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It's about time! The equilibrium theory of supply and demand has set economics back for decades. There is literally a century of criticism of the theory from po

by js8 7y ago

It's about time! The equilibrium theory of supply and demand has set economics back for decades. There is literally a century of criticism of the theory from postkeynesians, not only the lack of dynamism, but also all the strange assumptions.

holy_city 7y ago
I'm no economist or game theorist but in my experience with signals/systems, the "steady state" (which is an equilibrium, I guess) is the least interesting and important to the analysis of how a system behaves. Response to dynamics is far more important to understand and design around.
barry-cotter 7y ago
You know post-Keynesianism is just a flavour of dynamic stochastic general equilibrium models, right? Those “strange assumptions” are what distinguishes economics from disciplines whose models are so under specified that they can’t be proven wrong. Economic theory can at least say that if certain assumptions are met some set up is optimal.
- viburnum 7y ago
  You mean New Keynesian.
- js8 7y ago
  No, it isn't (as viburnum explains, you might have confused it with new-keynesian). Look what Steve Keen does with his Minsky program - that's decidedly not just DSGE flavor, it's a fully dynamic model. I would say distinguishing features of post-keynesian approach are fully dynamical modelling and treating uncertainty differently from risk. Both features go back to Keynes.
- soVeryTired 7y ago
  > Those “strange assumptions” are what distinguishes economics from disciplines whose models are so under specified that they can’t be proven wrong When an economist sees evidence against the prevailing models, they call it a 'puzzle' and write a paper on it. So then there's one model per puzzle. That doesn't really feel like an approach that allows falsification either.
neilwilson 7y ago
The classic failure for me is the damping harmonics you get from the delay in a corrective response to a change input. It's control theory 101. Loans take time to approve and issue, therefore interest rate changes, even if all the other assumptions stack up, suffer from such control harmonics. They end up being just as badly targeted as the discretionary fiscal policy decisions they are supposed to replace. That problem is hand waved away using 'expectations', which when you dig down requires the entities in the calculation to have perfect foresight over infinite time. ie they can see the future. And such expectations would 'correct' the discretionary fiscal policy approach too.
- BurningFrog 7y ago
  You seem to be talking about macroeconomics, which is a very different animal than supply/demand dynamics. Macroeconomics is a science all my itself, and by and in some ways a failed one. It may even be impossible as a (public) science, since the object of the study is intelligent, aware of the findings, and has incentive to change in response to it. This have very little to do with basic the microeconomic of supply/demand dynamics. Which could better be named "Price Theory".
brownbat 7y ago
People keep saying supply and demand is a broken theory, but I'm not sure how to interpret that. When oil prices fall some producers seem to shut off their pumps. When restaurants raise their prices the people I know tend to cook at home more. Do you think those are weird outliers, and increasing prices should spur increasing purchases as a general rule? Do you think consumer and producer behaviors have no relationship with price whatsoever? I have a hard time imagining what those worlds would look like, so I expect your critique is far more nuanced. But if it is a nuanced critique, then it seems we all agree on the general principles in broad strokes, and we don't need to throw out supply and demand after all.
- atq2119 7y ago
  The biggest problem is with the supply curve, really. Economics tends to pretend that more supply requires a higher price. In reality, more supply very often leads to a lower price due to economies of scale. This is a fundamental problem because it means that even if you assume fixed supply and demand curves (which is very dubious), there can be more than one equilibrium. That in itself pretty much invalidates most of the standard subsequent analysis. The other big problem is that it assumes too much that all economic actors are price takers. In reality, prices are largely administered via cost-plus pricing, and advertisement and related tricks are used extensively to subvert the basic principles of supply and demand. Another problem specific to macroeconomics is that it largely ignored the effect of demand. Increased demand very often leads to an increase in production rather than an increase of prices, a fact that was largely ignored in decades of supply-centred thinking. This has led to bad policies in response to the global financial crisis, for example. I agree though that it makes no sense to throw out supply and demand as concepts entirely.
  - newaccount456 7y ago
    > Economics tends to pretend that more supply requires a higher price. No it doesn't. Shifts along the supply curve are due to changes in price, but other factors can shift the entire supply curve to the right or left. This is like day 1 of Economics 101.

