Nonequilibrium Economics & Why We're Clueless

[Victor Galis]

Originally posted by Colonâ„¢
I like to compare markets to oceans (or surface water in general). As anyone knows, water always seeks a level and all surfaces could be perfectly even. It's just there are all kinds of disturbances that cause ripples, waves, tides and so forth. It's the same with the markets. Maybe if there weren't population growth, technological progress, policy changes (not in the least in monetary policy), trends in consumer preferences, warfare, weather patterns, natural disasters... then perhaps there would a situation in which prices don't change. What matters is not such much is that a state of equilibrum is ever reached but that there's a strong pressure towards it. Overpriced stocks fall and unsatisfied demand attracts new investments (and typically result in undershoots and overinvestments, creating pressure in the opposite direction).

But see, disequilibrium economics is premised on the notion that there isn't a tendency towards any sort of equilibrium, or at the very least that some times that tendency doesn't exist.

Equilibrium is a convenience economists came up with to allow all their equations to be solvable. In the real world, too much information is missing for anyone to really do the sort of marginal analysis required to bring things into equilibrium. Moreover, not everyone is rational. Even those that are don't necessarily maximize profits over the same period or have the same discount rate, etc.

I took an entire class designed to poke holes in mainstream economics... made it kind of hard not to in the other classes.

[Dr Strangelove]

It's mass psychology, but once a major downtrend occurs it's almost like regenerative feedback -> i.e., an explosion.

The taxing volume sales is interesting, someone should get Barack Obama in on this.

Palin will have apoplexy. ( Her fans will have axe handles. )

[Dauphin]

Originally posted by Kuciwalker


I'm not sure that should be flippant. It's a legitimate point.

The flippancy tag was for because the true price tag of the bailout being anything remotely resembling $700 billion is questionable. In theory there is a rose-tinted scenario that tax payers end up making money out of all this mess, just like anyone else who buys into a market at its low ebb.

A related thought on cost-benefit is that even if this model works well on world market scales, is it going to be a useful tool? The complexity involved may result in it providing quantifiable advice or it may only tell us longhand what we already knew shorthand. Alternatively it could predict things that we can do little or nothing about anyways - like a model forecasting a hurricane, earthquake, or other natural disaster.

[Ramo]

And of course the basic level of abstraction in a hurricane or earthquake simulation is pretty well established. That's decidedly not the case in one of these economic models. You've got to think through your assumptions pretty thoroughly.

[Victor Galis]

Originally posted by Ramo
And of course the basic level of abstraction in a hurricane or earthquake simulation is pretty well established. That's decidedly not the case in one of these economic models. You've got to think through your assumptions pretty thoroughly.

The real problem is that the standard assumptions are terrible since they were picked to simplify the math rather than because they were realistic.

[fed1943]

Actually "equilibrium" just means nothing.
It's just the current situation whatever it would be.
Best regards,

[Kidlicious]

Originally posted by fed1943
Actually "equilibrium" just means nothing.
It's just the current situation whatever it would be.
Best regards,

Yes, if there is a constant price then you can call that an equilibrium in a market economy. However, is the price directing resources efficiently or is it leading us to a crisis.

But equilibrium requires a price that everyone is trading at. When you see big swings in prices that's not an equilibrium because you really can't say that's the price of the stock or good. In fact, while you are looking at what is reported as the price, other people are probably trading at some other price.