As long as we cannot show, except under exceedingly special assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria – the value of general equilibrium theory is nil. As long as we cannot really demonstrate that there are forces operating – under reasonable, relevant and at least mildly realistic conditions – at moving markets to equilibria, there cannot really be any sustainable reason for anyone to pay any interest or attention to this theory.Lars P. Syll's Blog
General equilibrium economics – a dead end
Lars P. Syll | Professor, Malmo University
Why did this quest turn out so poorly and why is it so difficult to give up? It's based on the myth of the invisible hand as the economic correlate of laws of nature in the hard sciences. This myth has been enshrined as neoliberal dogma, and it constitutes the supposed connection between Classical and Neoclassical economics (with Paul Samuelson introducing it into Keynesian analysis). This leads to the assumption that markets operate based on laws of nature as if guided by an invisible hand, so that there are natural rates that are determined and can be expressed mathematically as invariants.
The explanations are meticulously crafted but the predictions have neither been uniformly accurate nor comprehensive. Global financial crisis? The model did not predict it. What path will the recovery take and when will it be over. The model doesn't predict that either. So now economists are toying with multiple equilibria, and shifting natural rates.
As Joe Stiglitz famously said recently, there is no "invisible hand." And as Adam Smith's biographer Gavin Kennedy (Adam Smith's Lost Legacy) observes, Smith never used the phrase "invisible hand" in the way that later neoclassical economists' interpreted it in light of 19th century physics. See Gavin Kennedy, Adam Smith and the Invisible Hand: From Metaphor to Myth Econ Journal Watch, Volume 6, Number 2, May 2009, pp 239-263.