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HERAKLES
POLEMARCHAKIS INTERVIEW WITH WEBPONDO
Webpondo: We will start with the heavy questions
and at the end start getting a little bit more
personal. The first few questions are related
to the paradigm of General Equilibrium. Carlo
Benetti has argued that, despite its unrealism,
the General Equilibrium Model (GEM) has become
the point of reference of efficiency and market
success, necessary for the understanding of the
failures of realities that generate inefficient
outcomes. According to Benetti, this normative
method of neoclassical economics has eliminated
any theoretical competition, since the other approaches
to economic analysis, like Keynesian rigidities,
turn out to be particular cases that can be described
as market failures. What would you have to say
about Benetti's argument?
Herakles Polemarchakis: I agree; I just
don't find it objectionable. I don't know if Benetti
means this as a simple statement of facts or whether
he considers the situation of the science as sad
and objectionable. I don't want to go as far as
saying that general equilibrium (and by general
equilibrium I mean the way it is practiced) is
value-free: this would be an absurd statement.
Nevertheless, it is a flexible model and it is
correct that Keynesian arguments, among others,
can and should indeed be addressed in a general
equilibrium framework. Now, whether there are
issues that general equilibrium cannot encompass
or address, there may be. I'm not sure what they
are, but an example or a discussion of, say, departures
from laissez faire, that general equilibrium is
incapable of handling would be very useful and
very welcome I would have expected Benetti to
put more emphasis on the absence of dynamics as
a weakness in general equilibrium, but he does
not in this quote.
W.P: There are two criticisms by Benetti that
we want to highlight. According to him, it is
hard to understand the actual consensus on the
general equilibrium model as a good, abstract
representation of market success of the price
system and there is no theory of the price formation
in the model. According to this argument, the
general equilibrium model is not a good normative
point of reference, invalidating all the results
that have arisen from it through the normative
method that we described in the previous question.
Do you agree in general equilibrium's lack of
a theory of prices and its implications?
H.P: I don't understand the statement that
general equilibrium does not have a theory of
price, but if by that Benetti means a theory of
price formation, this is true: general equilibrium
is not a theory of price formation. Another valid
point that Benetti makes, if I understand him
correctly, is to ask whether it is a fact that
market economies perform better than other forms
of economic organizations. It is important to
realize that no empirical study makes such a point.
It is casual empiricism that, at the present,
market economies seem to perform better than alternatives,
but this does not make it a general fact, a law
of economics. This is an issue that deserves serious
empirical study, not by simple, casual observation.
Furthermore, indeed Benetti is correct in saying
that the theory of general equilibrium is a way
of understanding, of looking at an economy: the
claim that general equilibrium proves that market
economies work better, is incorrect.
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