Topic: Equilibrium versus Market Process

http://www.econlib.org/library/NPDBooks … 0Essay%201

Israel Kirzner's famous theory of markets as a process of information discovery and opportunity taking by entrepreneurs, as opposed to equilibrium theories that rely on fixed parameters and interactions.

He has a book on it - Market Theory and the Price System, which I should get to after first reading Ludwig M. Lachmann's essays on macroeconomic uncertainty and capital theory.

(Yes, I'm reading econ now instead of writing software. Hey, it'll arrive. Eventually.)

"Humanity Is Overrated" - Shrek

Re: Equilibrium versus Market Process

Von Mises school of economics is heavy on theory and low on empiricism. Don't dicksuck the Austrian School of Economics.

Re: Equilibrium versus Market Process

There's no way for a market to reach a stable equilibrium because it's a chaotic process. Better way to describe a market would be a chaotic nonequilibrium game where there's no stable Nash equilibrium since the actors do not reliably act in a rational manner but roughly follow the payoff tables in some cases. The payoff tables also greatly vary since there's imperfect information, but that imperfect information should always be in the framework of Game Theory.

Re: Equilibrium versus Market Process

Game theory, bounded rationality and "payoff tables" (whatever those are) are still oversimplifying assumptions.

In fact, modeling markets as chaotic systems seems to be a kneejerk reaction too strong in the opposite direction. You're assuming overly high sensitivity to initial conditions and disregarding individual preferences and the entrepreneurial function for error correction and self-stabilization. Instead this would lead to the unrealistically pessimistic assumption of Circular Cumulative Causation, a sort of destructive anti-equilibrium that needs an exogenous entity like government to correct it (never mind now you're reckoning with public choice theory and government failures).

In fact, the game theory approach commits a grave fallacy by modeling uncertainty (in the kaleidic sense) as unidentified risk. Not the same.

"Humanity Is Overrated" - Shrek

Re: Equilibrium versus Market Process

All models simplify shit so that they're workable. That's what a model is.

The Grasshopper Lies Heavy

https://i.imgur.com/WsEkePS.png

Re: Equilibrium versus Market Process

oversimplifying assumptions != a direct criticism of simplification itself 


if anything fagix's "model" is the one your criticism would be more accurately addressing lel

Re: Equilibrium versus Market Process

...Which is the one I was addressing.

All models simplify. "Chaotic nonequilibrium game with unreliably rational actors chasing payoff tables" is something Duelix just regurgitated.

"Humanity Is Overrated" - Shrek

Re: Equilibrium versus Market Process

Was directed at wes I haven't slept in days I'm in class not sure how I didn't crash on the way here lol I'm a damn mess

9 (edited by HippieGangster 2015-12-03 15:19:39)

Re: Equilibrium versus Market Process

V.R. wrote:

...Which is the one I was addressing.

All models simplify. "Chaotic nonequilibrium game with unreliably rational actors chasing payoff tables" is something Duelix just regurgitated.

I didn't regurgitate; it's a concept I came up with myself because it makes the most sense. It's a very loose model that is oversimplifying; nevertheless it's a kind of useful summary of economics, which is way more complicated than that.



Game theory, bounded rationality and "payoff tables" (whatever those are) are still oversimplifying assumptions.

Payoff tables represent some sort of payoff for taking any action, usually in the form of capital. IE if you have multiple decision makers and multiple possible actors. Economics represents an exceedingly complicated set of decision makers, actions, and payoffs, which is why the players typically use irrational but simplifying heuristics to determine their choices.

In fact, modeling markets as chaotic systems seems to be a kneejerk reaction too strong in the opposite direction. You're assuming overly high sensitivity to initial conditions and disregarding individual preferences and the entrepreneurial function for error correction and self-stabilization.

Except it's pretty apparent that markets aren't self stabilizing. Ever heard of bank runs? Or the Great Depression? Or the financial markets collapsing in 2008? If there's no intervention or capital controls on a market it tends to become increasingly volatile. Markets are quite sensitive to initial conditions, although they have self stabilizing mechanisms built in. Just because a system is chaotic doesn't mean it isn't self correcting; it just means that the trajectory of the correction isn't predictable or explicitly modelable. For example, consider a double rod pendulum or a lorentz attractor. It's pretty much empirical fact that it's possible to model the short term trajectory of an economy but not the long term trajectory; look at the margins of error in GDP growth predictions, for example.


Instead this would lead to the unrealistically pessimistic assumption of Circular Cumulative Causation, a sort of destructive anti-equilibrium that needs an exogenous entity like government to correct it (never mind now you're reckoning with public choice theory and government failures).

Now you're using an ideology to justify a theory rather than deriving the underlying theory from reasonable assumptions and fact.


In fact, the game theory approach commits a grave fallacy by modeling uncertainty (in the kaleidic sense) as unidentified risk. Not the same.

