Many of the presumed 'known knowns' of economics have their underpinning in work produced by economists from the mid-nineteenth to mid-twentieth centuries. That time period is when many of the models that appear in micro- and macro- 101 classes were first constructed and much of what is now termed mainstream economics was developed. One of the leading lights of this time was Leon Walras, a French economist who is probably best known for his contributions to the theory of general equilibrium.
Without taking the time to pen a separate article on general equilibrium theory, it is probably enough for our purposes today to say that it is an attempt to explain how the supplies and demands for all of the goods and services in an economy interact. In other words, rather than merely discussing the supply and demand for a model of car, it contemplates the reality that the supply and demand curves for that product do not exist in a vacuum, but rather depend on the supply and demand for gasoline and competing models as well as things like taxes, import duties, regulations etc. It is an attempt to build a model for something that is nearly impossible; one that factors in all of the tastes of every consumer and the proclivities of every supplier for every product in an economy at any given time while reflexively and continuously adjusting for the continuously adjusting variables of every other input and product.
It is critical to note that the general equilibrium model (as well as most other economic models) makes great use of assumptions. One such assumption is that of a 'Walrasian auction.' The auction is essentially a deus ex machina utilized to lubricate economists through the seeming impossibility of what has been described above. Essentially the auction is the assumption which allows us to model outcomes describing a state of general equilibrium.
In technical terms, a Walrasian auction is a type of simultaneous auction where each agent calculates its demand for the good at every possible price and submits this to an auctioneer. The price is then set so that the total demand across all agents equals the total amount of the good, a process Walras describes as tâtonnement (French for "groping"). Theoretically, a succesful Walrasian auction would perfectly match all the suppliers with all the demanders, leading to the equilibrious state. The Walrasian auctioneer is the presumed agent that does the actual matching in a market of perfect competition. The auctioneer provides the necessary elements of perfect competition: perfect information and no transaction costs. When all of the supply and demand curves for individual products match up, i.e. they are all in their own states of partial equilibria, it follows that the entire economy is in a state of equilibrium as well, or general equilibrium.
Though Walras is held in high esteem in the economics mainstream, he and his theories are not without critics. On a merely intuitive basis, many readers will have noted that the assumptions made in this model are not light ones, they do not merely supplement harder facts; indeed they essentially make the model. Not exactly the stuff of algebra or chemistry.
Though all assumptions of the Walrasian auctioneer come under fire, one which has some of the most trouble standing up to critique is that of perfect information. For some people it is just too tough to assume in the idea that every actor in an economy like, say the US, can 'know' the prices of all of the inputs that make up the goods they purchase, that they are continuously able to weigh what a good costs in Minnesota and whether a low price there means traveling from Iowa is more efficient, what gas prices are shifting to that afternoon. The list can go on and on, and is only complicated by globalization; it is tough enough to ponder all of the permutations of the Iowa/Minnesota example, never mind throwing Canada or a post-NAFTA Mexico into the mix.
However, despite criticism and even putting all of the mathematical models aside, there is some pure intuitive appeal in thinking that all of the actors in an economy interact somehow; that people are able to make informed decisions that have trickle-down impacts on their other decisions; that everything works together in some logical way. In other words, it is nice to think that one of the other huge and hugely controversial assumptions of economics, the rational actor, at least could exist. Perhaps it is merely a human desire for order and predictability shining through, but the idea that things can somehow fit can be a comfort to many. This desire for order may be even stronger after the crises of the past few years. Then again, it is difficult for some to believe that the rational actor could even exist after the evidence of the past few years is examined.
However, what if something that the economists of the late 1800's could never have foreseen is rendering their assumptions a bit closer to reality? What if innovation were inching society closer to a world where information, if not perfect, were at least much, much better? What if a Minnesotan wishing to purchase products in Iowa, or Canada, or even further afield, had to concern themselves far less with the transaction costs associated with searching for products far from home, the travel, the time? What if the internet were able to get us closer to the assumptions that economists have made for nearly two centuries? What if the internet were able to serve as a real life Walrasian auctioneer?
This isn't entirely farfetched, and is to some extent already happening. Amazon and eBay have allowed consumers to see what prices might be had by searching a bit further from home than the corner store. Sellers are able to see what competitors are providing at certain prices and can make informed decisions on their own pricing strategies accordingly. Essentially, better information has the potential to allow sellers and buyers to make better decisions. This has happened, and will continue to do so. Of course, no technology can make the necessary assumptions of economics more than assumptions. People often use the internet to act very un-rationally. Unnecessary items are purchased, scams occur, time is wasted. However, it can help to make some of the assumptions better. And, if we are going to assume so much in models that are depended on by those policy makers who have so much control over our everyday lives, it is at least a quantum of solace that those assumptions are inching, no matter how slowly, closer to reality.
No comments:
Post a Comment