In my last post I argued that post Keynesians needed to take the concept of General Equilibrium seriously and not simply rely on an assumption that everything is in disequilibrium.
The familiar argument that most of the time most of the economy is in disequilibrium is no argument to abandon the concept of equilibrium. If disequilibrium is the natural state then prices would be essentially random and economics would have nothing to say. Empirically most prices are fairly stable or follow fairly predictable paths, except in times of crisis.
I dont disagree and I think its largely a matter of the terminology and meaning of ‘Equilibrium’. I didn’t want to get into the math of control theory so here’s a simple analogy.
Imagine a marble in an infinitely sized ladle – that doesn’t wobble. This kind of system is known as Assymptotically stable, that is the position of the marble will eventually converge to a point of equilibrium. Indeed the further away from equilibrium the greater the forced on the marble. The marble being small and the ladle infinitely large the marble has little influence on the dynamics of the system. This is the type of system generally assumed by the term ‘equilibrium’ in economics, where individual agents are price takers.
Imagine however that ladle is held by someone trying to guess the movements of the marble, they will usually be off, so the marble generally moves towards the centre of the ladle but within a bounded range never perfectly stable at any point. This type of system is known as Lyapunov stable.
Now imagine the ladle is not infinitely large but the marble can fall off the edge. If you guess badly the future position of the marble it will fall off. One of the conditions of Lyapunov stability is that there are boundary constraints.
Now finally imagine a system where two ladles are linked together. If two people move roghly in sync the marble will tend to move in a limit cycle, if they dont they it will be wildly unstable. This kind of system was first studied by Lorenz – weather patterns being the subject. If all subjects were blindfolded and uncoordinated then disequilibrium and wild movements would be the norm.
What kind of system is the economy? I agree with Steve that Neoclassical economics makes simplistic assumptions about equilibrium using only the narrow class of systems of equilibrium that are asymptotically stable. Like the marble in an infinitely large ladle with all movements perfectly predictable and predicted.
The economy is much more like the second class – the marble on a finite ladle with guesses on its position imperfect. Position here being a surrogate for price. It is not like the famous Wicksell analogy of a rocking horse hit by a hammer.
The issue is to how ‘chaotic’ the system is – how much it is like a Lorenz system? Clearly agents do most of the time have good information about the behaviour of others – chaos is the exception rather than the rule. I would posit that it is not like predicting the Weather in England in summer, unable to predict from one day to the next from observation alone, but like the weather in a desert. Most of the time you can guess sunny tomorrow from sunny today- but occasionally you can have flash floods with devastating consequences.
Yes economics does have simplistic models of equilibrium, but less simplistic models of equilibrium exist with bounded stability. Indeed once you get into the realm of imperfect and adaptive expectations you have to get into describing them. Which raises the issue of why students are not taught at least the basics of systems and control theory.