To what extent do Austrians find the concept of “equilibrium” useful?
I haven’t read the source materials, so I have to rely on Rothbard here.
First of all, one has to distinguish among the divergent branches within Austrian economics—each has something different to say about equilibrium. I believe there are three: (1) Menger—Bohm-Bawerk----Mises----Rothbard; (2) Menger—Weiser—Hayek—Kirzner; (3) Lachmann (don’t know his lineage).
The distinguishing feature among the branches is ontological and epistemological—and as a result, the primary difference among the branches is methodology.
Branch (1): the praxeologists / rationalists
Branch (2): Rothbard (and others) separate Hayek into two branches: the early Hayek is praxeological, the later Hayek is Popperian (Hayek I vs. Hayek II).
Branch (3): Don’t know much about Lachmann, except that he’s NOT a praxeologist, and seems likely to be a hermeutician.
Here’s Rothbard:
On Hayek vs. Lachmann vs. Mises:
Salerno discusses the Misesian view in greater detail in The Concept of Coordination in Austrian Macroeconomics. To understand the Misesian view well, I think, it is helpful (perhaps necessary) to be familiar with the philosophical status of “human action”.
Edit: Is this what you were asking?
The original equilibrium dispute was between Walrasian general equilibrium and Marshallian partial equilibrium price formation versus Mengerian subjective price formation.
From my general readings/research there are three Austrian equilibrium prices:
Equilibrium is a very useful concept when using the ERE as an imaginary construct to draw out deductions. In the real world though, the Austrians emphasis the markets’ constantly changing data and disequilibrium.
Well, since their is no consensus within Austrian Economics as such (big tent), I’m not sure wether or not you’ll get a decisive answer. If we take the typical Misesian answer, I would say you have different concepts. The ERE, the plain state of rest and one more which I don’t remember right now. (I’m not big on equilibrium analysis, I’m afraid.)
Equilibrium is a thought experiment that helps visualize exchange. It is useful in the same way as Crusoe’s Island thought experiments are; good for working out ideas, but not for measuring as if they exist in the real world.
But, then why do Austrians get so fussy when the mainstream uses equilibrium theory?
Stealing from Jon Catalan’s blog, here is an equilibrium graph demonstrating the effect of price control:
The mainstream, obviously, utilizes exactly the same demonstration. So, why is there so much hooplah when non-Austrians use equilibrium?
So you see no difference between the typical Austrian concept of equilibrium and this mainstream one? Like; at all?
Equilibrium is useful for visualizing ideas like curve shifts and such, but because it is an imaginary construct it doesn’t make sense to try to control it.
I brought up Crusoe’s Island on purpose. Imagine if Ben Bernake created a mathematical model of a deserted island and then used island calculus to determine ideal conditions in the real world. This would obviously be ridiculous.
Treating equilibrium like a real feature of the world that can be measured and manipulated like atoms or light is a dangerous mistake.
Strangeloop,
Well very but it depends how you understand it. The best work on the subject is Hulsmann’s A Realist Approach to Equilibrium
It is 49 pages but is absloutely fascinating.
The issue with the above diagram isn’t equilibrium per se but the curves themselves- continuity etc. I think Block has a paper on them but I haven’t read it yet.
Only if we are caricaturing the mainstream to be dogmatic believers that equilibrium theory perfectly models the real world.
Oke. What does - in your view - the typical ‘mainstream economist’ try to do when using equilibrium analysis? Something tells me that your answer will be completely different than what I get in my current micro-economics class, but feel free to give your answer anyway.
Again; I have no quarrel with ‘the mainstream’ if they use it correctly. The problem is that what you claim what the mainstream is, is often disjointed from what I have to learn in my micro class.
Instead of beating around the bush, how 'bout you just tell me how the mainstream [ab]uses equilibrium analysis?
StrangeLoop,
Instead of beating around the bush, how about you just tell us how the mainstream uses equilibrium analysis.
Well; you’re the expert…?
I saw equilibrium analysis as a benchmark to compare the real working market with. In as much as the real market doesn’t equal the perfect competition model (which is an equilibrium analysis), the market is imperfect and we can use the government to improve it.
That is so utterly bogus that I don’t know where to begin. So, how about it?
Adrian, I’m not sure what kind of school you go to but I was never taught that in any of my micro classes (the part about the real world not mirroring theoretical models perfectly and that in order to fix this we need to employ some kind of government intervention).
Some problems with the modern use of equilibrium are 1)They use it as an ideal economy to compare the “imperfect” dynamic/changing one we live in today, and 2)since mathematical models can really only describe equilibrium settings, they tend to focus on it alot and neglect “how” the market gets to the equilibrium setting. For them its not so much as entrepreneurship and the removal of profit and loss as simple “gravitation” and simultaneous determination so two sides of an equation can be equal.
Also, their equilibrium settings focus exclusively on either a single firm or a holistic aggregate in a spending equation. They observe both of these in isolation without observing their interrelations in the economy, and this leads to alot of faulty conclusions. For example, most analyses in economics tend to describe a “price taker” of some kind (other examples are “small” nations), which completely obfuscate what determines the price (since that equilibrium price is deteremined independantly outside the compettive market somehow) of their good and factors of production. Since it is completely isolated from the market and can’t determine the prices of any goods it uses, all of their cost and demand curves incorrectly depict reality (since every firm has an influence on price).
You may have already read it, but Israel Kirzner’s How Markets Work compares the Austrian conception of equilibrium to those of neoclassical economists (and, in trying to find the link for it again, I stumbled upon this post by Pete Boetkke, explaining Kirzner’s importance in equilibrium theory). I’d say it offers a more nuanced explanation than you’re likely to find on this Internet forum.
That’s what annoys me about many non-Austrians; they seem to work backwards from the model. Instead of the model being an abstract representation of reality, reality is supposed to represent the model.
StrangeLoop,
Basically, the Austrians reject both Walras’s mechanistic concept of general equilibrium (or that present prices represent an equilibrium in the market) and the later concept of long-run equilibrium. Instead, Austrians see the economy as a market process towards some equilibrium, where equilibrium is constantly shifting, and therefore a market of constant disequilibrium.
“I have long felt that the concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the analysis of the action of a single person and that we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interactions of a number of different individuals.”
“The data [used in equilibrium analysis and applied to the interactions of a number of people] which here are supposed to be objective facts and the same for all people are evidently no longer the same thing as the data which formed the starting-point for the tautological transformations of the Pure Logic of Choice. There “data” meant those facts, and only those facts, which were present in the mind of the acting person, and only this subjective interpretation of the term “datum” made those propositions necessary truths. “Datum” meant given, known, to the person under consideration. But in the transition from the analysis of the action of an individual to the analysis of the situation in a society the concept has undergone an insidious change of meaning.”
“All propositions of equilibrium analysis, such as the proposition that relative values will correspond to relative costs, or that a person will equalize the marginal returns of any one factor in its different uses, are propositions about the relations between actions. Actions of a person can be said to be in equilibrium in so far as they can be understood to be part of one plan. Only if this is the case, only if all these actions have been decided upon at one and the same moment, and in consideration of the same set of circumstances, have our statements about their interconnections, which we deduce from our assumptions about the knowledge and the preferences of the person, any application. It is important to remember that the so-called “data,” from which we set out in this sort of analysis, are…all facts given to the person in question, the things as they are known to (or believed by) him to exist, and not, strictly speaking, ojbective facts. It is only because of this that the propositions we deduce are necessarily a priori valid and that we preserve the consistency of the argument.”
Hayek, “Economics and Knowledge”