Reading Notes: The Irrelevance of Equilibrium Economics – Kaldor

Reading Notes on: Nicholas Kaldor, The Irrelevance of Equilibrium Economics, in Further Essays on Economic Theory, Holmes & Meier, 1972.

Equilibrium Economics, as embodied by Walras and Debreu (where equilibria of competing forces determine observed economic states), is “barren and irrelevant.”

Assumptions of economics, unlike hard sciences, are not based on observation. For example, some are unverifiable: producers maximize their profits, consumers maximize utility. Some are counter-factual: perfect competition never exists, markets are not impersonal, economic actors never act from perfect knowledge.

Equilibrium economics wasn’t intended to describe reality, but it is often asserted as the description of how individuals act in a decentralized market to maximal outcomes. Neoclassical economics takes this view as the axiomatic starting point for all other theories.

This sort of economic theory started as a first-draft approach that was buttressed by intellectual scaffolding (“assume perfect competition for now… we’ll deal with the real world when we understand the theory better…”), but instead of removing such unrealistic scaffolding, more and more was added, such that now, economics is even more divorced from the real world than ever before-more filled with arbitrary assumptions than previously-in order to satisfy the modern demand for logical cohesion.

“In fact, equilibrium theory has reached the stage where the pure theorist has successfully (though perhaps inadvertently) demonstrated that the main implications of this theory cannot possibly hold in reality, but has not yet managed to pass his message down the line to the textbook writer and to the classroom.”

… To be Continued …