Finally, many studies reject the joint hypothesis of equilibrium expectations and optimization, along with self-interest in valuing outcomes. Social preference models have emerged to explain these data, capturing concepts like inequity-aversion, reciprocity, and social image. Evolutionary Game Theory in Biology. Peter Hammerstein Olof Leimar. This chapter reviews the origin and development of game-theoretic ideas in biology.
It covers more than half a century of research and focuses on those models and conceptual advancements that are rooted in fundamental biological theory and have been exposed to substantial empirical scrutiny. The different areas of research-ranging from molecules and microbes to animals and plants-are described using informative examples rather than attempting an all-encompassing survey.
Calibration and Expert Testing.
Wojciech Olszewski. It, then, turns out an agent who knows only the test by which she is going to be judged, but knows nothing about the data-generating process, is able to pass the test by generating forecasts strategically. The literature identifies a large number of tests that are vulnerable to strategic manipulation of uninformed forecasters, but also delivers some tests that cannot be passed without knowledge of the data-generating process.
It also provides some results on philosophy of science and financial markets that are related to, and inspired by the results on testing experts. Theory of Combinatorial Games. Aviezri Fraenkel Robert A. Hearn Aaron N. Aim: To present a systematic development of the theory of combinatorial games from the ground up. Approach: Computational complexity.
Combinatorial games are completely determined; the questions of interest are efficiencies of strategies. Methodology: Divide and conquer. Ascend from Nim to Chess and Go in small strides at a gradient that is not too steep. Presentation: Mostly informal; examples of combinatorial games sampled from various strategic viewing points along scenic mountain trails illustrate the theory.
Add-on:Atasteof constraint logic, a new tool to prove intractabilities of games. The Complexity of Computing Equilibria. Christos Papadimitriou. In one of the most influential existence theorems in mathematics, John F. Nash proved in that any normal form game has an equilibrium. More than five decades later, it was shown that the computational task of finding such an equilibrium is intractable, that is, unlikely to be carried out within any feasible time limits for large enough games.
This chapter develops the necessary background and formalism from the theory of algorithms and complexity developed in computer science, in order to understand this result, its context, its proof, and its implications. Population Games and Deterministic Evolutionary Dynamics. William H. Population games describe strategic interactions among large numbers of small, anonymous agents.
Behavior in these games is typically modeled dynamically, with agents occasionally receiving opportunities to switch strategies, basing their choices on simple myopic rules called revision protocols. Over finite time spans the evolution of aggregate behavior is well approximated by the solution of a differential equation. From a different point of view, every revision protocol defines a map—a deterministic evolutionary dynamic—that assigns each population game a differential equation describing the evolution of aggregate behavior in that game.
In this chapter, we provide an overview of the theory of population games and deterministic evolutionary dynamics. We introduce population games through a series of examples and illustrate their basic geometric properties. Combining these streams, we consider classes of population games in which members of these families of dynamics converge to equilibrium; these classes include potential games, contractive games, games solvable by iterative solution concepts, and supermodular games.
We relate these classes to the classical notion of an evolutionarily stable state and to recent work on deterministic equilibrium selection. We present a variety of examples of cycling and chaos under evolutionary dynamics, as well as a general result on survival of strictly dominated strategies. Finally, we provide connections to other approaches to game dynamics, and indicate applications of evolutionary game dynamics to economics and social science.
Stochastic Evolutionary Game Dynamics. Chris Wallace H. Peyton Young. Traditional game theory studies strategic interactions in which the agents make rational decisions. Evolutionary game theory differs in two key respects: the focus is on large populations of individuals who interact at random rather than on small numbers of players; and individuals are assumed to employ simple adaptive rules rather than to engage in perfectly rational behavior.
In such a setting, an equilibrium is a rest point of the population-level dynamical process rather than a form of consistency between beliefs and strategies. This chapter shows how the theory of stochastic dynamical systems can be used to characterize the equilibria that are most likely to be selected when the evolutionary process is subject to small persistent perturbations. Such equilibria are said to be stochastically stable.
However, the justification for these solution concepts differs between the two approaches. In traditional game theory, equilibria are justified in terms of rationality, common knowledge of the game, and common knowledge of rationality. Evolutionary game theory dispenses with all three of these assumptions; nevertheless, some of the main solution concepts survive in a stochastic evolutionary setting.
