Wednesday, June 5, 2013

Happy birthday Adam Smith and John Maynard Keynes!

Quite appropriately, they share a birthday today.

The other day I posted an Akerlof quote about how one advantage economists have over non-economists is a deeper appreciation of general equilibrium. There was some speculation on twitter by Unlearningecon and others about whether I was just sharing it or whether I actually believe it.

I definitely believe it, and there are probably no better examples of the point than Adam Smith and John Maynard Keynes, who both really pushed the frontiers of economics by pointing out important general equilibrium phenomena and demonstrating that you can't just add up a lot of individual behavior and expect to understand aggregate behavior. In Smith's case he pointed out that even in a situation devoid of "benevolence" market economies make everyone better off. In Keynes's case, he pointed out individual decisions to guard their liquidity or to cut wages may, in the aggregate, produce results that hurt everyone because in the short run of a monetary economy output is typically demand-determined.

These are both general equilibrium insights and they are both points that people who have never taken the time to think about economics carefully have trouble accepting.

7 comments:

  1. Yup...Happy birthday, Dr. Smith and Lord Keynes!

    BTW...the "Big Three" figures in Economics most widely known to the public do share things in common, indeed. Smith and Keynes share a birthday, and Karl Marx died on 5 June, 1883.

    Marx commented on Smith, and Keynes commented on both Marx and Smith.

    Furthermore, I recommend people look at these important links to examine the parallels between Smith and Keynes...

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1728225

    http://adamsmithslostlegacy.blogspot.com/2011/10/adam-smith-jeremy-bentham-and-keynes.html

    http://www.youtube.com/watch?v=kraBLXWrE2Y

    ReplyDelete
    Replies
    1. Thanks for the links - that would be interesting with Marx although it looks like he actually died in March.

      Delete
    2. Drat. My memory must've jumbled things up. Still, Marx died the same year Keynes was born...

      Delete
  2. Thanks for this post, Daniel. :)

    It seems that the "general equilibrium" concept is more general than I thought. Speaking of Unlearningecon, I once asked what was equal in an economic equilibrium, and he replied, "I guess each market is in ‘equilibrium’ in that it clears. But not really; it’s just a confusing misuse of the term." Anyway, it seems that you have different ideas in mind.

    As for Keynes's and Smith's insights, it is not clear to me that they depend upon the concept of a general equilibrium. Keynes's insight follows from an equation, which may be necessary for a general equilibrium, but I don't see that a general equilibrium is necessary for it to hold. Maybe I do not fully understand Smith's insight, but it seems to me to depend upon commerce being in general a non-zero sum game, which does not depend upon there being any equilibrium, as far as I can see.

    I would appreciate your thoughts. :) Thanks.

    ReplyDelete
    Replies
    1. I think the difference between Unlearningecon and me is that I am focusing on the "general" part of it and he is focusing on the "equilibrium" part of it. Maybe we're swinging around an equilibrium... maybe we're on the path to it but it's always a moving target. I dunno. That part doesn't interest me as much as it interests Unlearningecon because I think it's clear that we are not dealing with an unstable or explosive equilibrium.

      So, that having been said, the more interesting issue to me is how the answers change when you look at a question from a partial vs. a general equilibrium perspective. That's the value added of economists.

      So when I say this is their point, I'm meaning that they make their point by looking at the mechanisms that work above the partial equilibrium level (although you could say that Smith works a whole lot with partial equilibrium too).

      Delete
    2. Thanks, Daniel. :)

      Delete
  3. People associate equilibrium with stable and stationary and it is not always stable and it is really never stationary.

    ReplyDelete

All anonymous comments will be deleted. Consistent pseudonyms are fine.