Austrian Economics in Action: The Economics of Groundhog Day

By MacKenzie, D. W. | Review - Institute of Public Affairs, March 2007 | Go to article overview

Austrian Economics in Action: The Economics of Groundhog Day


MacKenzie, D. W., Review - Institute of Public Affairs


Modern mainstream economics has particular strengths and weaknesses. Mainstream concepts like opportunity cost, comparative advantage, and marginal cost pricing have great merit. Yet mainstream economics places undue emphasis on equilibrium.

The shortcomings of mainstream economics are subtle, but can be understood with clear examples. Such examples need not come from observed history. While art may imitate life, there is one instance where life cannot imitate art. The movie Groundhog Day (1993) illustrates the importance of the Mises-Hayek paradigm as an alternative to equilibrium economics by illustrating the unreal nature of equilibrium theorizing.

In Groundhog Day, Bill Murray plays Phil Connors, a man who relives a particular day-Groundhog Day-many times. In the first instance Phil Connors lives through this day quite imperfectly.

After committing numerous errors he goes to sleep. When he awakens, time has turned back twenty-four hours. He is about to relive the same day. Since no one else remembers having lived this day before, Connors can relive it knowing more about what will happen than he did the first time. After reliving this same day hundreds of times, he learns how to live it perfectly, not just for him, but for others too.

How does this movie relate to economics?

The first time through, the day is highly imperfect because Connors lacks knowledge concerning what will happen. He lacks knowledge of how to take best advantage of what will happen during the day. By his final iteration of Groundhog Day, he has acquired virtually perfect information on how to act during this particular day, given how everyone else will react.

In economic terms the final reliving of the day constitutes what economists refer to as a perfectly competitive equilibrium based on perfect information. With full knowledge of how to realise every possible gain during this day, Connors is able take advantage of every opportunity for gain. The difference between his first time through the day and his final reliving are dramatic. While this is of course only a movie, it does serve to illustrate the wide gulf between the economists' notion of perfectly competitive equilibrium and reality.

The ability of this fictional character to relive a single day points to vital issues in economics. Perfectly competitive equilibrium requires perfect information. Ignorance leads to errors that put the ideal state of equilibrium out of reach. Ignorance and error exist due to perpetual change. In a world where everything stays the same-except our knowledge of previous days-we can approach perfection.

Phil Connors is able to live a perfect day not only because the events of the physical world are repeating perfectly (i.e. the weather), but more so because people are living it as if it was the first time. Economists refer to 'Nash Equilibrium' as a situation where everyone makes plans that are optimal given the plans of others. In such a situation the plans of everyone mesh perfectly. This situation requires everyone to know about the plans of others in advance. This is the essential idea behind equilibrium theorizing in economics.

The problem with equilibrium theorizing is that it assumes that the fundamental conditions of the world do not change. That is, it assumes that we simply play the same game over and over again without any fundamental structural change. In the hypothetical world of Phil Connors in (.iroundhog Day all of the parameters of the 'game' he is playing are reset back to their original position every night while he sleeps. In the real world there are no constants. FA Hayek recognised the importance of this fact in 1937:

For any one individual, constancy ot the data does in no way mean constancy of all the facts independent of himself, since only the tastes and not the actions of individuals can be assumed to be constant. As all those other people will change their decisions as they gain experience about the external facts and about other peoples' actions, there is no reason why these processes of successive changes should ever come to an end. …

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