Blog Topics...

3D plotting (1) Academic Life (2) ACE (18) Adaptive Behavior (2) Agglomeration (1) Aggregation Problems (1) Asset Pricing (1) Asymmetric Information (2) Behavioral Economics (1) Breakfast (4) Business Cycles (8) Business Theory (4) China (1) Cities (2) Clustering (1) Collective Intelligence (1) Community Structure (1) Complex Systems (42) Computational Complexity (1) Consumption (1) Contracting (1) Credit constraints (1) Credit Cycles (6) Daydreaming (2) Decision Making (1) Deflation (1) Diffusion (2) Disequilibrium Dynamics (6) DSGE (3) Dynamic Programming (6) Dynamical Systems (9) Econometrics (2) Economic Growth (5) Economic Policy (5) Economic Theory (1) Education (4) Emacs (1) Ergodic Theory (6) Euro Zone (1) Evolutionary Biology (1) EVT (1) Externalities (1) Finance (29) Fitness (6) Game Theory (3) General Equilibrium (8) Geopolitics (1) GitHub (1) Graph of the Day (11) Greatest Hits (1) Healthcare Economics (1) Heterogenous Agent Models (2) Heteroskedasticity (1) HFT (1) Housing Market (2) Income Inequality (2) Inflation (2) Institutions (2) Interesting reading material (2) IPython (1) IS-LM (1) Jerusalem (7) Keynes (1) Kronecker Graphs (3) Krussel-Smith (1) Labor Economics (1) Leverage (2) Liquidity (11) Logistics (6) Lucas Critique (2) Machine Learning (2) Macroeconomics (45) Macroprudential Regulation (1) Mathematics (23) matplotlib (10) Mayavi (1) Micro-foundations (10) Microeconomic of Banking (1) Modeling (8) Monetary Policy (4) Mountaineering (9) MSD (1) My Daily Show (3) NASA (1) Networks (46) Non-parametric Estimation (5) NumPy (2) Old Jaffa (9) Online Gaming (1) Optimal Growth (1) Oxford (4) Pakistan (1) Pandas (8) Penn World Tables (1) Physics (2) Pigouvian taxes (1) Politics (6) Power Laws (10) Prediction Markets (1) Prices (3) Prisoner's Dilemma (2) Producer Theory (2) Python (29) Quant (4) Quote of the Day (21) Ramsey model (1) Rational Expectations (1) RBC Models (2) Research Agenda (36) Santa Fe (6) SciPy (1) Shakshuka (1) Shiller (1) Social Dynamics (1) St. Andrews (1) Statistics (1) Stocks (2) Sugarscape (2) Summer Plans (2) Systemic Risk (13) Teaching (16) Theory of the Firm (4) Trade (4) Travel (3) Unemployment (9) Value iteration (2) Visualizations (1) wbdata (2) Web 2.0 (1) Yale (1)

Monday, December 13, 2010

Theory of Value: Final Thoughts...

I have just finished reading the final chapter on uncertainty in Debreu's Theory of Value.  This final chapter which is very short, simply introduces the idea of contingent commodities and then sketches how the theorems and proofs in previous chapters go through in this more general case.

Instead of sharing my thoughts about contingent commodities, I thought I would post some of my over all thoughts about the book and about general equilibrium more generally...

After reading this book I feel like I have a much improved understanding of both the mathematics and the economics of general equilibrium theory.  For an aspiring academic economist, this is clearly a good thing.  Unfortunately, I do not feel like I have a better understanding of how real-world  economies generally behave.   This is clearly not a good thing. 

After reading, say Minsky's Stabilizing and Unstable Economy, I felt that I was better equipped to talk about issues of serious importance in modern, capitalist economies.  I do not feel that way after reading Theory of Value.  General equilibrium, in my view at least, is not supposed to describe real-world economies but instead serves as a kind of null model for how an idealized economy should behave.  Thus perhaps comparing Theory of Value and Stabilizing and Unstable Economy is not very fair. 

However, even as a null model of the economy, I think general equilibrium falls short.  Any null model of the economy, in my opinion, must allow for the possibility that individual optimization decisions are influenced by the decisions of other individuals in the economy.  In the real world, economic behavior is a very social activity and preferences and individual decisions are heavily influenced by others actions and beliefs.  In the real world, there is also lots of trades.  Perhaps even lots of "false trades" (by false trades I mean trades at non-equilibrium prices).  In GE no one trades until the equilibrium price vector has been calculated, and then they only trade once. 

Once one allows for the possibility that a single agent's decisions can impact the decisions (and/or influence the preferences) of other agents, then micro-dynamics may no longer average-out in the aggregate.  Once one allows for "false trades" each false trade alters the wealth distribution amongst the agents in the economy which then shifts the equilibrium to which the economy would have converged.  In this world "equilibrium" is a moving target.

None of the above critiques of GE are original, and I had encountered all of them prior to reading Theory of Value.  Despite my criticisms, I am still very glad that I read the book and would recommend it to anyone who plans on pursuing an academic career in economics... 


  1. And GE does not explain *who* calculates prices (or how people learn what equilibrium prices are). At best - if we tack on some process for price adjustment - it is a theory of a Lange-style market socialist (or Parecon) economy in which the Central Planning Board adjusts prices to make plans consistent, before any trade takes place. It is not a theory of a capitalist economy.

    *dismounts hobby horse*


    I had a long reply written, but decided it could be easily summed up..

    Read the post above multiple times, and tell me if you find any value with that type of life.

    Now compare the 'academic economists' with those who actually live and interact in the real world. People like Doyne Farmer and the Chaos Cabal, Steve Keen, and ever other econo~physicist who have actually contributed something of value to the economic and financial world.

    I have an M.S in Economics, I love modeling the intangible, and I love mathematics. I have also had the privelage of trading equities and futures for the last five years (and coming out with more alpha than I could have imagined).

    I still can't comprehend how someone can theoreticize about something, when they can simply ask the person, what it is they are doing. Especially, when the data flows are increasing exponentially.

    A treasure trove of reading material awaits you, just shoot me an email.

  3. a,

    I would be happy to shoot you an email...but you don't seem to have one listed on your profile...