Introduction to the series. Kenneth J. Arrow Michael D. Chapter 11 Patent licensing. Morton I. This chapter focuses on the patent licensing. Game-theoretic methods have made it possible to address questions with regard to patent licensing. The common modes of patent licensing are a royalty, possibly nonuniform, per unit of output produced with the patented technology, a fixed fee that is independent of the quantity produced with the patented technology, or a combination of a fixed fee plus a royalty.
The patentee can choose which of these modes of licensing to employ and how to implement them. The interaction between a patentee and licensees is described in terms of a three-stage noncooperative game. The licensees are assumed to be members of an n-firm oligopoly, producing an identical product. Entry into the industry is assumed to be unprofitable, i. The firms in the oligopoly can compete either through quantities or prices. In the simplest version of the game, the oligopoly faces a linear demand function for its product.
The patented invention reduces the cost of production, i. Licensing of a product innovation can also be analyzed in this game-theoretic framework. Chapter 13 Axiomatizations of the core. Bezalel Peleg. The core is, the most intuitive solution concept in cooperative game theory. An intuitively acceptable axiom system for the core might reinforce its position as the most natural" solution. An axiomatization of the core may serve two other, more important goals: 1 by obtaining axioms for the core, those important properties of solutions are singled out that determine the most stable solution in the theory of cooperative games.
Furthermore, the converse reduced game property CRGP is essential for the axiomatization of the core of TU market games. A solution is acceptable if its axiomatization is similar to that of the core. There are some important examples of this kind: a the prenucleolus is characterized by RGP together with the two standard assumptions of symmetry and covariance, b the Shapley value is characterized by SUPA and three more weaker axioms, and c the prekernel is determined by RGP, CRGP, and three more standard assumptions.
The chapter discusses the TU games, several properties of solutions to coalitional games, an axiomatization of the core of balanced games, the core of market games, the results that are generalized to games with coalition structures, the results for NTU games, reduced games of NTU games, axiom system for the core of NTU games, and Keiding's axiomatization of the core of NTU games. Chapter 14 The core in perfectly competitive economies. Robert M. This chapter presents the results on the cores of perfectly competitive exchange economies, that is economies in which the endowment of each agent is negligible on the scale of the whole economy.
In the contributions of Edgeworth, Debreu and Scarf, and Aumann, the conclusion is: the core in Aumann's case or the intersection of the cores of all replicas in the other cases coincides with the set of Walrasian equilibria. One of the key elements of the Debreu and Scarf argument, the equal treatment property that permitted one to collapse the cores of all the different replicas into the same space, does not generalize even to sequences with different numbers of traders of the various types. The strong statement that the core in Aumann's continuum setting or the intersection of the cores in the Debreu and Scarf replica setting coincides with the set of Walrasian equilibria is simply not true in the case of general sequences of finite economies.
Weaker forms of convergence must be substituted. Convexity of preferences, which plays no role whatever in Aumann's theorem, is seen to make a crucial difference in the form ofconvergence in large finite economies. The type of convergence that holds depends greatly on the assumptions on the sequence of economies. The various possibilities can best be thought of as lying on four largely but not completely independent axes: the type of convergence of individual consumptions to demands, the equilibrium nature of the price at which the demands are calculated, the degree to which the convergence is uniform over individuals, and the rate at which convergence occurs.
Chapter 16 Two-sided matching. Alvin E. Roth Marilda Sotomayor. This chapter discusses the games that are two-sided matching markets. The phrase two-sided refers to the fact that agents in such markets belong, from the outset, to one of two disjoint sets-e. The term matching refers to the bilateral nature of exchange in these markets. The game-theoretic analysis of these markets has proved useful in various empirically oriented studies. This chapter describes some of the phenomena the theory should be able to explain, and concludes by returning to consider how the theory addresses the empirical questions raised at the beginning.
The chapter focuses on both the core of the game and the dominant and equilibrium strategies under various rules about how the game might be played. The distinction between cooperative and noncooperative game theory is often somewhat artificial because the tools of both kinds of theory can be used to study the same phenomena.
