Keen – Static analysis and the focus on equilibrium
Static analysis and the focus on equilibrium
The following is taken from pp.176-177 of Keen, S. (2011). Debunking economics: the naked emperor dethroned? (Rev. and expanded ed.). London; New York: Zed Books Ltd.
Cobwebs of the mind
Economic processes clearly take time, and yet economists don’t consider time in analyzing demand, supply, or any of their other key variables. For example, the quantity demanded of a commodity and the quantity supplied are both treated as functions of price, and the outcome is an equilibrium quantity. To illustrate what they believe will happen if the demand for a commodity rises, neoclassical economists compare one equilibrium with another, using what they call comparative statics. The time path from one equilibrium to another is ignored.
But what if the initial market price happens not to be the equilibrium price? Then demand and supply will be out of balance: if price exceeds the equilibrium, demand will be too low and supply too high. For equilibrium to be restored, this disequilibrium must set off dynamic processes in supply and demand which cause them both to converge on the equilibrium price. This dynamic process of adjustment will obviously take time. However, in general, economists simply assume that, after a disturbance, the market will settle down to equilibrium. They ignore the short-term disequilibrium jostling, in the belief that it is just a short-term sideshow to the long—run main game of achieving equilibrium.
A similar belief permeates even some of the alternative schools of economics. The dynamic process is ignored because it is believed to be a short-term, transitory phenomenon and attention is focused on the long-term, allegedly enduring phenomenon of equilibrium. As a result, time itself, the change in variables over time, and disequilibrium situations are all ignored. Even econometric programs which attempt to forecast the future value of macroeconomic variables such as output and employment assume that the current levels are equilibrium values, and they predict what the future equilibrium values will be.
Excerpt from post on RWER Blog: On How Equilibrium became the only game in town:
For example, Jacob Viner made a key contribution to the demise of development economics by removing a fundamental force of uneven development – increasing returns – from international trade theory, on the account that it was not compatible with equilibrium. What would have been more logical would have been to remove equilibrium from economic theory because it is not compatible with an analysis of the real world. Economists’ choice of tools came to trump their interest in reality. Equilibrium became virtually the only game in town
Link to POST:. https://rwer.wordpress.com/2017/03/16/understanding-economic-development-and-demolishing-neoliberal-development-myths/