From that glossary:
Equilibrium is the state to which classical, neoclassical and neoliberal economists all think that an economy should aspire.
No, there’s no should there. Economics – of these three types at least – is positive, not normative. There are observations that equilibrium is the state to which economies progress, absent further influences upon the economy. It’s also a usual observation that equilibrium is never actually reached in detail. And there’s an entire school of economic thought – Keynesiansim – based upon the idea that there are multiple equilibria in the short to medium term.
From the Oxford Dictionary of Economics:
An equilibrium can be defined either as a position of balance in the economy or, equivalently, as a situation in which no agent in the economy has any incentive to modify their chosen strategy. The first definition is derived from the perspective of equilibrium occurring when the forces of supply are balanced by the forces of demand. The second definition derives from the theory of games and is illustrated by the equilibrium of an oligopolistic market in which all firms are satisfied with their choice of output level given the choices of their rivals.
Don’t see any should or aspire there at all.
As to the Keynesianism the entire point is the observation that there is a series of possible equilibriums, some of which are non-optimal. Thus the justification for government intervention into fiscal and monetary policy at the macroeconomic level in order to jolt the economy from a sub-optimal equilibrium to that optimal one.
That is, Professor T. Solanum has managed to get his idea exactly, precisely,* and 180 degrees, the wrong way around. The entire and whole justification of Spud’s management of the economy is that he is the one to know and direct the economy to that optimal equilibrium.
He does, of course, get worse:
Theories of equilibrium assume that all participants in an economy are:
Rational, meaning that they behave consistently.
Are in possession of perfect knowledge i.e. they not only know what they want to achieve at a point in time and how they might achieve it because they are aware of all the options available to them but are also aware of this information for all time to come.
Aware that equilibrium is the outcome of a dynamic process that they now wish to halt because an optimal outcome has been reached not only for themselves but all other market participants.
Nonsense, obviously. Perfect knowledge is a useful modelling technique but not anything close to anyone’s description of the real world. Etc, but this doesn’t follow even from that misunderstanding:
The idea of equilibrium, with the stable state that it implies, is borrowed from physics, where it can be observed. In contrast, economic equilibrium has never been achieved because the conditions for it to do so are quite obviously absurd and contradict all known and observable human behaviour.
But the reason that equilibrium is not reached – in a modern economy, medieval ones were really quite stable – is that there are always further influences. Technology changes a bit – a bit – each and every day. There are new market entrants each and every day, as well as market exits. Tastes change, desires vary. There is absolutely no one at all insane enough to declare that equilibrium has been reached and therefore we enter economic stasis.
Because it is claimed that supply and demand are stable and have delivered both optimal prices and optimal levels of supply at the point at which economic equilibrium happens the theory of equilibrium is necessarily dependent upon and embraces theories of market supply and demand and of the profit maximising firm upon which the foundations of neoclassical economics (are built, as are those of neoliberal economics. These theories are built upon the idea that a firm can accurately predict the demand for its product at each price at which it might offer it for sale and also its own marginal (or total additional) cost of producing each item that it supplies at every possible level of production so that it can equate its supposed marginal cost for an item it makes available for sale with the additional or marginal extra revenue that it will generate from doing so. It is then argued that the firm in question will continue to supply that product until such time as the two are equal.
Good Grief. Supply and demand are stable? Rilly? That means we can plan the economy then and don’t have to rely upon these pesky markets and prices. Yet he’s trying to insist that equilibrium is used as the justification for the use of prices and markets. This is impressive misunderstanding even by the standards of a Tuber.
It is important to note that no firm in history has ever been in possession of this information.
Nor has anyone else. If we had certainty of the interaction of the utility functions of 67 million people then we could plan the British economy in the Fat Controller manner. We don’t, which is why we use markets and prices.
It is also important to note that the only conditions in which they might have this information are those where:
The products of one firm are incapable of being differentiated from those of another firm so that the consumer is indifferent as to which firm supplies them, which is almost certainly a condition that has never existed.
So, err, commodities do not exist. OK, so we can get all Steve Keen and insist that as 7 billion people growing grain is not actually an infinite number of people growing grain therefore true commodities, where the producer is a simple price taker with no influence on that market price, do not exist. Sure, we can be idiots. The actual observation is that many things are really pretty to very commodity-like. Shell, BP and Exxon do not control the global crude oil price. OPEC has an influence, sure, but for the capitalist companies they’re, to a very great and large extent, price takers. Dealing with a commodity that is.
The implication of these conditions is that only markets can deliver equilibrium outcomes within economies and what is assumed to be the distortionary activity of government is not required because the optimal position created by a market meeting these conditions cannot be bettered.
Yep, Professore Tres Tuberosos has got this entirely the wrong way around. If equilibrium actually existed, with the certainty of information he’s assuming, then we could plan the economy through government. It’s not just that he’s misunderstanding from a position of invincible ignorance it’s that he’s arguing against his own very position.
Although, as noted, it is impossible that the conditions that might deliver economic equilibrium might ever exist the achievement of this state remains the goal for almost all neoclassical economics and neoliberal economics.
No, it ain’t. The observation is that moving toward it – increasing economic efficiency that is, getting closer to being able to sate desire with the resources available – is a good idea.
The argument that each presents that government interference prevents equilibrium is not based on an analysis of any achieved state of equilibrium but solely upon the assumption that government action will prevent this state being achieved when that is already inevitable because equilibrium will always, as a matter of fact, be impossible to deliver.
Jeez, but that’s the Keynesian argument. That government action can move to a (more) optimal equilibrium. Hell, you can find the same idea – logical structure – in Friedman’s “A Monetary History of the United States”. Government action not to maintain the money supply was a bad idea in the 1930s. Government action to maintain the money supply in the 1930ss would have been a good idea, one that would have bounced the economy to a much better state.
It is accepted that neoclassical and neoliberal economists can and do relax the assumptions pertaining to the achievement of equilibrium when undertaking their work, and this cannot be disputed. However, this relaxation is usually undertaken to determine the supposed cost of the sub-optimal outcome that they suggest arises within the economy as a consequence of that sub-optimal behaviour so that they might suggest the gain that might arise if only the perfect market to which they (alone) aspire was in operation. As such these relaxations are largely meaningless.
This is entirely glorious. The entire justification for any government intervention is that a better equilibrium will be reached. So he’s just told us that equilibrium cannot be reached, the information is never available to even be able to define it and then he insists that this is an argument against laissez faire and in favour of government intervention to achieve the equilibrium that doesn’t exist and we’ve not got the information to be able to even define?
The concept of equilibrium lies at the very heart of neoclassical, neoliberal and positive economics and so at the very heart of much of the work of the economics profession whilst simultaneously explaining why most of the work of that discipline is as inevitably flawed and destined to fail as that of the alchemists always was. If you work on the basis of flawed assumptions you can never achieve a useful result.
Well, I suppose we can agree with that last sentence, yes.
And of course there’s one more glory there. That final para insists that this is why positive economics will never be right. But he’s started by stating that the problem is should – that’s normative, not positive.
*Didja spot that? Didja? The use of the oxford comma when quoting from an oxford encyclopedia? Tee Hee, it’s a barrel of laughs around here I tell ‘ee!