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Gary Becker on the Austrian unease with equilibrium
Posted By Kurt Schuler On March 17, 2013 @ 10:10 pm In Uncategorized | 5 Comments
Gary Becker gave an interview [1] published last year that I only saw recently, through a link from the Marginal Revolution blog. In it, he remarks (page 83, 11 pages into the interview) that “Economists from the Austrian school hate equilibrium analysis in some sense, but I never understood their criticism.” He the interviewer then go on to discuss the usefulness of equilibrium analysis.
Equilibrium and other key concepts in economics are metaphors, as one of Becker’s former University of Chicago colleagues, Diedre (formerly Donald) McCloskey, has stressed [2]. The question is how far we can fruitfully stretch the metaphor. As one of my graduate school classmates said, if the milkman skips his morning delivery, does that throw a general equilibrium out of kilter? Just before he criticizes the Austrians, Becker seems to make a similar point when he says, “You do not need to use the concept of a complete equilibrium.” Whether he knows it or not, Becker shares some of the Austrian unease about equilibrium.
In a complete general equilibrium, there is, among other things, no need for money. That we have money, and that the details of how the monetary system works can create problems that ripple throughout the economy (discussed on this blog, among other places), is one reason that Austrians think mainstream economists stretch the metaphor much too far. The Austrian focus on the market process is a competing metaphor, admittedly not as successful among academic economists, but one whose implicit message is that understanding the process is more important than achieving the goal of equilibrium, which Austrians view as impossible to identify with certainty because the knowledge involved is distributed across billions of minds.
By the way, Becker wrote a 1956 paper discussing a kind of free banking. He briefly updated his views half a century later. Here [1]is a discussion by another economist, Ludwig van den Hauwe; to see Becker’s paper itself, apparently you will have to go to the library. It was not published at the time and as far as I know did not appear in print until the 3-volume set, Free Banking [3], that Larry White edited in 1993, published by Edward Elgar.
ADDENDUM: Here [4] is a column in which a physicist offers a jaundiced view of the use economists make of equilibrium.
Article printed from Free Banking: http://www.freebanking.org
URL to article: http://www.freebanking.org/2013/03/17/gary-becker-on-the-austrian-unease-with-equilibrium/
URLs in this post:
[1] interview: http://mpra.ub.uni-muenchen.de/12825/1/MPRA_paper_12825.pdf
[2] stressed: http://www.amazon.com/Rhetoric-Economics-Human-Sciences/dp/0299158144/ref=sr_1_1?s=books&ie=UTF8&qid=1363572575&sr=1-1&keywords=rhetoric+of+economics&tag=freebank07-20
[3] Free Banking: http://www.amazon.com/Banking-International-Library-Macroeconomic-Financial/dp/1852785977/ref=sr_1_1?s=books&ie=UTF8&qid=1363572496&sr=1-1&keywords=white+%22free+banking%22+elgar&tag=freebank07-20
[4] Here: http://www.bloomberg.com/news/2013-03-17/the-insupportable-equilibrium-of-economic-thought.html
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5 Comments To "Gary Becker on the Austrian unease with equilibrium"
#1 Comment By Michael On March 18, 2013 @ 10:37 am
You've brought up two points that I never really understood. First: in a complete general equilibrium, there is no need for money. From my rather vague memory, that is based on the idea that we need money only because we are uncertain of the future, not sure what we want to obtain and when. Holding money does help with that. However, it seems that even if we had no uncertainty about that, we would acquire money to facilitate obtaining what we want, because it might allow us to move around a lot less to make the trades we would need to make than by barter.
Second: the difference between Austrians and mainstream on equilibrium. Neither seem to think we ever reside in an equilibrium, rather it's more like an everchanging limit toward which we tend to move, and both use it in that sense in explaining various things.
Kurt, or anyone: please help me understand these two points.
#2 Comment By Gonzalo R. Moya V. On March 18, 2013 @ 6:49 pm
Michael, you are asking "Why is it that in a complete general equilibrium there is no need for money?" when you should ask "What does ´complete general equilibrium´ entail so that no money is required under it?"
As you said, money solves the Jevons´ problem of "double coincidence of wants" that rises in every barter system. This problem imposes severe transaction costs due to the unlikeliness of two economic agents meeting at the same time and place with what the other want and willing to trade them in terms that both deem fair.
Thus, the phrase "In a COMPLETE general equilibrium there is no need for money" (highlight of my own) implies that the Jevons´ problem gets fixed under a CGE by definition, as everyone is aware of each other´s demands and supplies and have coordinated in a way such that (a) all needs have been satisfied and (b) no resources have been left idle.
#3 Comment By Gonzalo R. Moya V. On March 18, 2013 @ 7:19 pm
Regarding your second point, the notion of "equilibrium" in Economics and how markets tend to find it on their own when left freely and impeded from achieving so under government intervention (among other restrictions) is obviously attributed to Adam Smith and his popular "invisible hand".
"Classical" (not "mainstream") economists differ from Austrians in that the former claim that markets are largely stable, so that a "shock" is required for it to move away from its equilibrium and towards a new one, whose process is quick under normal conditions (e.g. in Finance, arbitrage opportunities have very narrow windows of time).
The Austrians, on the other hand, claim that markets are naturally unstable (without the need for occurrence of a "shock"): so ever-changing that the market convergence towards its equilibrium is meaningless as a new one has already appeared before the previous one has been reached.
#4 Comment By danmcl On March 20, 2013 @ 11:36 am
Erik Beinhocker has written an excellent book entitled "The Origin of Wealth," which details the advances in the science of complex adaptive systems, of which economies are examples. His discussion of the traditional view of equilibrium economics is right on target. The complex adaptive systems view of economics is actually fairly well aligned with Austrian economics, and Hayek's spontaneous order can be considered an early attempt at recognizing that complex adaptive systems are very different than linear or controllable equilibrium systems.
#5 Comment By Kurt Schuler On March 22, 2013 @ 4:15 am
Yes, I have read Beinhocker's book and have it on my shelf. It is a good presentation of the points you mention.