VRIJE UNIVERSITEIT. The Concept of Equilibrium in Different Economic Traditions. A Historical Investigation ACADEMISCH PROEFSCHR1FT

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1 VRIJE UNIVERSITEIT The Concept of Equilibrium in Different Economic Traditions A Historical Investigation ACADEMISCH PROEFSCHR1FT ter verkrijging van de graad Doctor aan de Vrije Universiteit Amsterdam, op gezag van de rector magnificus prof.dr. L.M. Bouter, in het openbaar te verdedigen ten overstaan van de promotiecommissie van de faculteit der Economische Wetenschappen en Bedrijfskunde op donderdag 12 maart 2009 om uur in de aula van de universiteit, De Boelelaan 1105 door Lubertus Anton Wilhelm Tieben geboren te Wolvega

2 3.6.5 Strategy: the inexact method a priori Is equilibrium theory an inexact science? Dogmatism in economics Towards a more eclectic economic science Conclusion 79 Chapter 4 The origins of economic equilibrium Introduction Economic order and the start of equilibrium theory Sir Dudley North: a pioneer in economic theory Scientific method and political objectivity Supply and demand as a 'universal maxime' Equilibrium vision and economic liberalism Pierre de Boisguilbert: equilibrium as a law of nature Introduction Welfare and stagnation Nature's order and economic well-being The unstable properties of economic equilibrium Conclusion 107 Chapter 5 Competition, circular flow and capital: Cantillon versus the physiocrats Introduction Cantillon and the self-regulating nature of the market economy Introduction Intrinsic value and market prices Ill A circular flow model of the economy The method of imaginary constructions The Tableau Economique of the Physiocrats Francois Quesnay and les economistes The step towards "disequilibrium analysis" Turgot and the missing link A comparison of methods 130 Chapter 6 Natural causes and economic equilibrium: Smith's love of system Introduction Smith's love of system Natural theology and natural philosophy Standards of judgment in natural philosophy The aesthetic element in Smith's standard of judgment Smith's love of system and the principle of order The principle of gravitation: sympathy and selfinterest 143

3 6.3.1 Final causes in Smith's moral theory Final causes in Smith's economic theory Conjectural history and nature as a process Is there a dichotomy in Smith? The stages theory of historical development Equilibrium as a process Conclusion 160 Chapter 7 Statics and dynamics in classical economics Introduction The elusive meaning of statics and dynamics Equilibrium as a process in price theory Introduction What does the pull of natural prices mean for supply and demand? Ricardo's cost of production theory of value Towards a mathematical theory of prices Did the Glut Controversy promote a different type of dynamics? The different meanings of Say's law Ricardo's growth theory in static dress Marx's extensions: simple and expanded reproduction What Ricardo and the classicals really meant Supporting Say's law of markets Malthus's rejection of Say's law: Underconsumption Simonde de Sismondi: Class conflict and market frictions Conclusion 198 Chapter 8 Mathematical economics and the transformation of the equilibrium concept Introduction Early work in mathematical economics A Jevonian revolution? Jevons's conception of science Marginal utility and the equilibrium price Static equilibrium and the complexity of economic laws ; The scope of Jevons's equilibrium theory General equilibrium theory: the 'dreamland' of Leon Walras Introduction Equilibrium theory and the mathematical method Classification of the sciences Scientific method Market equilibrium, Perfect competition 236

4 Graphical and mathematical analysis Theorem of maximum utility General equilibrium Exchange Production Marginal productivity Groping in the case of production Existence, stability and uniqueness General equilibrium: ideal or real? The moral dimension The function of the equilibrium concept Conclusion 258 Chapter 9 The subjectivist challenge of the Austrian School Introduction Human action and the methodology of the Austrian school Why equilibrium is not an end-state Causal-genetic explanation and the role of mathematics Empiricism and the method of decreasing abstraction Subjective value and utility Prices, market structure and economic equilibrium Introduction Carl Menger: bargaining and the nature of the market process Eugen von Bohm-Bawerk: price dynamics and intertemporal equilibrium Friedrich von Wieser: competition and leadership Conclusion 304 Chapter 10 Monetary equilibrium Introduction The quantity theory in its early stages The classical theory of the price level The neoclassical theory of the price level Keynes, money and equilibrium Introduction Money and the need for economic dynamics Keynes's turn towards static equilibrium theory The impact of IS-LM \ The challenge for monetary theory Money in the development of general equilibrium analysis Walrasian and non-walrasian equilibrium models with money Is money a veil? 359

5 Chapter 11 Dynamic analysis in monetary theory Introduction The dynamic method of the Stockholm School Sequence analysis and disequilibrium analysis From dynamics to statics Monetary theory Austrian economics and equilibrium as a thought experiment Human action and the Evenly Rotating Economy Entrepreneurship, competition and market order Business cycle dynamics Conclusion The problem of economic order Hayek and equilibrium theory The role of imaginary constructions Neutral money as an equilibrium benchmark The problem of economic order Conclusion 416 Chapter 12 Economics without equilibrium Introduction Post Keynesian Economics Introduction What is Post Keynesian Economics? The impact of uncertainty The accumulation of capital The capital controversies Conclusion Creative Entrepreneurship: Chaos or Coordination? Introduction Creative entrepreneurship as the key towards coordination The struggle between equilibrium and disequilibrium Disequilibrium theory and the future of Austrian economics Evolutionary Economics Introduction Games as evolutionary processes The fight against 'orthodox' neoclassical equilibrium theory Does evolution promote economic order? Evolution and institutions Towards a more multifarious economics Disequilibrium foundations of equilibrium analysis 509

6 Introduction Stability and disequilibrium trading Computational algorithms Information and search theory Post Walrasian Macroeconomics Conclusion Economics with or without equilibrium? 533 Chapter 13 Epilogue 537 Bibliography 541 Samenvatting (Summary in Dutch) 569