The Nature of Equilibrium in Macroeconomics: A Critique of Equilibrium Search Theory

Masanao Aoki,Hiroshi Yoshikawa

doi:10.5018/economics-ejournal.ja.2009-37

Abstract

Abstract The standard Walrasian equilibrium theory requires that the marginal value product of production factor such as labor is equal across firms and industries. However, productivity dispersion is widely observed in the real economy. Search theory allegedly fills this gap by encompassing apparent disequilibrium phenomena in the neoclassical equilibrium framework. Taking up Lucas and Prescott (1974) as a primary example, we show that the neoclassical search theory cannot explain the observed pattern of productivity dispersion. Non-self-averaging, a concept little known to economists, plays the major role. Empirical observation suggests strongly the presence of disturbing forces which dominate equilibrating forces due to optimizing behavior of economic agents. We must seek a new concept of equilibrium different from the standard Walrasian equilibrium in macroeconomics.

Highlights

In every branch of economics, equilibrium is a central organizing concept.The Walrasian equilibrium which is arguably most important of all, was once confined to the realm of microeconomics
A moment of reflection, suggests to us that the standard Walrasian equilibrium cannot well account for the productivity dispersion across firms and industries widely observed in the real economy
The Walrasian equilibrium which requires the uniformity of marginal value product of production factor like labor contradicts such well known empirical findings

Summary

Introduction

In every branch of economics, equilibrium is a central organizing concept.The Walrasian equilibrium which is arguably most important of all, was once confined to the realm of microeconomics. A famous treatise on general equilibrium theory by Arrow and Hahn (1971) has an independent chapter entitled the Keynesian model. Such understanding of macroeconomics has been completely redrawn over the last forty years. A moment of reflection, suggests to us that the standard Walrasian equilibrium cannot well account for the productivity dispersion across firms and industries widely observed in the real economy. Mortensen (2003), for example, documents that the marginal value product of labor differs across firms. The Walrasian equilibrium which requires the uniformity of marginal value product of production factor like labor contradicts such well known empirical findings

Objectives

Discussion

Conclusion