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August 31, 2011


Leigh Caldwell

Duncan noticed something similar yesterday:



Excellent post.

I got 'a bit Marxist' on the US a year ago.




I'm not sure I agree whether Marx would be on one side of the "equilibrium thinking" fence and DSGE models on the other. For a start, equilibrium in the context of a DSGE means roughly what stock-flow consistency means in Godly and Lavoie's PKE models. Equilibrium simply means that resources don't appear or disappear: they are all accounted for at all times. What people used to think of as "disequilibrium" would still be called equilibrium in the context of a DSGE. Instead, "disequilibrium" would imply that something logically impossible or inconsistent is happening.

Also, AFAIK, plenty people have put Marx into both static and dynamic GE models, e.g. Boldrin, Roemer, etc.

Jimmy Hill

Shorter version: "Two great thinkers both had something interesting to say".

It's a testament to how firmly gripped some people are by their ideology that this post even had to be written.


ABC doesn't fit the crisis well at all, because it was a story of excess consumption and asset price inflation. Austrian theory is based around malinvestment in capital goods. Hayek tried to get around this by redefining consumer durables as capital goods, but, erm, you can't do that.

I believe Jean-Baptiste Say would have said 'I agree with Marx, Malthus and Keynes':


Right now he'd be saying 'how the hell can you idiots believe general gluts are impossible when there's clearly one in front of you?' Or something.


Bingo. The very concept of equilibrium is fine for chemistry but useless for economics.

Say's law, IS-LM, DSGE are all flawed thinking.

Economics needs to aquire a mechanistic understanding - how the bank credit system works and how it can cause bubbles and other phenomena like business cycles.

This is what Austrians try (and fail) to do and what post-Keynesian circuitists/ chartalists (aka Modern Monetary Theory types) actually achieve.


"Instead, "disequilibrium" would imply that something logically impossible or inconsistent is happening."

Not even wrong then.


No, it is obviously quite possible for DSGE output to be wrong, if, e.g., you are interested in predicting the time path of some aggregate in response to a change in govt policy.

Equilibrium just means that everything that comes from somewhere goes to somewhere; that everything that happens is accounted for rigorously. It's directly analogous to stock-flow consistency.

Would you also describe SFC models as "not even wrong"? Even though we're told that they were one of the few to predict the crisis?

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