I got my degree in economics but, I did very poorly in intro to econ classes. The way intro macro and micro are taught is to compare two variables at a time, for instance you might look at supply and demand, you might compare unemployment with inflation. In order to make the concepts easier to understand the student is told to hold all else constant. Or maybe this just makes the math work at, I don’t know the expense of reality. I just couldn’t do it.
Outside forces unbalance everything, and in different ways. It is not really possible to just add binaries, one on top of the other and get any kind of a true picture of how the economy really works. Let’s take equilibrium theory for example, it adds prices to supply and demand and adds multiple markets, but in order to predict prices it has to start with an untenable assumption, that perfect supply and demand strive towards an equilibrium price.
Here is the definition of equilibrium theory from the Economist’s catalog of economic terms: “When SUPPLY and DEMAND are in balance. At the equilibrium PRICE, the quantity that buyers are willing to buy exactly matches the quantity that sellers are willing to sell. So everybody is satisfied, unlike when there is DISEQUILIBRIUM. In CLASSICAL ECONOMICS, it is assumed that markets always tend towards equilibrium and return to it in the event that something causes a temporary disequilibrium. GENERAL EQUILIBRIUM is when supply and demand are balanced simultaneously in all the markets in an economy.”
What, what, balance? When has a successful business ever seen or relied on balance? How does that even work? Have you ever ridden a see saw? I loved those when I was a kid. It was all about the up and down, the faster the better. No wonder businesses think economic tools have nothing to offer them. Honestly, any individual business doesn’t want balance either, it wants the ups. It’s not about increasing price and cutting cost, it’s about widening the margin. What kind of economic analysis would that entail? Certainly, not holding all else constant. As my Mainer husband says-“You can’t get there from here.”
- The Aggregate Supply – Aggregate Demand Model in the Econ Blogosphere (economistsview.typepad.com)