Keynes and the conceptual cul-de-sac of General Equilibrium

Economist John Maynard Keynes

“The reasons for which Keynes’s arguments fail to translate into the orthodox paradigm are not because they are vague, confused or poorly formulated. They fail to translate, instead, because they identify and address crucial flaws in the structure and logic of the dominant paradigm. As Keynes himself put it, what he hoped to do is ‘convince [us] that Walras’ theory, and all others along those lines are little better than nonsense’. He was able to see, like Kornai, that the Walrasian ideal is ultimately ‘a special branch of mathematics’, which employs ‘logical reasoning [but] from arbitrary assumptions’, making it more an ‘intellectual experiment’ than a theory in the mould of the sciences.

The real problem which far too many economists have had with understanding Keynes’s arguments exactly as he expressed them is an intransigent desire to believe that, as once said by Debreu in an interview, ‘the superiority of the liberal economy is incontestable and can be mathematically demonstrated’. The problem with this conviction is that the economy that Debreu had in mind has little connection with reality. It is time, if we want in the future to avoid the terrible waste, not just of the past ten years, but of the many other times that liberal economies have so clearly failed to provide for full employment, that we turn our attention to understanding more accurately not the economic society in which we might wish to live but the one in which we actually live. It is in this regard that Keynes, read without the desire to adhere to the conventional wisdom of the Walrasian General Equilibrium paradigm, provides a truly valuable starting point.”

Mark Pernecky and Paul Wojick

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3 thoughts on “Keynes and the conceptual cul-de-sac of General Equilibrium

  1. There are two forms of equilibrium economics, or perhaps it is better to speak of stages. The classical and the Walrasian-and-post-Walrasian stages.

    The classic economists made at least efforts at describing the mechanisms that are supposed to bring about equilibrium in specific markets and in the economy as a whole (i. e. in the full set of simultaneously equilibrating markets).

    Walras and those in his tradition were already protected from terminal refutation by the robustly entrenched ideology of the classics. The “Walrasians” were free to toy around with a mathematical theory totally out of touch with reality. The strength of the classical myths was such as to convince people that major economic problems were due to unwise interference with the unhampered economic system, which Walrasian theory supposedly could prove to be feasible.

    However, formidable mathematics notwithstanding, Walrasian equilibrium economics is actually easy to refute as a viable model of the economic system – just ask for a list of the assumptions it depends upon. In fact, many of its practitioners readily admit that they engage in art for art’s sake rather than in a meaningful representation of the economy.

    Significantly, in criticising the classic (pre-Walrasian) conceptions of an equilibrium economy, Keynes attacks and debunks the only reasonably complete case for equilibrium economics (as a realistic description of an economy), showing it to be … well, nonsense.

    He demonstrates that the mechanisms (the labour market, for instance, or the market for loanable funds) that – according to the classics – are supposed to create equilibrium do not exist at all or not in the form envisaged by the classics, and hence there cannot be automatic benign equilibrium.

    In fact, in taking money seriously, unlike the classics (who really think of the economy as a barter system where money does not affect real factors) he demonstrates that there are forces in an economy apt to prevent equilibrium or bring about malign equilibria (unemployment equilibrium).

    That’s why in my last comment I wrote:

    Keynes’ objections are possibly the best starting point on the way to a more scientific economics:

    https://peofdev.wordpress.com/2019/05/21/heterodoxy-on-central-bank-independence-and-monetary-policy/

    • Thanks for your comments Georg. For me, one of the most significant insights from Keynes thinking, certainly in the General Theory, was that the economic system is self-adjusting, or can be seen to find equilibria, but this can be with (mass) unemployment (malign equilbria as you say).

      • Nick, I interpret Keynes to mean that while the economy does comprise

        (a) equilibrating processes and (b) approximate or even perfect equilibria,

        neither (a) nor (b) are or can be part of a general equilibrium.

        (a) and (b) may or may not bring about welcome outcomes, but they certainly do not engender “the automatic good” promised by equilibrium economics.

        To attain maximum benefit from (a) and (b), it is necessary

        (1) to recognise that equilibrating processes and approximate or perfect equilibria are not by their very nature surefire successes, but rather prone to be dysfunctional and harmful under a number of circumstances, and therefore

        (2) need to be interfered with judiciously – especially since market mechanisms are incapable of ensuring sufficient aggregate demand – a discovery made by Marx prior to Keynes.

        Keynes is in that sense cleverer than Marx that he does not throw out the baby (a and b) with the bath water (the imperfection of (a) and (b)).

        Say’s law, with whose criticism Keynes is prominently associated, was nothing but the assertion that aggregate demand can be automatically established by a system of general equilibrium.

        And Keynes’ criticism of Say and the classics was an exercise in showing that they had not and could not explain in theory or produce evidence from reality that there exist equilibrating processes capable of this crowning achievement of equilibrium economics (guaranteeing sufficient aggregate demand).

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