Chapter 17 Von Neumann-Morgenstern stable sets. William F. Neumann and Morgenstern presented the first general model and solution concept for the multiperson cooperative theory. Stable set theory is viewed as only one of several approaches for analyzing coalitional games. This chapter focuses on the von Neumann-Morgenstern stable sets, describes their original model for the coalitional games along with some illustrations, analyzes the three-person case in detail, and discusses some of the mathematical properties of stable sets.
Stable sets often predict likely social structures and how groups will organize themselves. They show the important role of minimal winning coalitions and minimal-sized veto or blocking coalitions. They often show how a game will decompose into subgames between critical coalitions. They exhibit a variety of standards of behavior and delineate bargaining ranges. They predict the formation of cartels and illustrate the stability of discrimination and its limits. Few assumptions can lead to many insights into coalition formation, competition, and distributions of wealth.
There are also many situations where stable set theory matches well with experimental results. The chapter also discusses some highly undesirable properties of stable set theories. Chapter 18 The bargaining set, kernel, and nucleolus. This chapter focuses on the bargaining set, kernel, and nucleolus. The theory of the bargaining set answers a more modest question: How would or should the players share the proceeds, given that a certain coalition structure c. From a normative point of view, the reason for asking such a question stems from the need to let the players know what to expect from each coalition structure so that they can then make up their mind about the coalitions they want to join, and in what configuration.
The kernel was introduced as an auxiliary solution concept, the main task of which was to illuminate properties of the bargaining set and to compute at least part of this set. Kernel had many interesting mathematical properties that reflected in various ways the structure of the game. Kernel [prekernel] is covariant with respect to strategic equivalence. Both are finite unions of polytopes. It is almost as difficult to compute the kernel as to compute the bargaining set.
Being a point in the kernel, the nucleolus point has all the nice properties of the kernel points. Becauseit is a solution concept that does not depend on the names of the players, it preserves all the symmetries of the game. The nucleolus has an advantage over the Shapley value.
Because the nucleolus is not empty even if the core is empty, it can be stated that the nucleolus is the location of the latent position of the core. The chapter also discusses the axiomatic foundation of the prekernel and the prenucleolus, ideas embodied in the bargaining set, kernel, and nucleolus that spawned many other related solution concepts, and dynamic processes that lead the participants in a cooperative game to reach the bargaining set— or the kernel, or the nucleolus, or many other bargaining sets— via a sequence of steps that make good intuitive sense.
Chapter 19 Game and decision theoretic models in ethics. John C. This chapter focuses on the game and decision-theoretic models in ethics. The theory of rational behavior in a social setting can be divided into game theory and ethics. Game theory deals with two or more individuals often having very different interests who try to maximize their own selfish or unselfish interests in a rational manner against all the other individuals who likewise try to maximize their own selfish or unselfish interests in a rational manner.
Ethics deals with two or more individuals often having very different personal interests yet trying to promote the common interests of their society in a rational manner. The chapter discusses the axioms of Bayesian decision theory, an equi-probability model for moral value judgments, axioms for rational choice among alternative social policies, use of von Neumann-Morgenstern utilities in ethics, rule utilitarianism, act utilitarianism, Rawls' and Brock's nonutilitarian theories of justice, and Brock's theory of social justice based on the Nash solution and on the Shapley value.
Chapter 21 Game theory and statistics. Gideon Schwarz. Game theory, in particular the theory of two-person zero-sum games, has played a multiple role in statistics. Its principal role has been to provide a unifying framework for the various branches of statistical inference. On a less fundamental level, game theory has contributed to statistical inference the minimax criterion. While the role of this criterion in two-person zero-sum games is central, its application in statistics is problematic.
Its justification in game theory is based on the direct opposition of interests between the players, as expressed by the zero-sum assumption. Together with the minimax criterion, randomized, or mixed, strategies also appear in decision theory. The degree of importance of randomization in statistics differs according to which player is randomizing. Mixed strategies for Nature are a priori distributions. In the Bayes approach, these are assumed to represent the Statistician's states of knowledge prior to seeing the data, rather than Nature's way of playing the game.
Therefore, they are often assumed to be known to the Statistician before he or she makes his or her move, unlike the situation in the typical game-theoretic set-up. Mixed strategies for the Statistician, on the other hand, are, strictly speaking, superfluous from the Bayesian point of view, while according to the minimax criterion, it may be advantageous for the Statistician to randomize, and it is certainly reasonable to grant him or her this option. Chapter 22 Differential games. Avner Friedman. This chapter discusses differential games.
