Kingston Masters Political Economy Lecture 03: Instability of General Equilibrium

For Jevons and Walras, the market system was so powerful that it would converge to equilibrium even if participants in the market had limited information, knowing only what they wanted to sell and to buy at given market prices. For today’s Neoclassical economists, the market converges to inter-temporal equilibrium because every market participant is “rational”, by which they mean has the capacity to accurately forecast the future. So modern economic theory is a model of how a market economy operates when it is populated by Gods.

The beginning of this process was the discovery that, while Walras’ believed his “tatonnement” process would reach an equilibrium price vector for a multi-commodity economy, a pure mathematics theorem on the properties of arrays of non-negative numbers developed by the mathematicians Perron and Frobenius, showed that this was not true.

Rather than abandoning the dream that equilibrium was stable, Neoclassical economists forced it to reach stability by assuming we each knew where it should be, and “jumped” there, like Thor jumping from Earth to Asgard.

This lecture covers why the Marshallian model of perfect competition is mathematically false (while the Cournot model, as a one shot game, is accurate), and why Walras’s vision of the convergence of a multi-commodity economc to equilibrium is false. It’s a prelude to the next lecture on why IS-LM is not Keynesian, but a Neoclassical General Equilibrium model of the macroeconomy, based on a flawed application of Walras’ Law.