Kingston University Becoming an Economist Lecture 02: The Mainstream
Steve Keen
October 4, 2018
Steve Keen's Debt Watch
Mainstream “Neoclassical” Economics began with the legitimate question, first posed by Leon Walras in the 1870s, of “can a set of interdependent markets reach equilibrium where supply equals demand in every market, without any central coordination?” He invented the model of “tatonnement”: he imagined that all traders for all markets met in a room with an auctioneer who starting from a random set of prices, kept adjusting prices to try to have demand equal supply for all commodities, and only allowed trade to occur once every market was in equilibrium.
Walras thought this process would work, and was a reasonable abstraction from the complexity of the real world. It led to the first big “general equilibrium” models of the economy, known as CGE models for “Computable General Equilibrium”.
Unfortunately, the right answer was that this process wouldn’t work: a set of prices that would clear all markets at the same time could not be found this way. But it was mathematicians who proved this (as a side-effect of exploring the characteristics of an array of positive numbers and zeros) in the 1920s, not economists.
By the time economists came to learn of this in the 1960s, the belief that Walras’s model worked was ingrained in economics, and they kept going with it.
In the 1980s, mainstream economists started to try to make their model of the macroeconomy consistent with their theory of microeconomics, and this led to it splitting into two camps: “Freshwater” or New Classical economists, who thought that the economy was always in equilibrium, including during the Great Depression, and “Saltwater” or New Keynesian economists, who think that the economy can remain in disequilibrium with involuntary unemployment thanks to “imperfections” in the economy. |
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2018-10-04
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