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The (Confused) State of Equilibrium Analysis in Modern Economics: an Explanation



Modern economics produces many interpretations of the category of equilibrium as well as competing views of its relevance or worth for economic theorizing. In particular, interpretations and valuations often differ systematically between mainstream and heterodox contributions. I argue that these differences are best explained through understanding the competing ontological presuppositions of the mainstream and heterodox traditions. If correct, this explanation reinforces the assessment advanced elsewhere (Lawson, 2003) that mainstream and heterodox traditions are best distinguished not according to substantive claims or policy stances but rather precisely in terms of their ontological commitments.
Journal of Post Keynesian Economics / Spring 2005, Vol. 27, No. 3 423
© 2005 M.E. Sharpe, Inc.
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The (confused) state of equilibrium
analysis in modern economics:
an explanation
Abstract: Modern economics produces many interpretations of the category of
equilibrium as well as competing views of its relevance or worth for economic
theorizing. In particular, interpretations and valuations often differ systemati-
cally between mainstream and heterodox contributions. I argue that these dif-
ferences are best explained through understanding the competing ontological
presuppositions of the mainstream and heterodox traditions. If correct, this ex-
planation reinforces the assessment advanced elsewhere (Lawson, 2003) that
mainstream and heterodox traditions are best distinguished not according to
substantive claims or policy stances but rather precisely in terms of their onto-
logical commitments.
Key words: equilibrium, heterodox economics, mainstream economics, ontology.
A survey of the economic literature on equilibrium theorizing reveals
various prima facie problematic features, confusions, or at least curiosi-
ties, some of the most significant of which I wish to focus on here. These
are all features that, in due course, I shall seek to explain.
The first is that there are various competing conceptions of equilibrium,
with the range of notions apparently resistant to successful systematiza-
tion, despite the best efforts of some. The result, inevitably, is a lack of
clarity over what is being discussed. Machlup sums this up situation with
the assessment that equilibrium is “[a] term which has so many meanings
that we never know what its users are talking about” (1991, p. 43).
The author is in the Faculty of Economics, University of Cambridge, UK. He is grate-
ful to Stephen Pratten and Roy Rotheim for helpful comments on a previous draft.
This paper was prepared for, and presented (in November 2003) at, the seminar series
on “Dissent in Science,” organized by Valeria Mosini for the philosophy of social
science group at the London School of Economics. The author is grateful to the par-
ticipants for helpful comments.
06 lawson.pmd 2/14/2005, 11:24 AM423
A second notable feature of equilibrium theorizing in modern econom-
ics is that at any point in time many authors seem capable of providing (or
perhaps, more accurately, seem incapable of avoiding) inconsistent ac-
counts of the nature of their project. In particular, many oscillate between
(1) supposing that an equilibrium exists and is something to be explained
and (2) asserting that its existence is something to be established.
Thus, for example, Arrow and Hahn, in General Competitive Analysis
(1971—one of the seminal contributions to general equilibrium theory),
early on claim the heritage of Adam Smith (asserting that “Smith was a
creator of general equilibrium theory,” ibid., p. 2) and note that Smith’s
project was to explain an a posteriori state of affairs that was no part of
anyone’s design. Indeed, they hold the view that Smith’s
notion that a social system moved by independent actions in pursuit of
different values is consistent with a final coherent state of balance, and
one in which the outcomes may be quite different from those intended by
the agents, is surely the most important intellectual contribution that eco-
nomic thought has made to the general understanding of social processes.
(ibid., p. 1)
Yet no sooner do they assign to economics the task of explaining this
state of affairs, one they interpret as an equilibrium, than Hahn, writing
at the time Arrow and Hahn (ibid.) would have been in press, warns us
to caution against supposing an equilibrium exists:
it cannot be denied that there is something scandalous in the spectacle of
so many people refining the analyses of economic [equilibrium] states
which they give no reason to suppose will ever, or have ever, come about.
It probably is also dangerous. Equilibrium economics . . . is easily con-
vertible into an apologia for existing economic arrangements and it is
frequently so converted. (Hahn, 1970, pp. 88–89)
A third remarkable phenomenon is that, among economists who bother
to concern themselves with notions of equilibrium, there is a polarization
of responses. Most contributors are either (1) strongly in favor of retain-
ing some equilibrium notion in economics or (2) strongly against doing
so. This polarization is, prima facie, somewhat surprising in a situation
that lacks a consensus about what the concept means and even supports a
widespread awareness that interpretations are indeed multiple.
Yet examples abound. Thus, Machlup maintains that “it is impossible
to exclude the terms ‘equilibrium’ and ‘disequilibrium’ from the
economist’s discourse” (1991, p. 43); Hahn insists that “[w]herever eco-
nomics is used or thought about, equilibrium is a central organising idea”
(1984, p. 43); and Backhouse recently concludes that “[t]he strongest
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defence of equilibrium analysis . . . is that it is indispensable” (2003, p.
8). In the opposite camp, Kaldor writes of the irrelevance of equilibrium
economics (1972), Robinson states that the “metaphor of equilibrium is
treacherous” (1956, p. 59), whereas Hayek eventually chooses to avoid
it as “[a] somewhat unfortunate term” (1968, p. 184).
An interesting aspect of this situation also warranting explanatory com-
ment is that those most insistent on maintaining the notion are contribu-
tors to the mainstream project of modern economics, whereas those
rejecting the equilibrium notion are mostly associated with modern het-
erodox traditions.
That said, however, I should note that the figures with whom the mod-
ern heterodox traditions are most associated were often accommodating
of the equilibrium idea initially, before becoming less enchanted over
time. This, I think, is true of the likes of Robinson, Keynes, and Hayek,
now ineradicably associated with modern heterodox reasoning. Thus,
for example, Robinson came to contrast equilibrium theorizing nega-
tively to a preferred historical approach, whereas Hayek, for reasons we
will discuss in due course, came to prefer the “concept of order . . . to
that of equilibrium” (ibid., p. 15). This latter set of developments also
calls for some kind of explanation or further insight.
My aim with this paper is precisely to outline one way of rendering the
phenomena expressed in these observations intelligible. That is, I want
to advance and defend an interpretation of what is going on that can
account for the
1. various competing conceptions of equilibrium;
2. recurrent incoherencies that arise in equilibrium theorizing; and
3. polarization of attitudes toward equilibrium theorizing, including
a tendency for heterodox figures to become increasingly skeptical
over time.
The elaboration of an account that can explain these observed features
constitutes the objective of the main body of this paper. In a final sec-
tion, I draw out implications of the analysis sustained.
Explaining the phenomena noted
My explanation of the phenomena under examination follows from a broad
thesis about the nature of modern economics that I defend elsewhere.
