As usual, I’m coming quite late to this debate, but I’m glad we’re having this discussion. Thanks for the link to Kirzner’s work too Michael.
My own two cents:
To my understanding, the equilibrium concept of the ERE that the Austrians do use, is parallel to the concept of general equilibrium, though I can’t say I’m fully aware if this analogy is a 100% correct yet. Certainly Mises and Rothbard’s use of this concept as an imaginary construction is distinctly different to that of most general equilibrium modellers. They use it to build a mental picture of an absolutely regular “evenly rotating” world without uncertainty, and hence in which there are no further price changes and no phenomena affecting prices which are not known with absolute certainty well in advance(if the information is probablillistic it makes no difference, as insurance can be made in kind). Hence profits disappear, allowing one to derive the relationship between factor prices and the prices of products, due allowance being made for time preference and interest.
However, from my reading of Mises however, especially given his acute awareness of the connexity of prices, and the causal interrelatedness of different market phenomena, it makes me very skeptical that any notion of partial equilibrium could be considered sound within such a framework. Markets cannot be considered isolated from each other. The movement from PSR to FSR has to be a general movement among a plethora of interrelated prices(to my mind this would resemble a ripple effect based on a change in the quantity of one good perhaps) before profit is removed from the system all together (aside of interest based on positive time preference).
Only if we are caricaturing the mainstream to be dogmatic believers that equilibrium theory perfectly models the real world.
StrangeLoop, in all my experience this seems to be the case. Whenever professors of mine talk about equilibrium, they present it in a way that makes it seem like they are describing the real world (or how the real world should be). Perhaps they don’t actually think that, but they give the impression that they do. And certainly the average student I talk to walks away believing that neoclassical perfect competition and equilibrium analysis describe the real world (and many believe that government intervention is justified because the market is “obviously” failing to live up to the “ideal” of perfect competition). Those are just my observations and thoughts.
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.
I don’t know what you mean by “reality is supposed to represent the model”, what I’m going to assume is that you’re talking about a tendency to try and apply models to reality when they’re clearly a bad fit. Well, that’s the beauty of mathematical modelling and empirical work, if the model is a bad fit then we can adjust the model or apply another. On the other hand, this really isn’t possible with the ABCT which seems to be the only explanation Austrians have for just about every business cycle that has ever happened.
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.
So it’s only the policy implications that bother you or what? Everybody here seems to be talking about the perfect competition model. Which is just one of many equilibrium models.
My own two cents:
To my understanding, the equilibrium concept of the ERE that the Austrians do use, is parallel to the concept of general equilibrium, though I can’t say I’m fully aware if this analogy is a 100% correct yet. Certainly Mises and Rothbard’s use of this concept as an imaginary construction is distinctly different to that of most general equilibrium modellers. They use it to build a mental picture of an absolutely regular “evenly rotating” world without uncertainty, and hence in which there are no further price changes and no phenomena affecting prices which are not known with absolute certainty well in advance(if the information is probablillistic it makes no difference, as insurance can be made in kind). Hence profits disappear, allowing one to derive the relationship between factor prices and the prices of products, due allowance being made for time preference and interest.
However, from my reading of Mises however, especially given his acute awareness of the connexity of prices, and the causal interrelatedness of different market phenomena, it makes me very skeptical that any notion of partial equilibrium could be considered sound within such a framework. Markets cannot be considered isolated from each other. The movement from PSR to FSR has to be a general movement among a plethora of interrelated prices(to my mind this would resemble a ripple effect based on a change in the quantity of one good perhaps) before profit is removed from the system all together (aside of interest based on positive time preference).
No, the completely unscientific character of it. If one ‘uses’ equilibrium analysis - in this case: the perfect competition model - to ‘proof’ that this is ‘the real market’ and in so far that ‘the market in the world we live in’ doesn’t equal this ‘real market’ and that we have to use ‘the government’ to make sure it does equal that kind of market; than, Houston, we have a problem.
I mean; seriously; you can’t defend that kind of analysis, now can you?
Strangeloop has hinted that there are other uses. I’ve always defended the following position: I’m not fighting a war against ‘the neo-classicals’. I’m trying to argue for a causal-realist understanding of economics. In so far ‘the mainstream’ does good work: great! In so far it doesn’t: that’s a shame. Most (if not all) of what the Austrians do, however, seems to be of the correct methodological and epistemological framework, something which is sort of lacking in your typical micro- and macro economics class. Calculating utility and cost curves is not economics. The enormous amount of math we have to ‘calculate’ has nothing and literally nothing to do with a correct understanding of the market process.
I’m not an expert on how the whole of ‘the mainstream’ uses equilibrium. If it’s used in an epistemological correct way: good! But I haven’t encoutered them in my class in such a way that satisfies the demands of philosophy.
In any case; as a general rule: equilibrium cannot be used to analyze real world phenomena. It can only be used as a ceteris paribus situation. (Even the ERE is such a concept. )
To add to what Adrian said, the ceteris paribus assumption I feel represents an unavoidable problem with the mathematical treatement of prices in models. I asked my Quantitative Techniques lecturer in one of my lectures earlier this week (I must confess it does make me feel rather smug knowing i know more maths than the guy who’s supposed to teach me maths in a grad economics course) about whether one could construct a model where let’s say you have P and Q of 2 or even n quantities as having weak dependencies on one another, and then to track what happens in a causal chain, as the chang in one affects the other. Due to the fact the relationships have to be simultaneously represented, coupled with the et ceteris paribus assumption applied in the maths so that some variables have to be necessarily treated as independent(economists say exogeneous), expressed in another way by Mises in the sense, that one cannot have any constant economic data, all are variable in relation to one another, hence one can no longer refer to a treatement via calculus, as one loses the bearings in a sense to carry out such a treatment.
Hence the multiple price effects caused in sectors interrelated by the fact they employ shared less specific fctors, and the causal effects further caused by changes in the prices of these factors utilised in praxeological analysis cannot even be attempted in the mathematical treatment which must rely on simultaneous determination between variables even for representation. One interesting consequence of this is the complete abstention of the anlysis of these causal effects, because it doesn’t “fit in the model”, hence Mises aptly ripping it out of the mechanical quantity theorists for example in Human Action (p. 424):
The mathematical economists are at a loss to comprehend the causal relation between the increase in the quantity of money and what they call “velocity of circulation.”
If all this sounds like gobbledy gook, please forgive me, i intend to incorporate these arguments along with the many notes I’ve made on neoclassical micro into a full blown critical dissertation by January. I also sense a fallacy of composition involved with the PC model, as well as weaknesses due to its reliance on the notion of partial equilibrium. I think GB Richardson, a theorist of the firm trained by John Hicks came very close to realising the former, and would urge members of this forum to read his and Frank Machovec’s work on Perfect Competition.
I second AdrianHealey’s point that methodology—and therefore, philosophy—matters. What counts is correct method, regardless of one’s affiliations. The praxeologists within the Austrian school—i.e. the causal realists—by all appearances, to me look to have correct economic method well identified and practiced.
And according to the Austrian praxeologists, what matters is the market process.
One can see here that equilibirum is implied in all praxeological analysis, because according to this analysis equilibirum is a necessary TENDENCY inherent in human economic action.
edit: Well, Hulsmann argues that there’s no place in economic theory for ideas of “tendencies toward equilibrium”. I need to consider his argument more carefully, but I’m dubious because it turns on some weird notion of objective value.