In control theory, a certain evolutionary process typically given by a time-dependent system of differential equations depends on a control variable. A certain cost is associated with the control variable and with the corresponding evolutionary process. The goal is to choose the best control—that is, the control for which the cost is minimized. A similar evolutionary process is used in differential games, but it depends on two or more controls. Each player is in charge of one of the controls.
Each player wishes to minimize its own cost the cost functions of the different players may be related. However, at each time t, a player must decide on its control without knowing what the other usually opposing players intend to do. The strategy of each player at time t depends only on whatever information the player was able to gain by observing the evolving process up to time t only. Chapter 23 Differential games — Economic applications. This chapter discusses the differential games economic applications. Much of the application of N-person, general-sum differential games is in economics, where observed regularities are rarely invariant as in natural sciences.
Thus, expenditure patterns in America offer little insights upon the consumption habits in Papua-New Guinea. Out of those differential games that depend on specific function forms e. In the case of optimal control, broad conclusions are often obtained by means of the globally analytic phase diagram for those problems with a low-dimension state space.
On the other hand, from the viewpoint of economics, there are two distinct types of contributions that differential games can offer. First is regarding the multiplicity of solutions: differential game can yield broad conceptual contributions that do not require the detailed solution s of a particular game. Second, there remains an unsatisfied need that differential games may meet. For situations where a single decision maker faces an impersonal environment, the system dynamics can be studied fruitfully with optimal control models.
There are analogous situations where the system dynamics is decided by the interactions of a few players. Differential games seem to be the natural tool. What economists wish to predict is not only the details about a single time profile, such as existence and stability of any long run configuration and the monotonicity and speed of convergence toward that limit, but also the findings from the sensitivity analysis: how such a configuration responds to parametric variations.
Chapter 24 Communication, correlated equilibria and incentive compatibility. Roger Myerson. In principle, anything that a player can do to communicate and coordinate with other players could be described by moves in an extensive-form game, so that planning these communication moves would become part of the player's strategy choice itself. Adding a communication system does not eliminate any of the equilibria of the original game because there are always equilibria of the communication game in which reports and messages are treated as having no meaning and hence are ignored by all players.
The revelation principle for strategic-form games asserted that any equilibrium of any communication system can be simulated by a communication system in which the only communication is from a central mediator to the players, without any communication from the players to the mediator.
The one-way nature of this communication is not surprising, because the players have no private information to tell the mediator about, within the structure of the strategic-form game. However, players in a Bayesian game may have private information about their types, and two-way communication would then allow the players' actions to depend on each other's types as well as on extraneous random variables, such as coin tosses. Thus, in Bayesian games with communication, there may be a need for players to talk as well as to listen in mediated communication systems.
Chapter 26 Moral hazard. Prajit K. Dutta Roy Radner. This chapter discusses moral hazard. The output of the partnership depends jointly on the actions of the partners and on the stochastic environment; each partner observes only the output and his or her own action but not the actions of the other partners or the environment. This engenders a free-rider problem. As in the case of principal—agent relationships, a partnership, too, may last many periods.
The chapter presents the principal—agent model formally and describes some salient features of optimal principal—agent contracts when the relationship lasts a single period. In a large class of cases, equilibrium in the one-period game is Pareto-inefficient. This is a well-known problem in providing risk-averse agent insurance while simultaneously giving the agent the incentives to take, from the principal's perspective, appropriate actions.
The chapter also discusses other properties of static contracts such as monotonicity of the agent's compensation in observed profits. Chapter 27 Search. Search theory has provided a simple and robust laboratory that economic theorists have used to examine a wide variety of questions about the acquisition of information. Early work on search modeled an individual's searching decisions and drew inferences about the value of information and the nature of frictional unemployment. More recent work, building on sequential-bargaining analysis, has focused on the interactions among searching agents and has deepened the understanding of the nature and meaning of competition.
The chapter discusses the classical search problem: the optimal search rule for an individual who can, for a fixed and constant cost, take a random sample from a distribution F of economic opportunities. The marriage of search theory and bargaining theory has produced some of the more interesting recent economic theory. This research has shown such diverse and important topics as the nature of the competitive mechanism and the possible impact of externalities and multiple equilibria on macroeconomic performance.