Here I mostly outline relevant components of this thesis. I shall not re-
hearse previous extended defenses of the overall thesis (for this, see
Lawson, 2003, especially ch. 1), though I shall provide some motivation
06 lawson.pmd 2/14/2005, 11:24 AM425
for it. However, I do interpret its ability (demonstrated below) to render
intelligible the phenomena before us as further evidence of its explana-
tory power and, thus, adequacy. The relevant components of this broader
thesis are as follows:
1. The modern economics academy is dominated by a mainstream
tradition, the essence of which is an insistence on mathematical-
deductive modeling.
2. As an intellectual project, modern mainstream economics is not in
a healthy state. (It achieves few explanatory or predictive successes,
is plagued by theory practice inconsistencies, relies on constructs
recognized as quite fictitious, and generally lacks direction.)
3. The explanation of the situation noted under item (2) is that math-
ematical-deductive methods are regularly applied in conditions for
which they are not appropriate.
4. If the heterodox alternatives are defined by a reaction to the main-
stream insistence on the ubiquitous employment of methods of
mathematical modeling, the explanation of this opposition is a shared
vision largely at odds with the (atomistic and closed-system) onto-
logical presuppositions of methods of formalistic modeling.
5. The ontological nature of the heterodox opposition to the main-
stream is undertheorized and often unrecognized within the het-
erodox traditions themselves (or at least this has been the case
until very recently) being manifest mostly in the defense of alter-
native economic categories.
Let me briefly give some indication as to why I accept these particular
The first claim—that the modern economics academy is dominated by
a mainstream tradition that insists that mathematical-deductive model-
ing be utilized everywhere—surely no longer needs justification. Con-
sider the observations of Richard Lipsey, the author of a best-selling
mainstream economic textbook:
to get an article published in most of today’s top rank economic journals,
you must provide a mathematical model, even if it adds nothing to your
verbal analysis. I have been at seminars where the presenter was asked
after a few minutes, “Where is your model?” When he answered “I have
not got one as I do not need one, or cannot yet develop one, to consider
my problem” the response was to turn off and figuratively, if not literally,
to walk out. (2001, p. 184)
06 lawson.pmd 2/14/2005, 11:24 AM426
Simply put, an insistence on formalistic modeling methods, whatever
the problem, is an edict accepted by, but only by, the mainstream and is
the only recurring feature of the mainstream (see Lawson, 2003, ch. 1).
My second claim—that as an intellectual project, modern mainstream
economics is not in a healthy state—is again one that needs little sub-
stantiation, being a matter that the more reflective of mainstream econo-
mists seem increasingly prepared to acknowledge themselves.
Thus, we find winners of the Nobel Memorial Prize in economic sci-
ences noting that “[p]age after page of professional economic journals
are filled with mathematical formulas leading the reader from sets of
more or less plausible but entirely arbitrary assumptions to precisely
stated but irrelevant theoretical conclusions” (Leontief, 1982, p. 104);
that “economics has become increasingly an arcane branch of math-
ematics rather than dealing with real economic problems” (Friedman,
1999, p. 137); that “[e]xisting economics is a theoretical system which
floats in the air and which bears little relation to what happens in the real
world” (Coase, 1999, p. 2).
Further, mainstream “theorist” Ariel Rubinstein admits that “economic
theory has not delivered the goods” adding that “the link between eco-
nomic theory and practical problems . . . is tenuous at best” (1995, p.
12). Indeed, he concludes, “[e]conomic theory lacks a consensus as to
its purpose and interpretation. Again and again, we find ourselves ask-
ing the question ‘where does it lead?’” (ibid., p. 12).
Nor is the problem just the project’s lack of direction and limited ex-
planatory and predictive power. In addition, the project’s theory and
practice are highly inconsistent. For example, econometricians put huge
resources into elaborating the methods they take to be appropriate and
justified, yet their practices diverge significantly from their own meth-
odological strictures (see, e.g., Hendry et al., 1990, p. 179; Leamer, 1978,
p. vi).
All in all, the discipline is replete with theory/practice inconsistencies,
fares poorly by its own criteria, and lacks any clear idea as to where it is
going. It is also full of anomalies that range over its various subpro-
grams. Consider the observations of Lipsey once more:
anomalies, particularly those that cut across the sub-disciplines and that
can be studied with various technical levels of sophistication, are toler-
ated on a scale that would be impossible in most natural sciences—and
would be regarded as a scandal if they were. (2001, p. 173)
If a summary statement is required, it is perhaps provided by Mark Blaug,
a methodologically oriented economist who has spent considerable
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resources throughout his career attempting to shore up the mainstream
tradition. His current assessment runs as follows:
Modern economics is sick. Economics has increasingly become an intel-
lectual game played for its own sake and not for its practical consequences
for understanding the economic world. Economists have converted the
subject into a sort of social mathematics in which analytical rigor is ev-
erything and practical relevance is nothing. (Blaug, 1997, p. 3)
My third claim—that the disarray of modern economics follows be-
cause methods of mathematical-deductive modeling are regularly ap-
plied in conditions for which they are not appropriate—requires a little
elaboration (for a defense, see Lawson, 2003, ch. 1).
All methods are appropriate in some conditions and not others. As
Keynes long ago, in effect, recognized, the sorts of mathematical meth-
ods economists use presuppose a closed world of isolated atoms (Keynes
focused on the econometrics of Tinbergen, of course). To describe a
causal factor as atomistic in this fashion is not to make a claim about
size, but to indicate a presupposition that it exercises its own separate
independent and invariable effect, whatever the context, thus guarantee-
ing that under some repeated conditions, x, the same predictable out-
come, y, will always follow.
The point is that social reality does not comprise merely closed atom-
istic systems. Indeed, it is easy enough to show that social reality is not
only open (it consists in more than systems supporting event regulari-
ties) but also structured (irreducible to the course of events), intrinsi-
cally dynamic (its mode of being is as a process), and highly internally
related (consisting of parts and wholes each constituted through their
[ever-changing] relations to other parts and wholes—think of positions
of teachers and students, or employers and employees), among much
else. From this perspective, it is not at all surprising that attempts to
analyze social life using only methods that presuppose a world that is
closed and atomistic fare so poorly.
The fourth and fifth claims can be run together. Here I am suggesting
that heterodox contributions tend to presuppose a shared vision largely
at odds with the (atomistic and closed-system) ontological presupposi-
tions of methods of formalistic modeling. Rather, the heterodox contri-
butions tend to advance substantive, methodological, or policy claims
with ontological presuppositions that are essentially those of openness,
structure, process, internal-relationality, and so on. However (with a few
important exceptions, most notably Paul Davidson’s emphasis on
06 lawson.pmd 2/14/2005, 11:24 AM428
nonergodic systems),
the ontological nature of the heterodox opposi-
tion to the mainstream is undertheorized and often unrecognized within
the heterodox traditions themselves.
