Measurement, Quantification, and Economic Analysis: Numeracy in Economics

By Ingrid H. Rima | Go to book overview

Chapter 21

Simultaneous economic behavior under conditions of ignorance and historical time

Donald W. Katzner

Economists recognized long ago, indeed, at least as far back as Cournot (1960:127), that simultaneity is a fundamental fact of economic life. At present, their most sophisticated expression of this idea is represented, perhaps, by so-called general equilibrium analysis. In its microeconomic form, a fully developed general equilibrium analysis involves the construction of a dynamic mathematical model whose equations characterize, at each moment, the behavior of consumers, the behavior of firms and the operation of markets. (A government may also be included. ) Consumer and firm behaviors emerge from distinct decision-making mechanisms. For each vector of equilibrium and nonequilibrium price values, announced, perhaps, by an auctioneer, the unique solution of the relevant equations of the model at a moment on the model’s time-clock (assuming such a solution exists) represents the result of the simultaneous interaction of the consumers, firms and markets at that moment in light of the endowments and the history of the interactions of previous moments already determined by the model. A sequence of these solutions starting with a fixed initial endowment and generated by changing prices is called a time path. A time path along which there is neither change in economic behavior by any consumer or firm nor change in economic value in any market is an equilibrium path. It is frequently supposed in general equilibrium analysis not only that an equilibrium exists and is (globally) stable, but also that at this equilibrium all markets clear and that trade takes place only after market-clearing equilibrium is achieved. 1 As parameters and other “fixed” elements modify, the equilibrium changes. The presence of fixed-element variation across a succession of given dates thus generates a sequence of equilibria and resulting trades at those dates. Such a model is often referred to as a sequence economy. 2

However, the general equilibrium approach to simultaneity carries with it certain methodological assumptions that severely limit its applicability to real-world phenomena. 3 First, time is “logical” as opposed to historical. It can be restarted over and over again by repeatedly placing the same, fixed dynamic equations at their initial values. Moreover, the equilibrium itself, when it exists, is timeless, that is, the relations that determine the equilibrium

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