Chapter 28 Game theory and evolutionary biology. Peter Hammerstein Reinhard Selten. The subject matter of evolutionary game theory is the analysis of conflict and cooperation in animals and plants. Originally, game theory was developed as a theory of human strategic behavior based on an idealized picture of rational decision making. Evolutionary game theory does not rely on rationality assumptions but on the idea that the Darwinian process of natural selection drives organisms toward the optimization of reproductive success.
Most of evolutionary game theory focuses on those cases where stable equilibrium is reached. However, the dynamics of evolutionary processes in disequilibrium is also an active area of research. In principle, evolutionary game theory deals only with fully symmetric games.
Asymmetric conflicts are embedded in symmetric games where each player has the same chance to be on each side of the conflict. The mathematical definition of evolutionary stability refers to symmetric games only. Because asymmetric conflicts can be embedded in symmetric games, this is no obstacle for the treatment of asymmetric conflicts. Chapter 29 Game theory models of peace and war. This chapter discusses the game theory models of peace and war.
Game theory's relevance to peace and war was controversial from the start. The debate has continued up to the present day, but it has been conducted mostly in the abstract, with critics trying to prove a priori that game theory is inapplicable. Some aspects of international relations IR game theory discussed in the chapter are game analyses of specific international situations; the debate on realism and international cooperation; international negotiations; models of arms building, deterrence, and signaling resolve; the myth that game theory shaped nuclear-deterrence strategy; first-strike stability, and the outbreak of war, escalation; alliances; and arms-control verification.
Game-theoretical studies of verification are divided into two groups. The first involves decisions about allocating inspection resources or a quota of inspections limited by treaty. The second asks whether to cheat and whether to accuse in the face of ambiguous evidence.
The chapter also discusses military game theory. Chapter 31 Social choice. Herve Moulin. This chapter discusses social choice and aggregation of individual preferences into a social-welfare ordering. The axiom of independence of irrelevant alternatives IIA and Arrow's impossibility result are presented in the chapter. Two ways of overcoming the impossibility is proposed. One is to restrict the preferences to be single-peaked in which case majority voting yields a satisfactory aggregation, and the other is to require that the social-welfare relation be only acyclic: Nakamura's theorem sets narrow limits to the decisiveness of society's preferences.
The chapter describes the Gibbard—Satterthwaite impossibility result and its relation to Arrow's and presents the connection between the IIA axiom and strategyproofness on any restricted domain. The chapter focuses on voting in strong and Nash equilibrium along with the voting by veto example where the strong equilibrium outcomes are consistent with the sophisticated ones.
Implementation of arbitrary choice correspondences by strong and Nash equilibrium is discussed in the chapter. Implementability in Nash equilibrium is almost always characterized by the strong monotonicity property. Implementability in strong equilibrium, on the other hand, relies on the concept of effectivity functions.
Chapter 32 Power and stability in politics. This chapter discusses power and stability in politics and describes the applications of cooperative game theory to political science. The focus of the chapter is on the idea of power. The use of the Shapley and Banzhaf values for simple games to measure the power of political actors in voting situations, with a number of illustrative applications, is presented in the chapter. A voting situation can be modeled as a cooperative game in characteristic function form in which the value 1 is assigned to any coalition which can pass a bill and 0 to any coalition that cannot.
If politics is the shaping of power, political actors might act to increase their power, and the rational choice assumption that they do so might have some explanatory efficacy in political dynamics. The chapter describes three possible situations of this type. Chapter 33 Game theory and public economics. My personal view is that agent-based models offer the most viable framework for simultaneously incorporating the theoretical advances made over the past 30 years. But whatever framework we choose, the models used to guide public policy need to take into account simultaneously the theoretical advances and challenges highlighted below.
Quotes Topics: General The Sonnenschein-Mantel-Debreu results — You may never hear of them, even in grad school, but their implications are huge. The pitfalls of aggregation — There are many and the pit is deep.
Scott Moss: Game Theory: Limitations And An Alternative
Comparing equilibria vs. Comparative statics — One of the standard methods of policy analysis has feet of clay. Imperfect information — It changes everything. Uncertainty — As above, but more so. Incomplete markets — They routinely yield multiple equilibria. What kind of mathematics? Increasing returns — More than just production specifications.
