EQUILIBRIUM ECONOMICS: GLIMPSES BEYOND

Abstract

As Walter Heller once said, ceremonial occasions-presidential, memorial, or inaugural addresses-in particular seem to evoke musings on the troubled or even dismal state of our science. Suffice it to mention Wassily W. Leontief who criticized the mathematical superstructure of pure or speculative economic theory for its weak and all too slowly growing empirical foundations; John Kenneth Galbraith who condemned neoclassical and neo-Keynesian economics for eliding power and thus destroying its relation with the real world; Joan Robinson who blamed orthodox neo-neoclassical economics for its disregard of the most pressing problems involving war, poverty, environment and the quality of life of industrialism.
Another samples of criticism are easily found in many other presidential addresses; E. H. Phelps Brown viewed the usefulness of current works in economics as not equal to its distinction because it is built upon assumptions about human behavior that are plucked from the thin air; G. D. N. Worswick observed that, notwithstanding the appearance of formidable progress in techniques of all kinds, the performance of economics seems curiously disappointing and that there could be what looks like specutacular progress in economic theory and yet no progress at all in economic science in the broader sense. Nicholas Kaldor went so far as to say that the powerful attraction of the habits of thought engendered by equilibrium economics has become a major obstacle to the development of economics as a science, so that, in terms of gradually converting an intellectual experiment into a scientific theory, the development of theoretical economics is one of continual degress, not progress.
But today, stemming this current vogue of economic masochism, I should like to serve as defense counsel for equilibrium economics. In my belief, it would be at least as reasonable to judge a discipline by its success as by its failures. Having paid my devoirs to the critics mentioned above, I do not intend any point-by-point appraisal or refutation. Rather my object is to gain a more balanced perspective by focussing on the nature, significance, and contributions of equilibrium economics.
After discussing the economic relevance of equilibrium theory and the useful role of modern mathematical techniques, I review, with the purpose of illustration, certain recent investigations on the two failures of the neoclassical equilibrating mechanism, the first, the non-existence of futures goods markets, and the second, the persistence of underemployed resources. These developments bring money, uncertainty, transaction costs and trading at false prices into the framework of general equilibrium, and their main features are sequence economies, stochastic equilibria, equilibria relative to information, and non-Walrasian underemployment equilibria. Though all of these works are still in their infancy, the whole subject is plainly on a promising track. No doubt the range of phenomena the theory can deal with is being extended, which rebuts a demonstration that the theory at present cannot deal with anything at all.