyond equilibrium economics: reflections on the uniqueness of the Austrian tradition” (1994)

• The equilibrium benchmark can only be justified if we take “equilibrium” to mean market clearing, rather than general equilibrium. Certainly market clearing is essential for a theory of market order. In any given market there is a tendency for supply to meet demand, but this is quite different from the mechanical metaphor of equilibration. While equilibrium implies market clearing, market clearing does not imply equilibrium, with all of its questionable assumptions. #
• Consider what it would mean for human evolution to tend toward a final state. No biologist would ever say that we need to have a concept of a “fully evolved” human to understand the process of evolution. It would also seem questionable to attempt to explain evolution as a process “tending toward” such a being. That would necessitate both constructing the being and explaining the process. Similarly, the evolutionary process in economics does not refer to an end-state, but instead explains how creativity leads to complexity, while retaining a sufficient degree of coordination to make the complexity beneficial.#
• Market clearing arises when quantity supplied equals quantity demanded. Market equilibrium is achieved when the above holds, as well as an equality of marginal rates of substitution across all goods and factors, thus allowing price to equal marginal cost.#

Peter Boettke, “From The Philosophy of Mind to the Philosophy of the Market” (2002)

• General equilibrium theory was able to capture in abstract form the interconnectedness of all markets in an economic system, but it did so at the cost of assuming away the processes through which the division of knowledge in society is coordinated so that the interconnectedness can be realized. . . . Similarly, work in hard AI is able to replicate the mind as a ‘thinking machine’ and the interconnectedness of different parts of the brain, but at the cost of losing the human attributes of meaning and intentionality.#

Richard Wagner, Mind, Society, and Human Action (2010)

• The neo-Walrasian program provides a view of society as an equilibrated structure of relationships that is characterized by a set of prices that is consistent with market-clearing in light of consumer demands. You cannot get any more orderly than this. Much work in economic theory involves claims of market failure, which brings in claims that the observed degree of orderliness is not as complete as it could be. This claim of market failure, however, cannot be rendered intelligible without an ontological effort that would account for plausibility regarding the actual degree of orderliness within a society. The neo-Walrasian program makes no effort to develop such an account of plausibility.#
• As a tool of thought, the neo-Walrasian metaphysics of general equilibrium is surely indispensable for economic theory because it conveys the general interdependence among economic relationships in a society. As a description of reality, the situation is not so clear. It is possible to set forth necessary conditions for the existence of a general competitive equilibrium. What comes out of these formulations is mostly a sense that reality does not match these conditions.#
• If you work with equilibrium, you cannot allow structure to be anything other than a sideshow. If you want structure to matter, you cannot work with equilibrium.#

Steven Horwitz, “From The Sensory Order to the Liberal Order: Hayek’s Non-rationalist Liberalism” (2000)

• If indeed we were all the hyper-rational agents that general equilibrium theory assumes we are, then the very need for market institutions would disappear.#