DYNAMIC EQUILIBRIUM

DYNAMIC EQUILIBRIUM

(Updated Oct. 5, 2004)

Lonergan’s notion of dynamic equilibrium partly evolved from the General Equilibrium theory in Walras’ studies of 1898 that was later developed mathematically in the studies of Pareto in 1906. Later Schumpeter in 1954 critically analyzed GE in the context of his 1260-page book "History of Economic Analysis." Finally Lonergan, in a book editorially updated in 1999 as "Macroeconomic Dynamics: An Essay in Circulation Analysis", introduced into it a distinction, seemingly tiny, but with 228 pages of mathematical consequences.

What is this distinction? The terms used are "basic" (consumer goods) and "surplus" (producer goods) stages of an economy. . For non-mathematicians, the clarification can be helped by computerizing general equilibrium (CGE) as it is presently evolving.

Below are four excerpts relevant to the task. These are from or about (1) Walras, (2) Pareto, (3) Schumpeter, and (4) Lonergan.

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WALRAS

Léon Walras's theory should be familiar to every modern economist as his theory is essentially what is available to us in much of general equilibrium theory. Some historians and economists have disputed this claim - arguing instead that Walras's theory cannot really be considered without taking into account the social and applied economics laid out in his two other works (1896, 1898). However, as far as the Elements in isolation is concerned, modern G.E. seems to have adhered quite well to Walras's original vision - only elaborating upon various parts of it both in mathematical and theoretical terms, but the general "concept" remains the same. However, we should note that extensions into uncertainty and intertemporality can be considered substantial deviations from the original vision.

(From URL http://cepa.newschool.edu/het/profiles/walras.htm)

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PARETO (1848-1923)

Italian economist and sociologist, known for his theory on mass and elite interaction as well as for his application of mathematics to economic analysis. …

In his Manuale d'economia politica (1906), his most influential work, he further developed his theory of pure economics and his analysis of ophelimity (power to give satisfaction). He laid the foundation of modern welfare economics with his concept of the so-called Pareto optimum, stating that the optimum allocation of the resources of a society is not attained so long as it is possible to make at least one individual better off in his own estimation while keeping others as well off as before in their own estimation. He also introduced "curves of indifference," analytical instruments that did not become popular until the 1930s.

Believing that there were problems that economics could not solve, Pareto turned to sociology, writing what he considered his greatest work, Trattato di sociologia generale (1916; Mind and Society), in which he inquired into the nature and bases of individual and social action. Persons of superior ability, he argued, actively seek to confirm and aggrandize their social position. Thus social classes are formed. In an effort to rise into the elite of the upper strata, privileged members of the lower-class groups continually strive to use their abilities and thus improve them; the opposite tendency obtains among the elite. As a result, the best-equipped persons from the lower class rise to challenge the position of the upper-class elite. There thus occurs a "circulation of elites." Because of his theory of the superiority of the elite, Pareto sometimes has been associated with fascism.

(From URL http://www.britannica.com/eb/article?eu=59910)

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SCHUMPETER

Schumpeter was known to be an admirer of Walras’ thoughts on GE. Still, he saw room for further improvement. On page 90 of MD-ECA, his statement in "History of Economic Analysis" is quoted: "The Walrasian system of simultaneous equations … brought in a host of new problems of a specifically logical or mathematical nature that are more delicate and go much deeper than Walras or anyone else had ever realized … They are much too difficult and especially too technical for us,"

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LONERGAN

That observation of Schumpeter was the challenge that faced Lonergan from 1930 to 1983, and later faced the three co-editors of MD-ECA for the 1999 update of Lonergan’s 53-year study. On page 91-92, he says: "While we agree with Schumpeter that Walras’ system implicitly includes the aggregates commonly considered in macroanalysis, it can hardly be credited with distinctions between surplus and basic expenditures, receipts, outlay, income, and much less with an account of their various dynamic relations. But until such distinctions are drawn and their dynamic significance understood, the aggregates and relations cannot be contained implicitly in any system."

Lonergan's MD-ECA is fundamentally an exercise in amending the business cycle of booms and slumps and transforming this into a "pure cycle," i.e. without slumps or negative accelerations. This is an innovative insight called "dynamic equilibrium."

| Community-centered | Indeterminacy | Emergent Probability & MD |