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Lawrence E. Boland, Equilibrium Models in Economics. Purposes and Critical Limitations

Francesco Sergi
p. 615-621
Bibliographical reference

Lawrence E. Boland, Equilibrium Models in Economics. Purposes and Critical Limitations, Oxford: Oxford University Press, 2017, xviii+264 pages, 978-019027432-0

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1Equilibrium Models in Economics addresses the limitations of “equilibrium models”, i.e. economics models, in which “equilibrium is a central organising idea” (the quote is from Frank Hahn; 1). Lawrence Boland’s discussion of equilibrium models focuses on the “attainment” of equilibrium: How does a model move from out-of-equilibrium (or “disequilibrium”) positions toward equilibrium? The book starts with an assessment of the “standard textbook equilibrium model” (which is presented by Boland in the Prologue to the book). From Boland’s careful assessment, one main argument emerges: in order to convincingly explore the movement toward equilibrium, models should explicit the knowledge requirements for reaching an equilibrium, as well as the process for developing such knowledge (“learning”). This issue provides the thread for the central part of the book (Part Two, Chapter 6 to 12). Part Two goes far beyond the “standard textbook equilibrium model”: it reviews and assesses a great variety of equilibrium models (and even “all forms of equilibrium models” according to the author, 10). Finally, in Part Three (Chapter 13 to 15) Boland concludes by reviewing three research leads to overcome the limitations of equilibrium models—these leads are (in short): producing a theory of price dynamics; focusing on states of disequilibrium; and incorporating explicit assumptions about knowledge and learning.

2The general issue of the attainment of equilibrium is identified right from the start as a problem of “causal explanation” (Chapter 1). Indeed, once granted that the purpose of an equilibrium model is to “explain” economic variables (“how a set of exogeneous variables causes the endogenous variables”, 17), what happens out of equilibrium should constitute a key issue.

3Chapters 2-4 constitute the book’s backbone. This is where Boland identifies three “limitations” of the “standard textbook equilibrium model” for explaining how equilibrium is reached. These limitations are:

  1. In order to move toward the equilibrium, prices have to change (at least under the constraint that no transaction takes place outside equilibrium). And yet, the ability of market participants to change prices is contradictory with the price-taking assumption of perfect competition;

  2. The adjustment process of prices requires a precise knowledge, at least if the equilibrium reached is to be optimal (i.e. consistent with the assumption of optimizing individual behaviour);

  3. One needs to explain how this required knowledge is acquired.

4Boland emphasizes that these are “recognized fundamental problems”. Indeed, his exposition and discussion in Part One rely on the interesting combination of four past contributions (Hayek, 1937; Arrow, 1959; Clower, 1959; Richardson, 1959). However, it is important to point out that this book is not intended as an historical account of such contributions. Boland does not really engage with a systematic exploration of the context and the debates that led to the contributions he is discussing. He merely argues that “ideas and criticisms that are relevant today … were published by economic model builders decades ago” (xv).

