As regular readers of this blog will realize, several of my recent posts (here, here, here, here, and here) have been incorporated in my new paper, which I have been writing for the upcoming Carl Menger 2021 Conference next week in Nice, France. The paper is now available on SSRN.
Here is the abstract to the paper:
Neoclassical economics is bifurcated between Marshall’s partial-equilibrium and Walras’s general-equilibrium analyses. Given the failure of neoclassical theory to explain the Great Depression, Keynes proposed an explanation of involuntary unemployment. Keynes’s contribution was later subsumed under the neoclassical synthesis of the Keynesian and Walrasian theories. Lacking microfoundations consistent with Walrasian theory, the neoclassical synthesis collapsed. But Walrasian GE theory provides no plausible account of how GE is achieved. Whatever plausibility is attributed to the assumption that price flexibility leads to equilibrium derives from Marshallian PE analysis, with prices equilibrating supply and demand. But Marshallian PE analysis presumes that all markets, but the small one being analyzed, are at equilibrium, so that price adjustments in the analyzed market neither affect nor are affected by other markets. The demand and cost (curves) of PE analysis are drawn on the assumption that all other prices reflect Walrasian GE values. While based on Walrasian assumptions, modern macroeconomics relies on the Marshallian intuition that agents know or anticipate the prices consistent with GE. Menger’s third way offers an alternative to this conceptual impasse by recognizing that nearly all economic activity is subjective and guided by expectations of the future. Current prices are set based on expectations of future prices, so equilibrium is possible only if agents share the same expectations of future prices. If current prices are set based on differing expectations, arbitrage opportunities are created, causing prices and expectations to change, leading to further arbitrage, expectational change, and so on, but not necessarily to equilibrium.
Here is a link to the paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3964127
The current draft if preliminary, and any comments, suggestions or criticisms from readers would be greatly appreciated.
Uneasy Money 
You say: “But Marshallian PE analysis presumes that all markets, but the small one being analyzed, are at equilibrium, so that price adjustments in the analyzed market neither affect nor are affected by other markets.”
Actually it is easy to prove that, with one exception, it is impossible to draw a downward-sloping demand curve while keeping prices and quantities in other markets constant.
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I think that’s right (what’s the exception?). But the idea is that if the market is sufficiently small or disconnected from other markets, the CP condition need only be approximately maintained. As with Walrasian tatonnement, Marshallian PE requires a certain amount of hand-waving. But it’s good enough for applied work.
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David,
On page 3 of your paper is the following passage:
“In other words, ………..whose price is zero.”
Is this what you intended to say?
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Yes. In equilibrium, the price of a good is zero if and only if, the amount supplied of that good at a zero price is at least as great as the quantity demanded. Such a good like water in the neighborhood a spring or clean air in an unspoiled nature preserve is a free (non-economic) good.
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David: any reason not to consider the contributions
of M De Vroey and Franco Donzelli to the Walras-Marshall equilibrium approach? I believe it could be an interesting complement to yours.
Rgds,
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Ivo, Thanks for your comment. Not referring to De Vroey was an oversight on my part. If you look at my posts on the Marshall-Walras divide you will see that I quoted from and discussed De Vroey. I take issue with some of what he writes, but he provides a worthwhile perspective that was very helpful to me in working through some the issues I address.
I’m sorry, but I’m not familiar with the work of Donzelli, so I would very much appreciate getting some references to look into.
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David:
This is Donzelli’s paper:
Click to access 13.donzelli.pdf
I hope you find it interesting.
Best regards,
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Thanks so much. I will read with great interest.
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