Thus, in Post Keynesianism, we find an emphasis on uncertainty (pre-
supposing openness) in place of risk; in feminism, the emphasis is on
caring and identity relations (presupposing internal-relationality) instead
of selfish individuals; and in old institutionalism, the emphasis is on the
evolutionary method (process) rather than theorizing an equilibrating or
teleological system. However, as I say, the ontological presuppositions,
per se, are rarely emphasized. I believe it is because the ontological
basis of heterodoxy goes unrecognized that its criticisms of the main-
stream have usually been less effectual than they deserve.
A brief sketch of my explanation of the state of
equilibrium theorizing
I want to use this five-part thesis (which, I repeat, is defended at length
elsewhere—see, e.g., Lawson, 1997; 2003) to explain the phenomena
noted at the outset. The nature of my argument is perhaps unfamiliar. So
it may be useful at this point if I provide a schematic overview of its
basic thrust and direction.
The limited power of formalistic methods to illuminate social reality,
the lack of fit of the former to the latter, necessarily results in main-
stream economists inventing “a reality” of a form that their modeling
methods can address (i.e., a world of isolated atomistic individuals pos-
sessed, for example, of perfect foresight, or rational expectations, omni-
science, pure greed, and so forth). But this is not all. It also imparts
meaning to macro or system-categories of a sort that is driven by the
needs or constraints of formalistic modeling (rather than meeting with
their more usual, historical, or intuitive understandings). And this hap-
pens in ways that are often unappreciated (if ultimately explicable). We
shall see that equilibrium is one such system-category that suffers such
a fate (a further one of interest, but not considered here, is the economet-
ric idea of a data generation process [DGP], see Pratten, 2005; another is
that of complexity, see Perona, 2004).
If I can use the term theoretic to denote the quality of being a feature
of a model and the term ontic to denote the quality of being features of
the world the economist presumes to illuminate, a more succinct way of
See, for example, Davidson (1989; 1996).
06 lawson.pmd 2/14/2005, 11:24 AM429
describing the problem that arises through the prioritization of the mod-
eling orientation is a conflation of the theoretic and ontic, with the latter
reduced to the former.
In mostly neglecting to engage in systematic ontological elaboration,
the heterodox opposition has tended to take the mainstream constructs
at face value, and thereby to counterpoise alternative conceptions at the
same (substantive or system) level, mostly failing to appreciate that the
two sides to the discussion are talking about entirely different worlds.
Only with a turn to systematic ontology, however, can we make sense
of the total situation. For only then are we in a position both (1) to clearly
distinguish the ontological presuppositions of the mainstream methods
and those of the heterodox traditions, and (2) to see that not only are
they differently derived but also (given the lack of fit of social reality
and the formalistic methods used) necessarily very different in charac-
ter. And we shall see that it is only through sustaining the theoretic/ontic
distinction that we can ultimately comprehensively explain (1) the vari-
ety of equilibrium notions on offer, (2) the confusions and inconsisten-
cies as they arise, and (3) the debates and polarizations (including trends
to increase skepticism in the contributions of some) such as are observed.
Let me now defend these claims in detail.
The explanation in detail
In the context of equilibrium analysis, my central claim translates into
the idea that some conceptions of equilibrium found in the literature are
theoretic and others are ontic, but that this difference in the nature of the
competing conceptions goes largely unnoticed. This, I believe, is the
most fundamental distinction to draw in any attempt to systematize in a
meaningful way the various conceptions of equilibrium.
The closest we come to finding this step in the economics literature is
where specific theoretic and ontic conceptions are distinguished, but
where the theoretic/ontic basis of the differentiation made is unnoticed
and mistaken for something else.
To illustrate, we can consider the most frequently occurring examples
of contrasted notions of equilibrium in the economics literature. These
are those of system determinateness, on one hand, and balance or order,
on the other. And an examination of actual texts quickly reveals that
Elsewhere I have described this error as based on the epistemic fallacy. The fal-
lacy in question is the supposition that questions about being can always be rephrased
as questions about knowledge (of being).
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those who have emphasized determinateness have mostly meant by this
the determinateness of particular representations or formalizations of
the economy. On the other hand, those who have emphasized balance or
order have interpreted this as an aspect of the economy they are attempt-
ing to represent. Whereas the former is theoretic, a sought-after prop-
erty of theories or more typically models, the latter is ontic, a property of
society that the investigator is seeking to understand and explain.
However, it is a generalized failure to recognize that this is the nature
of the distinction being drawn that has led to such confusion as abounds.
Typically, the rhetoric of equilibrium analysis supports images of order
or balance, while its real content has concerned the properties of formal-
istic models. The failure to distinguish the two has resulted in a literature
that is often incoherent, with contributors tending to talk past each other.
Ultimately, we shall see, this state of affairs also throws insight on the
plethora of equilibrium concepts in contention as well as the polariza-
tions in attitudes to equilibrium theorizing.
The equilibrium dichotomy
It is useful at this point to consider the classic statement of equilibrium
theory in the modern period provided by Arrow and Hahn (1971). This
is useful because these authors start their book with a “historical intro-
duction,” which emphasizes precisely the general dichotomy just noted.
Indeed, their opening sentence runs as follows:
There are two basic, incompletely separable, aspects of the notion of gen-
eral equilibrium as it has been used in economics: the simple notion of
determinateness, that the relations describing the economic system must
be sufficiently complete to determine the values of its variables, and the
more specific notion that each relation represents a balance of forces.
(ibid., p. 1)
If we examine this passage closely, we can indeed see the different
nature of the two conceptions. The first criterion, determinateness, is
precisely a property of relations used to describe the economic system,
whereas a balance of forces is an aspect of the economy, one that each
equation is said to represent. The former is a property of the theoretical
conception; the latter is thought to be a property of what the theoretical
conception is about. The former is theoretic, the latter ontic.
Arrow and Hahn, though, like most modern economists, are so ori-
ented to the theorizing aspect that they misunderstand the nature of the
difference in the two conceptions they describe. As the noted passage
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also indicates, they suppose that the difference to which they are draw-
ing attention is one of level generality. Specifically, they emphasize that
the idea of representing a balance of forces is a “more specific notion”
than that of “determinateness.” Indeed, they go on to maintain that the
latter notion of determinateness is sufficiently general that “almost any
attempt to give a theory of the whole economic system implies the ac-
ceptance of [this] equilibrium notion” (ibid., p. 1).