5Chapter 2 discusses Kenneth Arrow’s (1959) essay “Toward a Theory of Price Adjustment”, which already uncovered the crucial issue of providing a “built-in explanation” of how prices are adjusted in any state of disequilibrium. This intuition, Boland writes, “judging by most textbooks … has not caused any major revolutions in the practice of equilibrium model-building methodology” (30). Boland then emphasizes that Arrow’s idea could hardly be reconciled with the perfect competition assumption of “price-taking”: Who is changing the prices, if market participants are not? One possible lead consists in investigating imperfect competition cases. Monopoly (or monopsony) would provide the simplest representation of out-of-equilibrium behaviour of price adjustment. However, here comes another problem. In order to achieve an equilibrium that is also an optimum (i.e. the solution to a maximization problem), the monopolist should in fact know the exact shape, slope, and location of the demand curve that she is facing. Chapter 3, focusing on Robert Clower’s (1959) article, illustrates precisely the limitations of this assumption. In this article, Clower shows that an “ignorant monopolist” (i.e. a monopolist without knowledge of the demand curve) is likely to achieve a sub-optimal equilibrium. Accordingly, Boland’s discussion shifts to the knowledge necessary to reach an equilibrium and for such an equilibrium to be compatible with the maximisation assumption (which is identified as the only behavioural assumption of the “standard textbook equilibrium model”). Chapter 4 starts with some clarifications about the issue of knowledge, based on George Richardson’s (1959) article “Equilibrium, Expectations and Information”. Richardson provides a useful distinction between “primary knowledge” (that is, the knowledge that each market participant should have about her own preferences and technological possibilities) and “secondary knowledge” (that is, the knowledge of the activities of other market participants). The subsequent issue is then how each market participant would achieve secondary knowledge, through trial-and-error (“the learning process”), confronting their plans (or “expectations”) with plans of other market participants. After a short review (Chapter 5) of other well-known (though still relevant) limitations of equilibrium models (including ‘external’ criticisms about the realism of assumptions, and rather ‘internal’ criticisms about existence, uniqueness, and stability of the equilibrium), the rest of the book deals mainly with alternative paths for investigating the issue of knowledge and learning.

6Part II aims at highlighting limitations of various equilibrium models going beyond the standard textbook model. The overall logic of this part of the book is less linear that in Part I, insofar as it combines and alternates between different topics in almost every chapter. On the one hand, Part II discusses again the major problem that was highlighted in Part I, namely the issue of knowledge and learning (which represents, then, the most consistent thread throughout the entire book). On the other hand, new topics are introduced. Some of these problems are theoretical (e.g., the issue of the stability of equilibrium; or the issue of including time and money into a general equilibrium model), while others are methodological (e.g., methodological individualism in equilibrium models; realism vs. instrumentalism).

7Part II starts precisely with a chapter (Chapter 6) that addresses at once most of these problems. The chapter starts with a discussion of the issue of knowledge and learning, then it turns to methodological problems. First, Boland tries to prevent any misunderstanding regarding how he thinks ‘knowledge’ and ‘learning’ should be conceptualized. For Boland, ‘knowledge’ is not about “accumulating information”: this conception, he claims, is the view underlying approaches such as Bayesian learning in game theory, adaptive expectations, and the economics of information. Indeed, all these approaches “[portray] learning to be accumulating observations that allow better and better probability-based estimates of the parameters of the distribution” of a given variable (83). Conversely, for Boland, knowledge is “a Socratic improvement-based concept” (84). This definition (rooted in his previous work—see e.g. Boland, 2003) implies a specific conception of the role of knowledge and learning in the equilibrium-formation process: that is, a conception of knowledge as (one could say) ‘trial and error’. In Boland’s words, market participants will form “conjectural expectations” about unknowns, then confront these expectations on the market, and finally correct any error. This requires that “agents are aware of the fallibility of their knowledge and thus they treat any decision as a test of their knowledge” (86). Boland then discusses the apparent contrast between the “methodological individualism” claimed by equilibrium models (“things do not decide, people do”) and the fact that individuals must bend before the ‘price system’. This results in a situation where, he claims, prices are in effect “holistic givens” (92). Finally, the chapter reminds the reader that the author is trying to explore “realistic” accounts of knowledge and learning, i.e. “explanatory accounts”, as defined in Chapter 1. This excludes any “instrumentalist” view (as discussed in more depth in Chapter 8). Besides, “realism” does not mean leaning towards any kind of “psychologism”, i.e. explanations of economic phenomena ultimately based on the actual psychology of individuals.