Arthur, W. Auyang, S. Batten, D. Colander, D. Commons, J. Das, S. DeCanio, S. DeCanio displays a deep understanding of the complexities of economic theory and of the limitations of models built upon that body of theory. Anyone involved in climate policy or even general economic policy should read it and absorb its lessons.
Dopfer, K. Fisher, F. Forni, M. Fullbrook, E. Harcourt, G. Hartley, J. Hodgson, G. Ingrao, B. McGilvray, I. Keen, S. Keynes, J. Knight, F. Leijonhufvud, A. Lindert, P. List, F. Including the notes of the French translation by Henri Richelot. McCloskey, D. McMillan, J. Metcalfe, J. Minsky, H. Mirowski, P. Nelson, R. Potts, J. Schumpeter, J. Steedman, I. Tesfatsion, L. Velupillai, K.
Ackerman, F. Akerlof, G. Eatwell, J. Reprinted from Journal of Business, , Vol.www.hiphopenation.com/mu-plugins/dwi/does-he-like-me-christian.php
Buy Theory Of Conjectural Variations Series On Mathematical Economics And Game Theory Vol 2
Bowles, S. Blundell, R. Clower, R. Bliss, C. Conlisk, J. Debreu, G. Dillard, D. Dorman, P. Fehr, E. Felipe, J. Feiwel, G. Petri, F. Frey, B. Greenwald, B. Hahn, F. Harper, D. Kehoe, T. Kirman, A. Leombruni, R. Lee, F. Clower ed. Howitt, P. Lewis, A. Little, D. Mantel, R. McCauley, J.
Heertje, A. Northrop, F. Radner, R. Rizvi, S. Rosser, J. Saari, D. Scarf, H. Simon, H. Sonnenschein, H. Veblen, T. Wulwick, N. Rima, I. Watts, London, pp. Not one reader in a thousand of the Wall Street Journal has any grasp of the qualifications without which the theorem, as a theorem, is simply false. That would hardly matter if the necessary assumptions were self-evidently true or even genuinely plausible to any open-minded observer.
They are neither. Nor do even sophisticated economists have any real grasp of the robustness of the theorem: I do not know of any convincing story, either way, about whether an economy that differs from the abstract economy about as much as ours does comes even close to satisfying the conclusion of the Invisible Hand Theorem. Instead of the machine-like responses of agents to prices, the agents will find themselves engaged in a game.
One must conclude that one cannot invoke the classical theory of the invisible hand in dealing with economies in which agents have market power. The aim of policy is to assure that the economic prerequisites for sustaining the civil and civilized standards of an open liberal society exist. If amplified uncertainty, extremes of income distribution, and social inequality attenuate the economic underpinnings of democracy, then the market behavior that creates these conditions should be constrained.
If it is necessary to give up a bit of market efficiency, or a bit of aggregate income, in order to contain democracy-threatening uncertainty, then so be it. As I think more about complexity theory, I become more convinced that there is some sense in which we will never know how the economy operates. Most biological and social systems are too complicated to have complete sets of macrovariables. They can be described by some macrovariables but these variables are too sparse to constitute laws.
Even macroeconomics, which succeeds in defining many powerful macrovariables, falls short of providing satisfactory macroeconomic laws. What I mean by this is that my idea of understanding is having a model that captures what is going on. They also depend on the political system, they depend on the educational system, and they are interrelated with other social systems. And in consequence, economists should enlist the support of lawyers, sociologists, anthropologists, and others in our work in order to understand why transaction costs are what they actually are.
We should invite these other practitioners in these other fields into our realm to help us in understanding how the economic system actually operates. The firm and the market appear by name but they lack any substance. And so it is.
As these institutional arrangements determine to a large extent what is produced, what we have is a very incomplete theory. My guess is that the age of theorems may be passing and that of simulation is approaching. Of course there will always be logical matters to sort out, and our present expertise will not be totally obsolete. But the task which we set ourselves after the last war, to deduce all that was required from a number of axioms, has almost been completed, and while not worthless has only made a small contribution to our understanding.
This theorem is widely acknowledged in all the textbooks and yet this has done nothing to displace the notion that perfect competition is an ideal that somehow casts light on the admittedly imperfect competition all around us. Still modelling without transaction costs? We do not do well to devote ourselves to a detailed study of the world of zero transaction costs, like augurs divining the future by the minute inspection of the entrails of a goose.
