Tuesday, November 23, 2010

Disequilibrium Economics

When you have agents engaged in multiple interactions over space and time, you get a strong dynamic nonlinear, non-equilibrium process, which results in structures and patterns, also known as self-organization. This arises entirely from interactions internal to the system. If we then cause the system to change due to external inputs, we get turbulence in the system, making the system even more nonlinear, throwing it into a far-from-equilibrium state. It is when it is in the far-from-equilibrium state that it is most creative. If the economy is a spontaneous order, it is a self-organizing system/process. And if it is a self-organizing process, it is a non-equilibrium process. And if it is a creative process, it is likely to be in a far-from-equilibrium state (and if it is a dynamic, self-organizing process with external inputs, it is likely to be in a far-from-equilibrium state).

Of course, neoclassical economics is based on the idea of equilibrium. However, I have noticed that the following result in disequilibria:

entrepreneurship involving new ideas/products
different cultures and subcultures

Now, since these are features of any real economy, and each causes diseqeuilibria, piling diseqeuilibria on disequilibria, does it make any sense to discuss equilibria? It is argued that it is a "useful fiction," but one does have to wonder how useful it really is, if it creates a consistently false picture of the economy. Worse, it creates "ideal conditions" which are unachievable, creating the fiction that there is such a thing as "market failures." Market failures are impossible except in the utopia of neoclassical equilibrium theory. That makes it a theory failure.
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