8After a transitional “educational dialogue” (Chapter 7)—which in effect sums up all the aforementioned theoretical and methodological problems and tries to illustrate how they are related to Part I of the book—Chapter 8 and Chapter 9 introduce a sharp criticism of some noted attempts at dealing with the problem of knowledge and learning. Chapter 8 develops in greater detail what would be a “realistic understanding” of the relation between the equilibrium and the learning process. The main point here is that any such “realistic understanding” must account for (i) how market participants form expectations of equilibrium prices, and (ii) how, when market participants confront those expectations to the market, a “disequilibrium awareness” arises, i.e. how market participants can recognize their (price- or quantity-related) errors. Then, and finally, one must

explain how the individual learns to respond in a manner that promotes a movement toward equilibrium and thereby ensures the future ability to fulfil consumption plans. In other words, we must explain how the individual learns to form more accurate expectations. (115)

9Chapter 9 discusses macroeconomic equilibrium models, particularly the fashionable rational expectations macroeconomic models or dynamic stochastic general equilibrium (DSGE). Boland considers this line of work as a “retreat” and a “defeatist” attitude with respect to the theoretical problems raised by the issue of equilibrium attainment. This harsh criticism relies on two arguments. The first is that the “rational expectations” hypothesis à la Muth conveys the kind of “quantitative-based” conception of knowledge that Boland disagrees with. Moreover, the rational expectations hypothesis goes around the obstacle of characterizing ‘how people learn’ from an information set, insofar as it simply assumes that every market participant would reach the same conclusions as any other market participant. Since all expectations are the same, the process of learning does not really matter. The second argument is about the “realistic understanding” of learning. As many economists before him, Boland considers that rational expectations treat market participants as “expert econometricians”, “as if all agents in one’s model have at least a Master degree in economics!” (122)

10Chapter 10 reviews some limitations to the “Walrasian” (Arrow-Debreu) general equilibrium model and some extensions trying to overcome these limitations. The three main points highlighted there are the issue of time, relatedly, the issue of money, and imperfect competition. Like the points raised in Chapter 5, these are familiar shortcomings. The discussion in this chapter rather serves as the transition towards the two final chapters of Part II, Chapters 11 and 12. There, Boland discusses two related traditions in economics that are relevant to address the limitations of standard equilibrium models. The first tradition is evolutionary economics (Chapter 11), especially what Boland identifies as the “newer school” (or “non-Darwinian evolutionary economics”), which is “concerned with what is missing from mainstream neoclassical disequilibrium models” (150). It is worth highligthing a quote used by Boland, from a paper by Dosi and Nelson (1994), which effectively summarizes how this approach is concerned with precisely the issues that are central to Boland:

the purpose [of evolutionary economics] is to explain the movement of something over time, or to explain why that something is what it is at a moment in time in terms of how it got there; that is, the analysis is expressly dynamic … Evolutionary models in the social domain involve some processes of imperfect (mistake-ridden) learning and discovery, on the one hand, and some selection mechanism, on the other. (153)

11Part II ends with a chapter (Chapter 13) emphasizing how the above topics have been also taken up, somewhat later, by complexity economics.

12In substance, even though Boland deals with various models and approaches to knowledge and equilibrium over the last fifty years, this is a book on the methodology of modelling in economics. It presents how economists build and use models of economic equilibrium (and how they should build and use them). The book is dense and rich, and there are many aspects worth discussing. In what follows, I have chosen to focus my closing comments on how Boland’s book contributes to some current debates on the teaching of economics.

13Though it was not conceived as a textbook, Boland hopes that “[the book] might be of help for students and teachers” (10). These intent echoes some of Boland’s previous work (especially Boland, 2005). Indeed, Equilibrium Models in Economics is a very helpful book (also) for teachers (although it is clearly too complex for students, at least for undergraduates). Recently, I have myself been confronted with the task of leading the first-year undergraduate ‘Introduction to Economics’ course—the (in?)famous ‘Economics 101’. I was extremely lucky to have come across Boland’s book around the same time. This is a deep and intelligent book that, when seen from the perspective of a teacher, helps (re)thinking about the ‘principles’ of economics we are supposed to pass on to the students. Indeed, Boland has built much of the book out of his own long-standing experience of teaching ‘Economics 101’. Throughout the book, Boland refers to the problems and questions inherent to such teaching (this includes an inspiring “educational dialogue”, a fictive conversation with his students, which is Chapter 7).