by js8 7y ago

holy_city 7y ago

I'm no economist or game theorist but in my experience with signals/systems, the "steady state" (which is an equilibrium, I guess) is the least interesting and important to the analysis of how a system behaves. Response to dynamics is far more important to understand and design around.

barry-cotter 7y ago

You know post-Keynesianism is just a flavour of dynamic stochastic general equilibrium models, right? Those “strange assumptions” are what distinguishes economics from disciplines whose models are so under specified that they can’t be proven wrong. Economic theory can at least say that if certain assumptions are met some set up is optimal.

viburnum 7y ago
You mean New Keynesian.
js8 7y ago
No, it isn't (as viburnum explains, you might have confused it with new-keynesian). Look what Steve Keen does with his Minsky program - that's decidedly not just DSGE flavor, it's a fully dynamic model. I would say distinguishing features of post-keynesian approach are fully dynamical modelling and treating uncertainty differently from risk. Both features go back to Keynes.
soVeryTired 7y ago
> Those “strange assumptions” are what distinguishes economics from disciplines whose models are so under specified that they can’t be proven wrong When an economist sees evidence against the prevailing models, they call it a 'puzzle' and write a paper on it. So then there's one model per puzzle. That doesn't really feel like an approach that allows falsification either.

neilwilson 7y ago

The classic failure for me is the damping harmonics you get from the delay in a corrective response to a change input. It's control theory 101. Loans take time to approve and issue, therefore interest rate changes, even if all the other assumptions stack up, suffer from such control harmonics. They end up being just as badly targeted as the discretionary fiscal policy decisions they are supposed to replace. That problem is hand waved away using 'expectations', which when you dig down requires the entities in the calculation to have perfect foresight over infinite time. ie they can see the future. And such expectations would 'correct' the discretionary fiscal policy approach too.

BurningFrog 7y ago
You seem to be talking about macroeconomics, which is a very different animal than supply/demand dynamics. Macroeconomics is a science all my itself, and by and in some ways a failed one. It may even be impossible as a (public) science, since the object of the study is intelligent, aware of the findings, and has incentive to change in response to it. This have very little to do with basic the microeconomic of supply/demand dynamics. Which could better be named "Price Theory".

brownbat 7y ago

People keep saying supply and demand is a broken theory, but I'm not sure how to interpret that. When oil prices fall some producers seem to shut off their pumps. When restaurants raise their prices the people I know tend to cook at home more. Do you think those are weird outliers, and increasing prices should spur increasing purchases as a general rule? Do you think consumer and producer behaviors have no relationship with price whatsoever? I have a hard time imagining what those worlds would look like, so I expect your critique is far more nuanced. But if it is a nuanced critique, then it seems we all agree on the general principles in broad strokes, and we don't need to throw out supply and demand after all.

atq2119 7y ago
The biggest problem is with the supply curve, really. Economics tends to pretend that more supply requires a higher price. In reality, more supply very often leads to a lower price due to economies of scale. This is a fundamental problem because it means that even if you assume fixed supply and demand curves (which is very dubious), there can be more than one equilibrium. That in itself pretty much invalidates most of the standard subsequent analysis. The other big problem is that it assumes too much that all economic actors are price takers. In reality, prices are largely administered via cost-plus pricing, and advertisement and related tricks are used extensively to subvert the basic principles of supply and demand. Another problem specific to macroeconomics is that it largely ignored the effect of demand. Increased demand very often leads to an increase in production rather than an increase of prices, a fact that was largely ignored in decades of supply-centred thinking. This has led to bad policies in response to the global financial crisis, for example. I agree though that it makes no sense to throw out supply and demand as concepts entirely.
- newaccount456 7y ago
  > Economics tends to pretend that more supply requires a higher price. No it doesn't. Shifts along the supply curve are due to changes in price, but other factors can shift the entire supply curve to the right or left. This is like day 1 of Economics 101.