Game theory doesn't identify uncertainity (in the kaleidic sense) as unidentified risk. Not sure where you get this from. Read a book on game theory: here's a suggested one:

https://mitpress.mit.edu/index.php?q=books/game-theory

From the winner of the 2014 Nobel Prize in Economics.

Re: Equilibrium versus Market Process

I agree with some of what you're saying, but I don't think your model can be predictive, which is why it's only useful as a thought experiment, which is why I said wes's comment can be more accurately pointed at your "model". Good luck ever finding a set of inputs.


Nobody has anything resembling a proof regarding market forces. I agree there's pretty good empirical evidence that in the current regulatory-business climate business cycles can and will fuck up. I'd say assumptions about some kind of stabilizing force without monetary and/or fiscal policy curbing failure are demonstrably destructive in the short term, because I believe these curbing policies keep a lot of people employed and eating and prevent a lot of pain. I also don't believe they'll have significant long-term effects, at least as long as the government exercises even a minimum amount of mitigation. Self preservation tends to take care of that. But again, that's in this regulatory-business climate. I can think of several factors that can potentially cause major reductions in business-cycle amplitude. There's no saying that difficult to predict and violent business cycles are inherent to economy. I don't think a convincing case can be made by any stretch of the imagination supporting that assumption.

Re: Equilibrium versus Market Process

The whole point is that the system is not predictive. That's the basis of chaotic systems; they're inherently NOT predictive.

I don't know the underlying parameters of the chaotic system because I haven't studied economics in depth. However, it's pretty obvious from looking at business cycles that the system is chaotic, especially considering that no one has been able to predict the market in any consistent way, but there's some degree of stability in the short term for the most part.

Re: Equilibrium versus Market Process

Note that I don't even think it can generate prescriptive or helpful information, either. "We haven't predicted market forces therefore they're unpredictable" is not a helpful "model". That's what I'm getting at. Not even really in a descriptive sense. We already *know* we can't predict the business cycle  at the moment. Making the leap from that to "markets are *inherently* chaotic and unpredictable" and that there's no way for markets to reach a "stable equilibrium" (in a practical real world sense) misses a good deal of underlying econ.

Re: Equilibrium versus Market Process

Business cycles are unpredictable perturbations, but not evidence for chaos. Chaos implies determinism. Moreover, you cannot isolate the starting conditions from which parameter modifications lead to a business cycle. In fact, almost no one other than the RBCT proponents believe that business cycles are an intrinsic economic phenomenon.

The way you define payoff appears to be a muddled and underthought summary. I'd also be wary of injecting consumer psychology post-facto definitions of "irrationality". Are you defining capital as capital goods or financial capital?

Bank runs are a vulnerability of fractional reserve banking and are mitigated by a myriad of methods, but those aren't a property of markets.

No one can even agree on the causes of the Great Depression. Prior depressions like 1920-1921 were averted smoothly. Then, your attempting to isolate the multi-pronged 2008 crisis is disingenuous to your chaos theory hypothesis.

I wasn't injecting ideology. I was making an observation that your theory is similar to CCC, and hence has problems emanating from that. Public choice theory is also a real body of thought that has practical implications on the efficacy of political action. It is a fallacy to present a market theory requiring government intervention without also having a corresponding government theory.

"Humanity Is Overrated" - Shrek

Re: Equilibrium versus Market Process

I'm completely out of depth here; I don't know much Econ but it seems roughly chaotic with human behavior as a stochastic variable...

Yeah I don't know shit ATM but you does one empirically model a market?

Re: Equilibrium versus Market Process

Just went through Ludwig M. Lachmann's essay "Macro-economic Thinking and the Market Economy".

Basically his commentary from the sidelines of the Cambridge capital controversy between the neoclassicals and Piero Sraffa/hard Keynesian disposition. He notes the folly of assuming homogeneous capital stock that can be modeled in static aggregates, and rejects equilibrium in any market process with durable capital goods as factors of production because of permeable and irreducible changes in the many sectors. Exceptions include markets with high potential for arbitrage. He calls out neoclassicists on tailoring their assumptions for easier modeling. Further, he says that the range of decision making in individual action is too diverse to be statistically reduced to aggregates of output quantity, price and labor begs the question and cannot be correlated in a world of disequibrilating markets, nor can these aggregates be repeatable due to factors of production always being continuous and human preferences spontaneous and uncertain. Additionally the same production techniques may be profitably used at different rates of interest, and there are no uniform rates of profit since it depends on planning and capital combination in each individual firm.

Capital theory seems to be something that mainstream economics handwaves, but some of the heterodox theory can be really multi-layered.

"Humanity Is Overrated" - Shrek

Re: Equilibrium versus Market Process

Hutt laid out an impressive taxonomy of idleness and withheld resources that I must revisit later down the road.

Next I'm thinking of going through Rothbard's opus Man, Economy and State (with Power and Market)... all 1441 pages of it.

"Humanity Is Overrated" - Shrek