Should economists use more disequilibrium modelling?

Post Reply New Topic

http://www.businessspectator.com.au/bs. ... 0923-YEDVJ

This is an article by Steve Keen, an Australian Post-Keyneisan economist. In it, he touches on Irving Fisher's dead wrong predictions before the crash of 1929 that the Stock Market wouldn't dramatically fall. He blames Irving Fisher's mistakes (which lead to a hefty loss of money) on a fixation on equilibrium modelling of financial markets.

Fisher, after losing it all, drifted away from equilibrium modelling and developed a theory of "debt deflation".

http://en.wikipedia.org/wiki/Debt_deflation

Keen's view is that neoclassical economists folly has been to continue modelling the economy either in equilibrium or as static "snapshots" transitioning from one equilibrium to another. A better method would be incorporating the "complexity" or "chaos" theory that revolutionized meteorology.

What are your thoughts, especially if you're from one of the sciences which Keen presents as having largely abandoned equilibrium modelling?

Our economies actually work at states far from equilibrium so your proposal makes sense.

This is analogous to non-equilibrium thermodynamics. Since we live in an open system here on earth, we can actually decrease entropy locally.

Our economy is capable of wasteful production in which the product of capital and labor is not cleared from the market by autonomous choices on the part of buyers and sellers.

Since you seem to know something about economics (I don't) would you say that Pareto Optimality and dis-equilibrium are possibly compatible? (This is a genuine query. I really do not know the answer).

ruveyn

Many Austrians have bee at least somewhat critical of general equilibrium theory for years.

But they tend to shun any form of mathematical modelling period, preferring verbally axiomatic "praxeology".

In light of both the 1929 and 2008 financial "issues" they probably should. In my experience the problem with academic economics (as it is in much of academia) that the researchers and theoreticians over time develop a large time investment into their field of expertise and thus have a large personal investment which may become invalidated or made useless if they change their approach.

Debt deflation and Minsky's Financial instability hypothesis both hold a lot of promise and seem intuitively to be sound, given effects of the 2008 financial crisis. Interestingly enough, the Austrian school's business cycle theory has some similarities.

I think one of the fundamental problems is the fact that economics is an applied science. As soon as economists think they have it all figured out they start going out and advising government and private sector entities based on the current theory that is in vogue. Private actors then take advantage of these theories (usually with an incomplete understanding, admittedly) which effectively changes the game, making the theory even more irrelevant than it was to start. This "information feedback" effect creates a paradox vaguely analogous to the Heisenberg uncertainty principle where the "true value" of a market variable in motion is unknowable.

I don't think this means mathematical models are useless though. I just think they are more expository than predictive in an absolute sense.

Please don't apply the uncertainty principle to economics. It is the hallmark of post-modernism to do so.

Also, the Austrian criticism of equilibrium modelling is undeserving of a reply. Austrian Economics (in it's current state) is fringe science, at best... It has been decades since the Austrian school last made any relevant contributions to economics...

The equilibrium approach is (in my opinion) the only useful approach to economics.

The neoclassical approach didn't become the mainstream in economics by chance...

It's not post-modernism and I never said the analogy is exact. The problem I stated cannot simply be swept under the rug. Denying it would be like mathematicians denying Godel's incompleteness theorem because they don't like it.


The problem with Austrian Economics is that it's become a political fad and is ideologically driven, no less than Marxian economics. Also, Murray Rothbard is an idiot.


All this says is that non-equilibrium economics is difficult. I'm guessing most mainstream economists just don't want to have to deal with trying to break new ground in difficult terrain while at the same time getting backlash from mainstream economists. It's not worth risking their career over.

Then please provide evidence that the uncertainty principle and Kurt Gödels incompletenesss theorem (not being Austrian is no excuse for misspelling a name) could be applied to economics while making sense at the same time.

Normally, I'd say that a discussion on economics is a no laughing matter, but this leaned the f**k out of me.

I never said they did. It seems you don't understand the concept of an analogy.

I understand analogies very well. Which is why I have no respect for them...

That would depend entirely on if the analogy actually has a function beyond being merely a rhetorical move to overshadow a lack of arguments.

My "Tazed in the balls" analogy about flawed ideologies was quite the magnificent example of useful analogy if I say so myself.

How can you have no respect for analogies in general?

http://en.wikipedia.org/wiki/Argument_from_analogy
http://en.wikipedia.org/wiki/False_analogy

I prefer Popper...

That's the fallacy of argument from analogy and false analogy, not all analogies in general. That's like saying you're against sentences in general because some people lie with sentences.