Did neoclassical economic theory address the real questions? It is the last twitch of a dying method. It rescues rational choice by ignoring every one of the questions pressing for attention. I think to expose young impressionable minds to this scholastic exercise as though it said something about the real world, is a scandal. The most widely used textbooks use the old long-run and short-run cost curves to illustrate the theory of the firm.
I find that inexcusable. It is as if a biologist studied the circulation of the blood without the body. In fact the economic system is extremely complicated. What is wrong is the failure to look at the system as the object of study. The treatment of identification now is no more credible than in the early s but escapes challenge because it is so much more opaque. The Sonnenschein-Mantel-Debreu results.
This is a significant conclusion and brings the microfoundations project in GET [General Equilibrium Theory] to an end. Of course, if one does not want to look for regularities at the macro level, the SMD results pose no problem; but every theorist who wants to argue that a change in some price variable … affects a corresponding quantity aggregate in a definite direction, cannot base this argument on GET. Abu Turab Rizvi in Rizvi, S. They show that standard and restrictive assumptions on the preferences of individuals cannot guarantee stability.
Yet without this, the intrinsic interest of economic analysis based on the General Equilibrium model is extremely limited. Bourgine, P. The utility hypothesis tells us nothing about market demand unless it is augmented by additional requirements. Arrow, K. II pp. This illusion, or should I say rather, this hope, was destroyed once and for all, at least for the traditional model of exchange economies.
Microeconomic theories of imperfect competition
I was tempted to repress this insight and continue to find satisfaction in proving existence of equilibrium for more general models under still weaker assumptions. However, I did not succeed in repressing the newly gained insight because I believe that a theory of economic equilibrium is incomplete if the equilibrium is not well determined. Walras Law literally anything can be the excess demand of a well-behaved exchange economy. Consequently, all forms of chaotic behaviour can occur, but even a single locally stable equilibrium need not! Much more is possible.
With the same preferences and just by changing initial endowments, the price dynamics can jump from any specified kind of behaviour to any other kind. Cycles of any length, chaos, or anything else you can describe, will arise in a general equilibrium model for some set of consumer preferences and initial endowments.
Not only does general equilibrium fail to be reliably stable; its dynamics can be as bad as you want them to be. The immediately antecedent stage in model-construction, i. The behavioral assumptions underlying a particular mode of aggregation are, however, just as important as the behavioral relationships assumed to hold between the variables defined.
The first type of assumption is often left implicit and particular aggregative structures are thus left to develop into undisputed conventions while at the same time controversies rage over the second type of assumption. Representative agents? Such an idea is so familiar to physicists and biologists that it seems banal. Nevertheless it is still far from being generally accepted in economics. Aggregate capital? This is a technical result long ago proved by myself, Gorman, and others.
Nevertheless, the implications of that result do not always seem to have been fully realised. One of those implications, in particular, is that if one attempts to use aggregate capital as though it were a factor in a production function, there will be a paradox somewhere, something will go wrong. One cannot depend on any intuition that comes from considering aggregate relationships as production functions.
In fact, this is illegitimate and leads to false conclusions about macro-behaviour see e. Kirman, As Frank Hahn points out in this volume, the situation is far from being simple. There are feedbacks from aggregate variables to individual behaviour which cannot and should not be overlooked. Furthermore, the behaviour of an interactive system cannot be reduced to the behaviour of its average member.
Thus, the general equilibrium model in full generality is nothing more than an extreme case and to deduce macroeconomic relationships from it is an exercise which is doomed to failure. This has not discouraged macroeconomists from continuing to work in such terms. Put simply, they do not exist. It deserves to be more widely known … Jonathan Temple in Temple, J. Hayami, Y. This is particularly true when it comes to the labour market where setting the money wage is equivalent to setting the product wage.
While I could not resist the ease of perfect competition theorising, I think that I never took the results as applicable economics. All current textbooks say as much but then they immediately go on to say that the cloud-cuckoo-land of perfect competition is the benchmark against which economists may say something significant about real world competition … But how can an idealized state of perfection be a benchmark when we are never told how to measure the gap between it and real-world competition?
If we were to doubt this theory, then we would have no reason whatsoever to rely on CGE models. I am so displeased at the way undergraduate and even graduate economics is taught.