It is at this point that they claim the heritage of Adam Smith, asserting
that “Smith was a creator of general equilibrium theory” (ibid., p. 2). In
a general way, Arrow and Hahn draw attention to Smith’s mention of
the “invisible hand.” Here Smith writes:
Every individual necessarily labours to render the annual revenue of the
society as great as he can. He generally neither intends to promote the
public interest, nor knows how much he is promoting it. . . . He intends
only his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention. Nor
is it always the worse for society that it was no part of his intention. By
pursuing his own interest he frequently promotes that of the society more
effectually than when he really intends to promote it. I have never known
much good done by those who affected to trade for the public good. (1975,
book 4, ch. 2)
Of course, Arrow and Hahn interpret equilibrium as a set of prices—
those that equate supply and demand on each market under a given set
of conditions. And it is true that Smith, at one place, talks of a system of
natural prices being influenced by forces of supply and demand. But if
Smith’s endeavor is treated as the rhetorical justification of the project
of Arrow and Hahn; the latter, in nature, is quite different.
As already noted, Smith’s objective is to explain such order or out-
comes as he believes occur. Thus, in the context of his consideration of
natural prices, Smith writes:
There is in every society or neighbourhood an ordinary or average rate
both of wages and profit in every different employment of labour and
stock. This rate is naturally regulated, as I shall show hereafter, partly by
the general circumstances of the society, their riches or poverty, their
advancing, stationary, or declining condition; and partly by the particular
nature of each employment.
There is likewise in every society or neighbourhood an ordinary or
average rate of rent, which is regulated too, as I shall show hereafter,
partly by the general circumstances of the society or neighbourhood in
which the land is situated, and partly by the natural or improved fertility
of the land.
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These ordinary or average rates may be called the natural rates of wages,
profit, and rent, at the time and place in which they commonly prevail.
When the price of any commodity is neither more nor less than what is
sufficient to pay the rent of the land, the wages of the labour, and the
profits of the stock employed in raising, preparing, and bringing it to
market, according to their natural rates, the commodity is then sold for
what may be called its natural price (ibid., book 1, ch. 7)
Smith’s aim in the relevant four chapters of his book is to explain the
causes of variations in these phenomena, including the natural price of
which the others are component parts:
The natural price itself varies with the natural rate of each of its compo-
nent parts, of wages, profit, and rent; and in every society this rate varies
according to their circumstances, according to their riches or poverty,
their advancing, stationary, or declining condition. I shall, in the four
following chapters, endeavour to explain, as fully and distinctly as I can,
the causes of those different variations. (ibid., book 1, ch. 7)
It is not clear whether Arrow and Hahn suppose Smith’s contribution
to general equilibrium theory is explaining the state of affairs described
by Smith in his passage referring to the invisible hand or the variations
in natural prices. But, either way, there is a very significant difference
between Smith’s project and that of Arrow and Hahn. Whereas Smith is
concerned with explaining a particular state of affairs, Arrow and Hahn
are instead concerned with showing that one exists. That is, Smith is
concerned with the ontic, with a real-world state of affairs, whereas Ar-
row and Hahn are concerned only with whether the model system has a
formal property.
However, the failure to explicitly distinguish the theo-
retic and the ontic results is sloppy use of language. Thus, as we saw in
the earlier passage from Hahn, he engages only in formal modeling but
draws conclusions expressed as follows.
it cannot be denied that there is something scandalous in the spectacle of
so many people refining the analyses of economic [equilibrium] states
For example, they turn next to Walras, to whom, they suggest, the “full recogni-
tion of the general equilibrium concept can be attributed unmistakably” (Arrow and
Hahn, 1971, p. 3). Here we are in the realm of models. Things are confused, because
variables in models are referred to as prices, demand and supply, and so forth. How-
ever, it is clear from the discussion that when equilibrium is now conceived as a set of
prices, being those that equate supply and demand on each market under a given set of
conditions, the category is a property of models, not of states of affairs they are pur-
ported to represent: “That there was an equilibrium set of prices was argued from the
equality of the number of prices to be determined with the number of equations ex-
pressing the equality of supply and demand on all markets.” (ibid., p. 5).
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which they give no reason to suppose will ever, or have ever, come about.
(1970, pp. 88–89)
Of course, when Hahn refers to an equilibrium that may never come
about, it does seem like he is using an ontic notion. However, this is not
so. He is really saying that in an imagined world consistent with his
model there is nothing to ensure that an equilibrium position would re-
sult. Or more accurately, he is saying that if, for a set of equations used
to construct a description of the economy, there is a manner—a specifi-
cation—whereby the various equations are found to be mutually consis-
tent, then the solution to the consistency question, stylized as an
equilibrium, is not a part of the model description, and so is not a neces-
sary outcome even in such a counterfactual (closed and atomistic) world
as described by the model specification.
In short, the equilibrium is merely a solution to a system of equations.
It is a vector that renders the equations consistent. Hahn’s point is that
there is nothing in the apparatus of the model to ensure that even if, per
impossible, the model accurately represented the world, the equilibrium
situation, expressed by the model’s consistency condition, would emerge.
I do not want to suggest that Hahn intentionally misleads or always fails
to acknowledge the limits of his endeavor. Certainly, Hahn seems to have
become increasingly clear with the passage of time on what his construc-
tions entitle him to conclude. Indeed, in an “Intellectual Retrospect,” he is
very clear about what is taking place in his theory contributions:
The great virtue of mathematical reasoning in economics is that by its
precise account of assumptions it becomes crystal clear that applications
to the “real” world could at best be provisional. When a mathematical
economist assumes that there is a three good economy lasting two peri-
ods, or that agents are infinitely lived (perhaps because they value the
utility of their descendants which they know!), everyone can see that we
are not dealing with any actual economy. The assumptions are there to
enable certain results to emerge and not because they are to be taken
descriptively. (Hahn, 1994, p. 246)
It seems reasonable to suppose that if Hahn had been clearer on this
score from the outset, however, some of the earlier (nonconnecting) dis-
cussion might have been avoided. Robinson (e.g., 1978, p. 127), in par-
ticular, might have been spared the effort of responding to Hahn in terms
of outlining, and defending as more realistic, a particular (ontic) con-
ception of an equilibrium.
To repeat, then, my explanatory thesis (conditioned on the description
of modern economics described above) is that, in modern economics,
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there is an erroneous (if explicable) tendency to conflate theoretic and
ontic features of an analysis. And this thesis can be seen to account for
much of the incoherency of equilibrium analysis as abounds.
The remaining problematic features
How does this thesis account for the two remaining sets of observations
noted at the outset, namely,
1. of a plethora of competing equilibrium conceptions, especially of
those conceptions that can be viewed as versions of system deter-
minateness; and
2. of a polarization of orientations, divided among mainstream/het-
erodox lines?
