dynamics

Steve.Keen at unsw.edu.au Steve.Keen at unsw.edu.au
Sun Apr 2 14:52:23 MDT 1995


Rakesh recently posted a set of "bobby-dazzler" questions re bourgeois
economics, saying in part:

|What real developments cannot be explained by classical and
|neo-classical theory? What constitutes "endogeneous structural
|development"?  What is the difference between a theory of adjustments and
|endogeneous structural development? What exactly is it that is static about
|bourgeois economics?
|Is it true that bourgeois economics can only explain disruptions of
|equilibrium as externally produced, i.e. by changes in what is economically
|given?  What does it mean to say that equilibrium has been disrupted? What
|are examples of these economic givens--population growth and savings?  Is
|it possible to see the change in these givens as internally produced?

Whew! Firstly, to give you some worthwhile references. A few which are both
accessible and lucid are:

* JM Blatt, _Dynamic Economic Systems_, ME Sharpe 1983. His critique of
neoclassical economics is largely contained in Chs. 1, 2, 10, 12 and 16.

* D Bell & I Kristol, _The Crisis in Economic Theory_, Basic Books, 1981;
|a set of papers by a number of authors.

* P Mirowski's _More heat than light_ (which I haven't read, but I have
read several papers preceding it), which argues that neoclassical economics
is a failed attempt to emulate 19th century physics.

To quickly attempt to answer some of your questions:

"What exactly is it that is static about bourgeois economics?" Very
simply, their theories fundamentally do not include time as a variable.
Thus they presume that there are no time-dependent processes in economics
of any consequence.

For example, you would have heard of the argument that prices are set by
supply and demand. If that were a dynamic process, then you would have
an argument something like "the rate of change of price with respect
to time is a function of the difference between supply and demand":

dP/dt = f(S-D)

What students actually get taught is that price is set by the intersection
of the supply curve and the demand curve:

(S) S = -a + b*P
(D) D = +c - d*P

which defines two straight lines, and the price is the level of P which
simultaneously satifies both equations.

The first approach has the time course mattering, and it is possible, for
example, that price could fluctuate around an equilibrium and explode
away from it: equilibrium can be unstable. But with the latter, the time
process is irrelevant, and it is automatically assumed that equilibrium
will "eventuate", effectively instantaneously.

The far more sophisticated higher reaches of the theory also abstract from
time, but in a far more complex manner, and the complexity of technique
often blinds practitioners to what they are actually doing. This area is
known as the Arrow-Debreu model, and in it one of the key concepts is
"contingent commodities". This says that a commodity is not defined just
by its existence, but by where it is and when it exists, and the conditions
which apply at that time and place. Sounds reasonable; except that they then
model a world where contracts are for the exchange of "contingent
commodities" only.

An example would be that Rakesh and I could exchange a contract where he
agrees to supply me with an umbrella in Denver on July 30th 2013, if it's
raining.

Now what this means is that, if it isn't raining in Denver on that day,
then I don't need an umbrella, and indeed, I haven't wasted money buying
one. But if it is raining in that day (and I'll be there, too, by the
way--why else would I have bought the contingent umbrella?), then I'll
need an umbrella, and I'll have one.

The gist is that there is no such thing as uncertainty: I don't know
everything that's going to happen in the future, but I know all the
possible futures (raining/not raining in Denver on 30/7/2013), and
I've purchased contracts to cover them all. Thus time might as well
not exist.

As a result, since the entire economy consists of individuals like me
exchanging contingent contracts, the market system (of contract
exchange) allows us to reach the one point of equilibrium which
maximises utility for each and every agent. Then time rolls on, and
whichever sequence of events actually unfolds, the capital stock,
prices and commodity distributions that occur are perfectly suited
to it.

Of course, some economists actually are required to make predictions
about the real world:

"Is it true that bourgeois economics can only explain disruptions of
equilibrium as externally produced..."

The practical gist of the above is that such economists take it as
proven that the economy is fundamentally stable, and will reach
equilibrium. They then develop simpler models which presume that
the real world would be a succession of equilibrium states if it
weren't for random disturbances from such things as weather, truck
accidents, etc. So econometrics, which attempts to track the cycles
of an economy, is normally based on the concept of random shocks to
a highly stable process. Blatt has some especially good pieces on
this.

Hope this enlightens,
Steve Keen


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