Efficient Markets? That Is a Presupposition, Not a Finding!

Pete Boettke points us to a wonderful passage from David Glasner:
An especially pretentious conceit of the modern macroeconomics of the last 40 years is that the extreme assumptions on which it rests are the essential microfoundations without which macroeconomics lacks any scientific standing. That’s preposterous. Perfect foresight and rational expectations are assumptions required for finding the solution to a system of equations describing a general equilibrium. They are not essential properties of a system consistent with the basic rationality propositions of microeconomics. To insist that a macroeconomic theory must correspond to the extreme assumptions necessary to prove the existence of a unique stable general equilibrium is to guarantee in advance the sterility and uselessness of that theory, because the entire field of study called macroeconomics is the result of long historical experience strongly suggesting that persistent, even cumulative, deviations from general equilibrium have been routine features of economic life since at least the early 19th century. That modern macroeconomics can tell a story in which apparently large deviations from general equilibrium are not really what they seem is not evidence that such deviations don’t exist; it merely shows that modern macroeconomics has constructed a language that allows the observed data to be classified in terms consistent with a theoretical paradigm that does not allow for lapses from equilibrium. That modern macroeconomics has constructed such a language is no reason why anyone not already committed to its underlying assumptions should feel compelled to accept its validity.
It is always possible to depict any situation as an equilibrium of some sort or other: we can just take whatever phenomena that seem to imply disequilibrium and simply posit some counteracting factor that shows the situation actually is an equilibrium: price controls don't create a disequilibrium, they just create an equilibrium in which queueing time plus price equilibrates supply and demand.

The problem with theorizing that posits "equilibrium always" is that it drains the idea of any empirical oomph: if markets are always as efficient as they can be, economics is reduced to simply giving its blessing to whatever social arrangements currently exist.


  1. Gene: No. There are good equilibria and bad equilibria. An equilibrium with queues is an equilibrium (there is an equilibrium length of the queue); but it is (usually) a bad equilibrium. Rationing by queues is (usually) less efficient that rationing by price.

    And to say the world is always in equilibrium, yes, does drain the concept of "equilibrium" of any empirical oomph. But to say the world is in the equilibrium *of theory A* is what gives the empirical oomph; much greater empirical oomph than if you said theory A is true, but only in equilibrium.

  2. Ironically the harder sciences, chemistry, biology, where equilibrium is a key concept have in the same period embraced far-from-equilibrium states as vital and central to the newer developments.

  3. Nick Rowe wrote:

    Gene: No.

    This is getting linked from Free Advice.

  4. Anonymous6:02 AM

    Ultimately, your query and disagreement lies with not only the practices with regard to, but also the definition, of what "equilibrium" actually is. It's an example that surely has some empirical examples, but also one that is not a preference. It's a tool for use in a certain construct of economic analysis, but not necessarily one that is exactly identifiable.

    My own opinion is that once you give preference to what "equilibrium" ought to be, then you've left economic analysis at the wayside. You've missed the point that equilibrium is not an actual thing, but is rather a tendency.


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