The plethora of competing conceptions
The plethora of conceptions is easily explained. For where equilibrium
is merely a solution concept for a model, a property of a system of equa-
tions, there can clearly be as many definitions of equilibrium as there are
possibilities for system-model construction. And scope for the latter seems
This situation is grasped by some, but seemingly not by most. Thus, a
heroic attempt to bring clarity by Machlup ends up doing no more than
rendering both the equilibrium as balance and equilibrium as determi-
nateness notions as theoretic:
Equilibrium, in economic analysis [is] a constellation of selected interre-
lated variables so adjusted to one another that no inherent tendency to
change prevails in the model which they constitute. . . . As an alternative
definition of equilibrium we may propose mutual compatibility of a se-
lected set of interrelated variables of particular magnitudes. (1991,
pp. 54–55)
But Dixon, among others, hits the nail on the head precisely:
At its most general, we can say that “equilibrium” is a method of solving
economic models. At a superficial level, an equilibrium is simply a solu-
tion to a set of equations. (1990, p. 356)
The polarization of orientations
It is equally possible to explain our remaining puzzle, the polarization of
attitudes over the relevance of an equilibrium notion. I have already
noted that attitudes have tended to divide along mainstream/heterodox
06 lawson.pmd 2/14/2005, 11:24 AM435
lines, with the mainstream, unlike heterodoxy, insisting the equilibrium
notion is essential, and with the heterodox opposition becoming increas-
ingly marked over time. We now have before us the resources to under-
stand why.
Consider first the mainstream insistence that the notion be retained.
The reason for this must now be clear. This mainstream project is de-
fined by its insistence that mathematical methods be everywhere and
always employed, despite the dearth of explanatory successes to date.
But in a situation where model equations are found almost always to be
inappropriate to the analysis of the economic system, what other goal
can be accepted for modelers than the questioning of their equations’
mutual consistency? Where the emphasis is on a formalistic system, at-
tention is always going to turn to the question of whether the system has
some sort of mathematical solution. And the obvious, certainly tradi-
tional, way to try and present this as an economic activity is to present
the mathematical exercise as the search for an economic equilibrium.
Associating the process with Smith is merely an attempt to grant the
exercise a historical legitimacy, an endeavor that significantly misleads.
How about the heterodox rejection of the use of the term? If the main-
stream was always going to require a notion to express the model-prop-
erty of consistency or determinateness, was it equally predictable that
heterodoxy was always going to abandon the term?
The answer, I think, is yes, if not necessarily immediately. I earlier
suggested that a feature of the heterodox traditions is that, although they
emphasize categories with ontological presuppositions different from
those of the mainstream mathematical methods, they rarely acknowl-
edge that this is so. Specifically, the mainstream methods presuppose a
closed atomistic reality, whereas heterodox conceptions can be shown to
be based on a vision of social reality as open, structured, processual,
highly internally related, among much else (see Lawson, 2003). As I say,
though, the ontological basis of the opposition has rarely been explicitly
Even so, heterodox economists have been oriented to ontic elabora-
tion, focusing mostly on equilibrium as a balance or form of order. In
consequence, the tension between the conceptions of social order they
have been seeking to explain and the more dominant definitions of equi-
librium have usually been apparent, even if the ontological basis of the
distinction remained untheorized. This has resulted in equilibrium no-
tions being employed, if at all, often in a hesitant and cautious manner.
Robinson provides an obvious example:
06 lawson.pmd 2/14/2005, 11:24 AM436
The word equilibrium, in ordinary speech, describes a relation between
bodies in space. The scales of a balance are in equilibrium when the bal-
ance is at rest. . . . If we are continually throwing coppers at random into
either scale, the balance is continually wobbling and never reaches equi-
librium; but, at any moment, there is a definite equilibrium position which
it would quickly reach if, from that moment, we left it alone. (1956, p. 57)
She concludes:
Nor can we apply the metaphor of a balance which is seeking or tending
towards a position of equilibrium though prevented from actually reach-
ing it through constant disturbances. In economic affairs the fact that
disturbances are known to be liable to occur makes expectations about
the future uncertain and has an important effect on any conduct (which,
in fact, is all economic conduct) directed towards future results. . . . A
belief that a particular share is going to rise in price causes people to offer
to buy it and so raises its price. . . . This element of “thinking makes it so”
creates a situation where a cunning guesser who can guess what the other
guessers are going to guess is able to make a fortune. There are then no
solid weights to give us analogy with a pair of scales in balance. The
metaphor of equilibrium is treacherous. (ibid., p. 59)
The more that the ontic orientation has been manifest in a sustained
concern with the nature of the actually existing social order, the more
heterodox economists have grasped the irrelevancy of the equilibrium
framework. Thus, with time, of course, Robinson turned from equilib-
rium thinking to history.
In the history of heterodox economics, though, I think one of the more
interesting stories, in this regard, is the progressive development of the
thinking of Hayek. Hayek is interesting in that he recognizes the theoretic
or a priori nature of the dominant framework, interpreting it as a logic of
choice, while being driven himself always to provide an ontic account.
This is especially true of his work of the late 1930s. Had Hayek, at that
time, undertaken the sort of ontological theorizing that he later pursued,
he would likely have avoided the earlier exercise. But he had not, and his
“Economics and Knowledge” paper (1937) is a particularly ingenious
attempt to reconcile two ultimately incompatible endeavors: an a priori
logical framework (presupposing a closed system) and a desire for a real-
istic (open-system) vision of the actual social world. By examining this
particular paper by Hayek, we can see clearly the sorts of incompatibili-
ties that arise. And by looking very briefly at Hayek’s subsequent work,
we can understand why heterodox economists, initially receptive to equi-
librium theorizing, often took a very different tack over time.
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Hayek’s “economics and knowledge” position
The substantive part of Hayek’s argument in “Economics and Knowl-
edge” need not overly concern us here; it is, in any case, well known. In
brief, Hayek takes the view that equilibrium economics can be rendered
coherent if it concerns itself with the manner in which knowledge is
acquired and communicated. Specifically, he first argues that the equi-
librium concept makes most sense if it is couched in terms of the consis-
tency of an individual’s actions with his or her plans over time. He then
argues that societal equilibrium, if it means anything, is the consistency
of these separate plans across all individuals.
However, it is Hayek’s broader methodological stance that is most
interesting. It is this I want mostly to focus on here.
