Economics – a sensible view from a warmer clime July 28, 2010 at 6:06 am

Not Barbados

DeLisle Worrell, Governor of the Central Bank of Barbados, had these sensible words to say in a speech recently:

Traditional Economics remains trapped in a time warp defined by the concepts that Leon Walras borrowed from the physics he knew at the time of the development of the marginalist theory of market economics which underpins the classical, keynesian, neoclassical and new keynesian views of the world. At that time only the first law of thermodynamics – the conservation of energy – was known. The notion of equilibrium is a form of expression of the first law. Physics subsequently discovered the second law – that entropy (disorder or randomness) is always increasing. The implication of the second law is that if the system were ever to reach equilibrium it would be dead.

In other words, equilibrium models of social systems are models of dead systems. No real economy is anywhere close to equilibrium in the physical sense. (This is a point that we have made before: see for instance here or here.) Mr. Worrell then suggests that ‘viewing the economy as a complex adaptive system provides us with a new set of tools, techniques and theories for explaining economic phenomena.’ Now if the governor of the Central Bank of Barbados can talk sense like that, why can’t we have it from the central bankers of larger countries?

5 Responses to “Economics – a sensible view from a warmer clime”

  1. [...] a recent post on his (consistently interesting) blog, David Murphy questions the value of equilibrium analysis in [...]

  2. [...] a recent post on his (consistently interesting) blog, David Murphy questions the value of equilibrium analysis in [...]

  3. There are strong echoes of Keynes’ “in the long run we are all dead” Was that deliberate? Was Keynes ahead of his time in invoking (obliquely) the 2nd law of thermodynamics?

  4. Dave – I hadn’t thought of that, thank you. It seems to me that Keynes was often ahead of his time…

  5. [...] the exchanges to react to each other before quotes can be updated, so that there is some kind of equilibrium (to overuse a currently-in-vogue term). I’d say 300ms is better. That’s still three [...]