Non-Equilibrium Economics…

On Graduate School we are bombarded with the Neoclassical Paradigm. In many programs nothing else is even presented. Often no criticism is even address to this research program.

The cornerstone of economic theory: Equilibrium.

Modern Economics is based on the principles of thermodynamic equilibrium, pioneered by Leon Walras, Jevons and continued by Paul Samuelson and his followers, requires us to assume that the economy can be best described by looking for numerical quantities and functional relationships between them, furthermore we now know that most systems are not in thermodynamic equilibrium, thus economic theory should reflect this fact. It is easy to forget that assumption because we never made it; we inherited it as undergraduates.

But we know as a fact that most systems found in nature are not in thermodynamic equilibrium; for they are changing or can be triggered to change over time, and are continuously and discontinuously subject to flux of matter and energy to and from other systems and to chemical reactions. Thus since Economics are based on Equilibrium thermodynamics it seems appropriate to change our tools from Equilibrium to non-Equilibrium to come closer to reality.

The main problem in Economics is due to this equilibrium assumption, where no explicit mechanism of exchange is given (or needed) to arrive to an equilibrium. Thus reality is completely overlooked.

As Students we want more realistic principles and assumptions on which we can trust and relate to. For this Behavioral Economics, Complexity Economics among other disciplines can give students better tools and understanding of Economic phenomenon from the First year of Graduate studies on…

5 Responses to Non-Equilibrium Economics…

  1. downunder economist says:

    I agree with what you write, but not sure that neoclassical economics is based on equilibrium thermodyamics – rather an NE is based on analogies from classical mechanics – yes Samuelson drew also from equlilibrium chemistry, to construct economic analogies.

  2. Hugo Domic says:

    Thanks for your reply!
    In fact we have two different strands, first Walras took directly from classical mechanics his mathematical foundations (in fact he practically copy the whole thing just renaming it…you can read Weintraub where he exposes clearly this). Furthermore Poincare heavily critized Walras because of this.
    Secondly We have the neo-classical school (lead by Samuelson) who took the principles of a closed system thermodynamics and once again pratically copying the underlying mechanisms of thermodynamics equilibrium. Have you ever wonder from where comes the “elasticities”? In fact economists just took the elasticities functions from physics and rename the whole thing with economic terms…
    Even the money function, is a copy from physics if you take a look at high school physics you will find the same equation that Friedman “created” with different letters and different names but the equation is the same.

  3. cliff says:

    The notion of equilibrium is one of the most maddening fallacies of mainstream economics. Equilibria can only exist in closed systems – systems with no inputs and no outputs. Open systems can have steady states, but the mathematics appropriate for the analysis of equilibria are not appropriate for the analysis of steady states in an open system. It is pretty safe to say that concepts like “equilibrium pricing” have no real world counterparts.

  4. Dear all, you can see the establishment of the exact isomorphism between neoclassical microeconomic consumer theory (for producer theory, it’s analogous) and equilibrium thermodynamics in my paper with Tânia Sousa: Sousa, T., T. Domingos (2006). Equilibrium econophysics: a unified formalism for neoclassical economics and equilibrium thermodynamics. Physica A 371: 492-512.

  5. cliff says:

    I am not surprised that you can demonstrate an exact isomorphism between a component neoclassical economics and equilibrium thermodynamics. I wonder, however, what motivated you to expend the effort. Since equilibria can only exist in closed systems and there is little (if anything) within the purview of economics that even remotely approximates a closed system, it would seem that your paper should properly be considered a refutation of the elements of neoclassical theory that are isomorphic with equilibrium thermodynamics. Did you address this point in your discussion?

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