The first point to note on this score is that Hayek is indeed concerned
with equilibrium as an ontic notion; he is concerned with prioritizing the
understanding of real-world situations or causation:
the question to what extent formal economic analysis conveys any knowl-
edge about what happens in the real world. Indeed, my main contention
will be that the tautologies, of which formal equilibrium analysis in eco-
nomics essentially consists, can be turned into propositions which tell us
anything about causation in the real world only in so far as we are able to
fill those formal propositions with definite statements about how knowl-
edge is acquired and communicated. (ibid., p. 33)
At the same time, Hayek is aware that modern equilibrium analysis
has taken on the character of a system of formal logic:
I am certain that there are many who regard with impatience and distrust
the whole tendency, which is inherent in all modern equilibrium analy-
sis, to turn economics into a branch of pure logic, a set of self-evident
propositions which, like mathematics or geometry, are subject to no other
test but internal consistency. (ibid., p. 35)
However, Hayek is not yet convinced that the two are incompatible. In
seeking a resolution, he actually argues that there is a sense in which the
noted tendency to turn economics into a branch of logic has not gone far
enough. His assessment is that the logical framework ought to comprise
statements concerning only highly general or a priori factors, when, in
fact, it has increasingly included statements about all sorts of concerns
that are not of this nature. The point is to empty the logical framework of
everything but a priori factors:
But it seems that if only this process is carried far enough it carries its
own remedy with it. In distilling from our reasoning about the facts of
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economic life those parts which are truly a priori, we not only isolate one
element of our reasoning as a sort of Pure Logic of Choice in all its pu-
rity, but we also isolate, and emphasize the importance of, another ele-
ment which has been too much neglected. My criticism of the recent
tendencies to make economic theory more and more formal is not that
they have gone too far, but that they have not yet been carried far enough
to complete the isolation of this branch of logic and to restore to its right-
ful place the investigation of causal processes, using formal economic
theory as a tool in the same way as mathematics. (ibid., p. 35)
In so arguing, Hayek is clearly accepting that a closed-systems frame-
work might be of use at least at a broad level of generality. Of course,
Hayek does not use the language of closed systems. And with the hind-
sight of modern ontological analysis, we know social reality to be open
and not easily rendered closed, so that any conception of equilibrium
that emerges from Hayek’s is likely to be fictitious. But, though not
employing this or an equivalent terminology, Hayek recognizes this re-
sult all the same. And it marks an important step in his argument. For
Hayek seems to accept that the formal logical system of a priori consid-
erations must give us an equilibrium notion (one in which different indi-
vidual plans for action in time are mutually compatible) that is fictitious
as a claim about the existing state of affairs. However, he appears to
believe this is not fatal for equilibrium theorizing. And the reason is a
presumption that a posteriori considerations can render the approach
realistic nonetheless by investigation of the possibility of, or conditions
for, a real-world tendency in the equilibrium direction:
We shall not get much further here unless we ask for the reasons for our
concern with the admittedly fictitious state of equilibrium. Whatever may
occasionally have been said by over-pure economists, there seems to be
no possible doubt that the only justification for this is the supposed exist-
ence of a tendency toward equilibrium. It is only by this assertion that
economics ceases to be an exercise in pure logic and becomes an empiri-
cal science; and it is to economics as an empirical science that we must
now turn. (ibid., pp. 43–44)
So Hayek’s strategy for rescuing the equilibrium program in a manner
that maintains its theoretic and ontic aspects is to insist that a priori
reasoning determines the fictitious state of equilibrium, whereas empiri-
cal reasoning elaborates the tendencies toward it. Hayek provides no
justification of this role for a priori reasoning. Nor, I think, is there any.
In truth, Hayek, in effect, acknowledges this in admitting that there is no
obvious basis on which to argue for such a tendency. Specifically, in the
context of his own knowledge-based conception, Hayek accepts that a
06 lawson.pmd 2/14/2005, 11:24 AM439
tendency to equilibrium requires that individuals’ expectations of each
other become more and more accurate. However, he admits that he does
not know why or how such an eventuality should come about:
In the light of our analysis of the meaning of a state of equilibrium it
should be easy to say what is the real content of the assertion that a ten-
dency toward equilibrium exists. It can hardly mean anything but that
under certain conditions the knowledge and intentions of the different
members of society are supposed to come more and more into agree-
ment, or, to put the same thing in less general and less exact but more
concrete terms, that the expectations of the people and particularly of the
entrepreneurs will become more and more correct. In this form the asser-
tion of the existence of a tendency toward equilibrium is clearly an em-
pirical proposition, that is, an assertion about what happens in the real
world which ought, at least in principle, to be capable of verification.
And it gives our somewhat abstract statement a rather plausible com-
mon-sense meaning. The only trouble is that we are still pretty much in
the dark about (a) the conditions under which this tendency is supposed
to exist and (b) the nature of the process by which individual knowledge
is changed. (ibid., p. 44)
Indeed, after further discussion of concrete hypotheses concerning the
conditions under which people are supposed to acquire relevant knowl-
edge, Hayek concludes:
But I am afraid that I am now getting to a stage where it becomes exceed-
ingly difficult to say what exactly are the assumptions on the basis of
which we assert that there will be a tendency toward equilibrium, and to
claim that our analysis has an application to the real world. I cannot pre-
tend that I have as yet got much further on this point. (ibid., p. 47)
Mindful of his audience, though, Hayek attempts to be upbeat:
I do not want to appear unduly despondent about what we have already
achieved. . . . I still believe that by what is implicit in its reasoning, eco-
nomics has come nearer than any other social science to an answer to that
central question of all social sciences: how the combination of fragments
of knowledge existing in different minds can bring about results which,
if they were to be brought about deliberately, would require a knowledge
on the part of the directing mind which no single person can possess. To
show that in this sense the spontaneous actions of individuals will under
conditions which we can define bring about a distribution of resources
which can be understood as if it were made according to a single plan,
although nobody has planned it, seems to me indeed an answer to the
problem which has sometimes been metaphorically described as that of
the “social mind.” But we must not be surprised that such claims on our
06 lawson.pmd 2/14/2005, 11:24 AM440
part have usually been rejected by sociologists, since we have not based
them on the right grounds. (ibid., p. 52)
But this is mostly (mere) rhetoric. Following these comments, Hayek
considers an issue not previously raised, one that further reveals the fra-
gility (or meaninglessness) of any supposed tendency to equilibrium.
Following this final assessment, Hayek remarks: “With these rather des-
ultory remarks on topics which would deserve much more careful ex-
amination I must conclude my survey of these problems” (ibid., p. 53).
I have focused upon Hayek’s “Economics and Knowledge” contribu-
tion, because I think it reveals the incompatibility of the theoretic and
ontic aspects of equilibrium analysis in an interesting, and perhaps most
compelling, fashion, in the writings of a serious contributor clearly mo-
tivated to reconcile the two. I think Hayek also provides an intelligible
attempt at reconciliation. But, ultimately, he fails. And, despite some of
his rhetoric, I think it is clear that Hayek is aware of this.
Not surprisingly perhaps, this failure spurred Hayek into a form of
ontological reasoning. After initially trying to maintain an equilibrium
idea, Hayek’s ontic orientation led him increasingly to appreciate its limi-
tations. Some time after the “Economics and Knowledge” paper, in fact,
Hayek was emphasizing the idea of social order rather than equilibrium:
The concept of “order,” which . . . I prefer to that of equilibrium, has the
advantage that we can speak about order being approached to varying
degrees, and that order can be preserved throughout the process of change.
