August 9, 2017

There is NO such thing as supply-demand-equilibrium

Comment on Gavin Kennedy on ‘Paul Samuelson’s awesome error’

Blog-Reference and Blog-Reference on Aug 10

Gavin Kennedy summarizes: “I don’t think that anything Smith wrote can be credited to his anticipation of Nash Equilibrium - thought some modern economists (post-Samuelson) appear to think he did, even beyond Nash Equ. 1 to Nash Equ, 2. I am not sure that outside the models, Equilibria exists in the real world. I have long been suspicious about the basic Supply and Demand equilibrium exemplified in the Marshallian Supply and Demand diagram. I understand its construction, of course, but when I try to envisage its operation in a real market-stall, I am flummoxed!”

Everybody with one iota of scientific instinct immediately realizes that there is something fundamentally wrong with supply-demand-equilibrium and the SS-curve―DD-curve― intersection which is the analytical workhorse of standard economics. Leijonhufvud ironised this construct as totem of the micro/totem of the macro. And already Schumpeter found it necessary to diffuse doubts about the scientific content of the supply-demand-equilibrium approach: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”

Orthodoxy is since 140+ years built upon false premises. The microfoundations approach is defined with these hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

It should be pretty obvious that the Walrasian hard core contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). To take equilibrium into the premises and then to establish and discuss the properties of general equilibrium is a methodological blunder that is known since antiquity as petitio principii.

Because the axioms of orthodox economics are false the whole analytical superstructure, including supply-demand-equilibrium, is false. What has to be done is to replace false microfoundations by true macrofoundations. This paradigm shift fundamentally changes the depiction of the market. The new prototype which replaces SS-curve―DD-curve― equilibrium is shown on Wikimedia.#1, #2

Loosely speaking, Orthodoxy defines itself as follows “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman)#3 This is bad enough, but that Heterodoxy could not refute and replace this plain proto-scientific garbage in 140+ years shows the abyss of scientific incompetence in its bottomless depth.

Egmont Kakarot-Handtke

#1 Wikimedia, The market prototype
#2 Essentials of Constructive Heterodoxy: The Market
#3 The father of modern economics and his imbecile kids

Related 'Ground Control to David Glasner' and 'Petitio principii — economists’ biggest methodological mistake' and 'Why you should NEVER use supply-demand-equilibrium' and 'Traditional Heterodoxy’s paradigmatic impotence' and 'All models are false because all economists are stupid' and 'The Law of Supply and Demand: Here It Is Finally' and 'How to Get Rid of Supply-Demand-Equilibrium' and 'How to overcome the manifest silliness of Econ 101 and save the economy'