Equilibrium is a foundational concept in mainstream economics. In micro, goods and services are priced at the point where supply and demand are in equilibrium. In macro, economies grow at a rate that represents an equilibrium point where several equations--representing preferences, technology, institutional behavior and other variables--are all true at the same time.
In macro, this leads to a very big problem. The logic of equilibrium dictates that--thanks to forces that are treated more or less as magical--economies inexorably move toward equilibrium and stay there. "Shocks" might shift them away from this equilibrium point, causing unemployment or idle resources, but a fundamental force always works to restore full employment and efficient use of resources. This force is analogous to gravity in that it is basic and fundamental. We might speculate as to whether something more basic is what causes it, but for all practical purposes it is taken as a given.
Now, if one is skeptical of the ability of experts to intervene in the operation of natural forces (a skepticism shared by anyone with a passing familiarity with human history), then the obvious policy recommendation is: don't fuck it up!
"Don't fuck it up!" is actually a branch of heterodox economics known as the Austrian School. When folks refer to Ludwig Von Mises or Friedrich Hayek, they are frequently declaring that the wise course is "don't fuck it up", don't get in the way of the market.
And so it is when Austrian Robert P. Murphy looks at the economic history of the early 1920s:
As I explained in my post, [book author] Grant is following in the tradition of several free-market writers (including me) who think the 1920-21 depression shows the flaws in Keynesian thinking. Specifically, the depression after World War I was sharp but short, with the economy snapping back into recovery without Keynesian “stimulus”–indeed despite massive doses of “austerity” to use the modern lexicon.
For our purposes here, let it suffice to say that this is not actually what happened in the early 1920s.
The problem is that the economists who criticize this bad history never seem to notice that it is simply the logical result of their own beliefs in equilibrium. Even those heterodox economists who are relentlessly critical of mainstream economic thinking never get to the point where they completely reject equilibrium analysis. And as long as you accept equilibrium analysis, there will always be Austrians who say, "don't fuck it up and get in the way of an economy returning to equilibrium."
Below is a dialog on this topic adapted from my comments on the EconoSpeak blog post: Are Keynesians "Desperate" About The 1921 Recession? by Barkley Rosser.
Thornton Hall: As long as respectable economists promote the nonsense idea that "equilibrium" is a useful concept in the understanding of a complex system created by dynamic and idiosyncratic agents, there will be those who take equilibrium analysis to its necessary logical conclusion.
No amount of contrary examples can change the fact that the Mises crowd's logic is correct. And correct logic is revered in economics.
Barkley Rosser: Are you aware that I am one of the leading experts in the world on complexity economics? If you are not, please check out my website... http://cob.jmu.edu/rosserjb .
Anyway, let me simply note that I am one of the very small (although growing) group of economists that is interested in the somewhat small while nontrivial overlap between Keynes and Hayek (and some other Austrians). That overlap certainly involves complexity issues, including your concerns about out of equilibrium dynamics. I know it is annoying to have somebody send you to a website, but, really, you need to read some of what I have written, not just some, but a whole lot.
Merry Christmas to one and all who want to have one!
Thornton Hall: So I read:
IMPLICATIONS FOR TEACHING MACROECONOMICS OF COMPLEX DYNAMICS
I think a lot of blame goes to post modernism, the idea that there is no true observation, that we all start with theory and the observe accordingly. I think this is part of what accounts for the confusion between "less wrong" and "more right" so perfectly demonstrated in your closing reference to physics:
Thus, although probably the majority of the developments in complex nonlinear dynamics are unlikely to be suitable for inclusion in macroeconomics textbooks in the near future, some of these things can and should be said to students somehow. As regards the ultimate effect of these developments upon economic theory, we can do worse than to contemplate the following comments of Steve Smale (1977, p. 95):
How did Relativity Theory respect classical mechanics? For one thing Einstein worked from a very deep understanding of the Newtonian theory. Another point to remember is that while Relativity Theory lies in contradiction to Newtonian theory, even after Einstein, classical mechanics remains central to physics. I can well imagine that a revolution in economic theory could take place over the question of dynamics, which would both restructure the foundations of Walras and leave the classical theory playing a central role.
Einstein contradicts Newton by being "more right". Newton, within the proper scope, is not wrong. He is less general. Einstein is more complex but more complete. He can predict the acceleration of an apple falling as well as the behavior of that apple as it approaches the speed of light.
Rational expectations is not Newton. Equilibrium is not Newton. Human behavior is not rational. It just isn't. Prices aren't set were supply and demand meet. They just aren't. There is no proper scope where these ideas work. There has never been any evidence to contradict the rotting fruit in the dumpsters behind every grocer in Anerica. [If markets cleared that fruit would have sold.]
Now, bounded rationality does sort of match the world. It's "less wrong" than rational expectations. Complexity sort of leads to "shocks". That idea is less wrong than RBC.
You go from more right to less right when the simplicity of F=ma gives the right answer. But going from less wrong to wrong isn't a simplification. It's just... Wrong.
That's why Noah Smith's arrogant bumbling thru the philosophy of science is so excruciating. Yes you start with theory, but the magic happens when the world comes crashing thru. If those orbits aren't circles, but rather ellipses, then…Insight… Revolution!
You, Barkley Rosser, get to that same juncture where equilibrium analysis is analogous to circular orbits and instead of revolution you say, "Well isn't this [complexity] a very interesting special case."
But in every single other empirical endeavor in human history it's the special cases that reveal what's really going on! Abnormal psych teaches us how the normal mind works, earthquakes teach us what forces are *always* at work on the Earth's crust, hurricanes the weather, unique Finch beaks evolution, supernovas the stars, and on and on.
Use the ladder of John Stuart Mill to see what you can, but then discard it in favor of insight. Holding on to that ladder is literally killing people every day.
Not bad, although I would say you are sounding more like early Wittgenstein than J.S. Mill on that last bit. As it is, or was, Mill was an early student of the complexity idea of emergence, but in his philosophical writings rather than his ones on economics.
There's more including where Rosser apologizes for sounding pompous about his expertise and I wave him off noting that I'm the idiot who isn't an expert anything and quite fortunate that the Internet lets me communicate with people like him who know what they are talking about. And I have edited slightly for clarity, including adding the large quotation from Rosser's paper that was referenced but not copied in my original comments.