(1968, p. 184)
Eventually, of course, Hayek elaborates a social ontology of rules and
other aspects of social structure and develops his conception of sponta-
neous order:
What reconciles the individuals and knits them into a common and en-
during pattern of society is that . . . they respond in accordance with the
same abstract rules. . . . What . . . enables . . . men to live and work to-
gether in peace is that the pursuit of their individual ends and the particu-
lar monetary impulses which impel their efforts . . . are guided and
restrained by the same abstract rules. If emulsion or impulse tells them
what they want, the conventional rules tell them how they will be able
and allowed to achieve it. (1976, p. 12)
A catallaxy is thus a special kind of spontaneous order produced by the
market through people acting within the rules of the law of property, tort
and contract. (1982, p. 109)
This is no longer a conception of a state of order in which expecta-
tions are always met; rather, it is one in which disappointments are
06 lawson.pmd 2/14/2005, 11:24 AM441
In a spontaneous order, undeserved disappointments cannot be
avoided. . . . It is only because countless others constantly submit to dis-
appointments of their reasonable expectations that everyone has as high
an income as he has. (ibid., p. 128)
With this being so, Hayek’s conception is now far more in line with
the world we daily experience. It is quite different from Hayek’s origi-
nal notion, but it reveals the sort of direction that is ultimately to be
expected where there is a consistent emphasis on the ontic.
Implications and conclusion
Modern economics is not in a healthy state. And the reason for it is that
it, or rather the dominant mainstream tradition, defines itself in terms of
its method, that of formalistic-deductive modeling, and does so in a con-
text in which this method has little application. I have indicated before
how this emphasis has resulted in limited explanatory successes, theory
practice inconsistencies, and other pathologies. Here I have focused on
a further problematic feature created by the mainstream prioritizing of
modeling over illumination: the confusing of claims about models and
their properties with properties of the reality that the models putatively
aim to represent.
In truth, modern economics supports two broad sets of traditions: the
mainstream project and the heterodox alternatives. The mainstream pri-
oritizes modeling, whereas the heterodoxy prioritizes social illumina-
tion. And because the implicit (though rarely examined) ontological
commitments of the heterodoxy (of openness, structure, internal-
relationality, and process) are quite different from those (of atomism
and closure) presupposed by the mainstream modeling emphasis, the
two projects rarely find common ground.
However, the true ontological nature of the differences is rarely ex-
plored. One of the many debilitating results of this is that when common
categories are employed, the real nature of the differences in arguments
mostly goes unrecognized, resulting in participants in debates talking
past each other. I have illustrated this theme in the context of equilib-
rium analysis.
If all parties agree that Adam Smith set (and contributed to answering)
one of the fundamental question of economics—namely, how social or-
der emerges in the absence of central or any intentional design, and,
indeed, with individuals pursuing largely independent goals—it is clear
that the inheritors of Smith’s project are not economic equilibrium theo-
rists concerned with formalistic modeling. Rather, it is those working in
06 lawson.pmd 2/14/2005, 11:24 AM442
the traditions of Marx, Keynes, Hayek, and others who make the ex-
plaining of the actually existing social order the priority.
The project of formalistic modeling can be misinterpreted as one con-
cerned with explaining the actual social order only if the atomistic pre-
suppositions of the former go unrecognized, or their irrelevance remains
unappreciated. Once we turn to social ontology, to theorizing the nature
of social reality, the impotence of the equilibrium notion becomes ap-
parent. The real question, Smith’s question in modern terms, is how
social reproduction of complex, internally related, dynamic, social struc-
tures occurs in an open world of individuals seeking their own ends. As
I say, this eventually was the concern of Hayek and Keynes as well as
Marx. How successful they were in the details of their analyses, of course,
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... Potts (2000), Foster (1997) ve diğer iktisatçıların bir 'heterodoks' kompleksite iktisadı işleme çabalarına rağmen, iktisatta kompleksite düşüncesinin çoğu Lawson (2005) tarafından kompleksitenin ontolojisini epistemolojiğe indirgeyen görüşüne atıf yapmaktadır. Sadece iktisata değil, diğer tüm kompleks sistemlere uygulanan ölçekleme değişmezliği kanunları veya dinamikleri tarafından ekonominin oluşturulduğu dikkate alınmaktadır. ...
... Diğer bir açıdan, kompleksite iktisadı, evrim ve çok boyutluluk ile formalistik modellemeye dayanmaktadır. Her biri matematiksel modellemede ısrarcıdır (Lawson 2005). Kompleksite iktisadı, geleneksel olmayan iktisattan yüksek derecede formel olması sayesinde ayrım göstermektedir; Heterodoks okulların düşünceleri ve kompleksite ile ilgili öncü çalışmalarına karşın, kompleksite iktisadı bu okullardan değil, standart iktisat teorisi üzerinden gelişmiştir. ...
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There are several underlying factors of cyclicality in property markets. Two of these factors are heuristics and biases which have significant impacts on appraiser judgments in real estate valuation process. All estimates include a kind of uncertainty at different levels, and real estate valuation also includes an uncertainty as it is a price estimate aiming to determine the present value of future cash flows. The uncertainty may increase the tendency to use heuristics and biases during real estate valuation due to the complex nature of valuation decision-making. Based on the relevant empirical and experimental literature, these heuristics and biases widely investigated are anchoring and adjustment heuristic, recency heuristic, herding behavior, representative heuristic, loss aversion, regret aversion, false reference point, client feedback, and appraisal smoothing bias. The aim of this study is to explain the role of uncertainty which gives rise to heuristics and to highlight the relation between these heuristics and real estate valuation process and cycles.
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... On one side it contributed to the establishment of another cross-cutting convention for schools of thought: the search for stable components (leading to the prevailing equilibrium perspective; see Lawson 2005, Samuels 1997, Settereld 1997. Thus, instability is typically conceived as bad and as such it must be either temporary or localized (which means both self-contained, no run-away, and not spatially widespread, no pandemic, in other words limited in a time-based or space-based dimension; see Vercelli 1982). ...
