Fallacy of Composition: The So-called General Equilibrium Model

 

Certain celebrity macroeconomists are fond of playing with GEMs for general equilibrium models. They must be kidding!

             Equilibrium in the paradigm of particular market does not necessarily lead to equilibrium in the model of general economy. On the contrary, what is true between a definitive few is never and nowhere true of indefiniteness, much less infinity. More simply, the market has nothing whatsoever to do with the economy: consequentially, the distance between economics and macroeconomics is no shorter than from Here to Eternity.  

             Now, “for the sake of convenience” as usual among those macroeconomists, we copy from somewhere else:

 

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The Fallacy of Generality

How many parts do we think our body, for instance, is composed of? The only feasible answer is “infinity.” We cannot manage the infinity because the managed is beyond naming. Moreover, we cannot tell coefficients from variables in organism because co-relationships themselves keep varying.

           Much worse, there are frictions, including “transaction costs” if in the economy, each of which is between two parts at least, whereas the number of bilateral relationships in infinity (_nC₂, where n= ∞) is half the square of infinity. Thus, nothing at all can be definitive with regard to organic frictions. Illustration: _100,000C₂= 100,000∙(100,000 - 1)/ 2= 100,000²/ 2.

           In a word, “generality” of an organism, our body, the economy or any other kind, is a vacant concept.

 

The Fallacy of Equilibrium

An organism can never be in equilibrium. Even the term “normal” is qualitative. For instance, we can never prove whether, much less when in general, we in person are in a normal condition. After all, “qualitative” is more artistic than scientific.

           To be fair, "equilibrium” in macroeconomics must mean that the economy is either at full employment of the labor force (L) or at a certain level of unemployment. In the first place, equilibrium in either meaning is partial inasmuch as labor is only one of the three production factors. In other words, the real GD Products (Y) is not only due to labor but also to physical capital (K) and land (N). In the second place, employment is not about the stock quantity but about running hours.

Changes in stocks. Macroeconomists often suggest that the stock of production factors be fixed or stable at least. This is not even close to the reality.

           Looking forward, the stock quantities themselves are subject to change on the basis of cost-benefit analysis: we join the labor force if the wage rate (MB for marginal benefit) is worth our while (MC for marginal cost); we construct an industrial machine when the market price (MB) is higher than the marginal production cost (MC); we turn our yard into the farming field (MB) if worthwhile (MC). As the economy fluctuates by chance, the quantity of production factors keeps changed by design. Probably in the first place, few macroeconomists would like to rule the gross domestic investment (I= ΔK in macroeconomics) out of their theories; K changes due to “I,” one of the variables.

           In the context of stability macroeconomics for the short run, the fiscal year as the accounting period is much too long for any stock to remain constant. The stability assumption of the stocks is self-contradictory as far as macroeconomic theories are concerned.

Running hours. As opposed to general practice, the “production function” must be defined in terms of factor services instead of factor stocks. For instance, labor force must become the human power to run at the creation of products (C) or assets (I) before begetting GDP (Y). With that said, we could hardly estimate the annual running hours of labor, capital and land powers precisely enough to make any call on the employment status.

           Take the labor force for example. There in reality are no doubt unemployed people but we cannot calculate the unemployment ratio among other reasons because full employment as the reference point is unknowable. We cannot say the unemployment ratio until we define what the full employment means.

           Even with the size of labor force (L) is defined and constant, the so-called “unemployment rate” would at best be a normative concept. For instance, who would be named “unemployed” out of one-fortieth to forty-fortieth retirees?

           In sum, either full employment or the natural level is a bankrupt concept: it is not definable, much less confinable. Consequently, the economy should in no case be associated with equilibrium. It keeps changing in most every respect. To borrow from Benjamin Franklin, when the economy is finished changing it is finished.

 

The Fallacy of Modeling

No model can represent the economy. First, there in the economy are indefinite quantities of infinite parts to choose from, invalidating any effort of sampling or modeling, if not cloning.

           Second, any model, somehow built, is never inter-organic with the rest of the population. For instance, no American city as a “role model” could exist independently from the rest of the US over any short a period of time; or, no city by itself can represent the US economy, particularly in the short-run cyclicality. After all, what if the model is “penny wise and pound foolish”? Hopefully, no empirical macroeconomist would offer such an answer: “For simplicity’s sake, we control the rest of the US economy.” 

          After all, each model of the organism did, does and will never represent all. In other words, a model of general equilibrium would not work. Such a (non-human) model, if any, will surely be no less still than money supply (M^s) is.

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Les Gemmes Brillantes!