14How to teach ‘Economics 101’ is both a classic preoccupation and, more importantly, a topic that has been recently heatedly debated. This makes Boland’s book particularly welcome. There is a shared concern (not to say, a dissatisfaction) among economists with the ‘traditional’ content of ‘Economics 101’ teaching and the ways it is taught (‘traditional’ here meaning: what was fashionable 15 years ago). Needless to say, the “standard textbook equilibrium model” (the main target of Boland’s book) has a place in such concerns that is directly proportional to its crucial place in ‘traditional’ contents for ‘Economics 101’. Such concerns were significantly amplified by the 2008 financial crisis and, in its aftermath, the strong calls for change coming from students (see, e.g., the Post-Crash Economics Society in Manchester, or the PEPS society in France). However, this concern has not yet turned into a widespread reappraisal of the content and ways of teaching ‘Economics 101’. Many economists seem to have carried on without changing much their pre-crisis teaching. This is apparent in the state of most popular textbooks, which Boland refers to, though without mentioning any of them in particular (for a quantitative and critical investigation of “standard textbooks”, see e.g. Bowles and Carlin, 2020). Other economists have engaged more directly with the issue: the most popular example of this is, I think, the CORE project, which offers indeed some novelties (above all, a shiny and open-access layout; see https://www.core-econ.org). However, in many respects, the actual content of CORE is substantially disappointing (for a detailed criticism, see Mearman et al., 2018). Other more radical views for change (such as those promoted by the group Reteaching economics; see http://reteacheconomics.org/​) seem to have found an echo, so far, only in a limited number of places. Boland’s book will be most valuable to those that are willing to engage seriously with this debate.

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Bibliography

Arrow, Kenneth J. 1959. Towards a Theory of Price Adjustment. In Moses Abramovitz (ed.), Allocation of Economic Resources: Essays in Honor of Bernard Francis Haley, Stanford: Stanford University Press, 41-51.

Boland, Lawrence. 2003. The Foundations of Economic Methodology: A Popperian Perspective. London: Routledge.

Boland, Lawrence. 2005. The Principles of Economics. Some Lies my Teacher Told Me. London: Routledge.

Bowles, Samuel and Wendy Carlin. 2020. What Students Learn in Economics 101: Time for a Change. Journal of Economic Literature, 58(1): 176-214.

Clower, Robert W. 1959. Some Theory of an Ignorant Monopolist. The Economic Journal, 69(276): 705-716.

Dosi, Giovanni and Richard R. Nelson. 1994. An Introduction to Evolutionary Theories in Economics. Journal of Monetary Economics, 4(3): 153-172.

Hayek, Friederich A. 1937. Economics and Knowledge. Economica, 4(37): 33-54.

Mearman, Andrew, Danielle Guizzo, and Sebastian Berger. 2018. Whither Political Economy? Evaluating the CORE Project as a Response to Calls for Change in Economics Teaching. Review of Political Economy, 30(2): 241-259.

Richardson, George B. 1959. Equilibrium, Expectations and Information. The Economic Journal, 69(274): 223-237.

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References

Bibliographical reference

Francesco Sergi, Lawrence E. Boland, Equilibrium Models in Economics. Purposes and Critical LimitationsŒconomia, 10-3 | 2020, 615-621.

Electronic reference

Francesco Sergi, Lawrence E. Boland, Equilibrium Models in Economics. Purposes and Critical LimitationsŒconomia [Online], 10-3 | 2020, Online since 01 September 2020, connection on 28 March 2024. URL: http://journals.openedition.org/oeconomia/8538; DOI: https://doi.org/10.4000/oeconomia.8538

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About the author

Francesco Sergi

Université Paris Est Créteil, LIPHA. francesco.sergi@u-pec.fr

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