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In recent years the names of Minsky and Piketty gained increasing notoriety to researchers because the two authors investigated issues of financial instability and income inequality, which represent both two unsolved macroeconomic problems of the new millennium, and evidence contradicting the long-run implications of mainstream macroeconomics. By combining these two names we set ourselves an ambitious goal, going beyond the technical aspects of the model presented in the paper. Indeed, not only we want to contribute directly to the debate meant at clarifying the controversial relationship between financial instability and income inequality; we also aim at addressing a broader issue which is the explanation of the reasons why a theoretical revolution in macroeconomics has not yet occurred, and why financial aspects still play a subordinate role to real factors in the explanation of growth and cycles. In this broader perspective Minsky and Piketty are assumed as extreme examples of the opposite poles of heterodoxy and orthodoxy. Both target and argumentative line of the contribution are quite unconventional, as usually financial instability and income inequality, are treated as separate if not independent issues of inquiry; and methodological reflection is no longer a customary explicit part of technical papers. We discuss possible reasons why these two circumstances happen. The theoretical framework proposed in this paper builds on Ferri (2016), who presents a class of demandled models in a medium-run time horizon. This class of models is not conventional too, though it belongs to pedagogical models, we consider especially relevant tool for macroeconomics. Among the different specifications investigated by the author, we select the nearest to possible comparison with Piketty (2014) and then we introduce corporate debt into the financial account of firms. Because of the non-linearity of the model, we explore its dynamic properties with numerical simulations. Such simulations are also performed to assess the parameters enabling to support the Financial Instability Hypothesis. Aiming at deepening the comprehension of robustness properties, we also consider analytic results from a linearized version of the model. Obviously, the criticism addressed to Piketty with respect to the definition and measurement of inequality can be extended to our model too, as we use the same expedient to check the evolution of inequality. This leads to emphasize the relevance of the issue of measurement as a critical one for future developments. Nevertheless, this does not impinge on the achievement of our purpose. Indeed, our analysis confirms the utility of pedagogical models. Furthermore, it underlines the need of a change of economic vision such that complexity comes as a substantial part of representation. In terms of future perspectives these considerations point out the need for macroeconomic epistemology to resume constructive dialectics: a mixture of plural narratives and foundations for new visions of economic policy. Those just proposed at the end of the paper differ from orthodox ones as they call for financial regulation, they underline qualitative aspects and heterogeneity; but such embryonal policy suggestions stem from the overall perspective described in the paper, a perspective rooted into Ferri's notion of medium-run, and qualified by Minsky through an eclectic approach leading to networks of balance-sheets: two ways highly overlapping though not totally equivalent to represent the reality of and endogenously unstable capitalism lying at the edge of chaos.
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Neoclassic economic theory regards equilibrium, whether general or partial, as a crucially important foundation of the dismal science[1]. In the view of mainstream economists, the general equilibrium framework not only an investigation of the economy in terms of its perfect qualities, but also is suitable as an end or goal of action. The Austrian school, in contrast, sees equilibrium (or the evenly rotating economy - ERE) merely as a tendency for economic activities to move us in that direction, but it is never attained. Praxeological economics has thus concentrated not on equilibrium, but on the process by which the market moves toward it. Since the process of shifting resources to meet these ends cannot be achieved spontaneously, entrepreneurship plays a key role. In Mises and Rothbard’s view, entrepreneurship involves uncertainty bearing which beyond the alertness emphasized by Hayek and Kirzner; on the other hand, unlike Lachmann looks the economy as a kaleidoscope and rejects the ERE, Mises and Rothbard regard the ERE as an indispensable way to understand the economy. [1] As Frank H. Hahn said “Whatever economics is used or thought about, equilibrium is a central organizing concept.” (Hahn 1984: 43). Many economists and philosophers of science consider mathematical neoclassical general equilibrium theory as one of the peak achievements of economics (Rosenberg, 1992). Tieben (2012) stated that policy-makers and theorists of all schools of economics all use some form of equilibrium theory to develop their ideas and support their main theoretical and political claims. Lawson (2005) indicated that the equilibrium concept is a major cause of controversy between different schools of economic thought. A.W. Bob Coats even deems it the case that “economics has been dominated throughout its history by a single paradigm – the theory of economic equilibrium via the market mechanism.” (Coats 1969: 292).
It is conventional theory that property valuation activity has neutral effects on transaction prices in property markets. This chapter critiques this view and argues that it prevents the proper identification of the relationship between property valuation and cycles in property markets. An alternative framework is presented, in terms of which the relationship between valuation, transaction prices and market activity is clarified. The framework is further employed to explain price bubbles in property markets which may, in certain cases, presage turning points in market cycles.KeywordsProperty valuationTransaction pricesProperty cyclesPrice bubbles
This paper introduces Hume’s law (the fulcrum of the ‘is-ought’ problem of moral philosophy) into the property valuation literature, and uses it as a prism to reflect on the nature and limitations of standard valuation theory. The paper shows how a consideration of Hume’ thesis can help to clarify and solve some specific practical problems in property valuation. The opportunity presented by the subject of property valuation is, in turn, used to reflect back on Hume’s thesis itself, to show conditions under which Hume’s law may be said to be false. The paper makes important contributions both to the property valuation literature and to the literature on moral philosophy. With respect to property valuation, it proposes a change in the manner conclusions of valuations are reported, and the replacement of the notion of valuation accuracy by the wider and more socially appropriate concept of reasonableness.
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Alfred Marshall is often depicted as a pioneer of neoclassical economics almost as if this is a label he embraces and promotes. Yet neoclassical economics is not a category Marshall deploys but a term Thorstein Veblen introduces in characterising Marshall. Veblen coins the term neoclassical to identify an ontological discrepancy in the work of a specific group of his contemporaries, a prominent figure among whom is Marshall. Veblen’s view is that Marshall and other neoclassicals discern features of social reality that suggest a tentative recognition of a causal processual social ontology of the type Veblen associates with modern evolutionary approaches and yet also remain staunchly committed to a taxonomic conception of science underpinned by a quite different set of ontological presuppositions. Veblen’s assessment of Marshall is brief and assertive. In this paper it is argued that the ontological discrepancy interpretation of Marshall, that Veblen first sketched, can convincingly be filled out, has substantial merit and is of importance in developing an adequate appreciation of Marshall.
There is an embarrassing polarization of opinions about the status of economics as an academic discipline, as reflected in epithets such as the Dismal Science and the Queen of the Social Sciences. This collection brings together some of the leading figures in the methodology and philosophy of economics to provide a thoughtful and balanced overview of the current state of debate about the nature and limits of economic knowledge. Authors with partly rival and partly complementary perspectives examine how abstract models work and how they might connect with the real world, they look at the special nature of the facts about the economy, and they direct attention towards the academic institutions themselves and how they shape economic research. These issues are thus analysed from the point of view of methodology, semantics, ontology, rhetoric, sociology, and economics of science.
In this classic work Joan Robinson goes back to the beginning and works out the basic theory that is needed for a coherent treatment of the problems that present themselves in a developing economy. This new edition features a new introduction, which discusses the great significance of Robinson's work.
When discussing the implications of uncertainty on economic activity and its policy implications, the fundamental differences among various economic theories involve (a) the analyst’s conception of the external economic reality in which decision-makers operate, and (b) the ability of agents to understand that reality.