Glötzl, Erhard (2015): Why and How to overcome General Equilibrium Theory.

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Abstract
For more than 100 years economists have tried to describe economics in analogy to physics, more precisely to classical Newtonian mechanics. The development of the Neoclassical General Equilibrium Theory has to be understood as the result of these efforts. But there are many reasons why General Equilibrium Theory is inadequate: 1. No true dynamics. 2. The assumption of the existence of utility functions and the possibility to aggregate them to one “Master” utility function. 3. The impossibility to describe situations as in “Prisoners Dilemma”, where individual optimization does not lead to a collective optimum. This paper aims at overcoming these problems. It illustrates how not only equilibria of economic systems, but also the general dynamics of these systems can be described in close analogy to classical mechanics.
To this end, this paper makes the case for an approach based on the concept of constrained dynamics, analyzing the economy from the perspective of “economic forces” and “economic power” based on the concept of physical forces and the reciprocal value of mass. Realizing that accounting identities constitute constraints in the economy, the concept of constrained dynamics, which is part of the standard models of classical mechanics, can be applied to economics. Therefore it is reasonable to denote such models as Newtonian Constraint Dynamic Models (NCDModels).
Such a framework allows understanding both Keynesian and neoclassical models as special cases of NCDModels in which the power relationships with respect to certain variables are onesided. As mixed power relationships occur more frequently in reality than purely onesided power constellations, NCDmodels are better suited to describe the economy than standard Keynesian or Neoclassic models.
A NCDmodel can be understood as “Continuous Time”, “Stock Flow Consistent”, “Agent Based Model”, where the behavior of the agents is described with a general differential equation for every agent. In the special case where the differential equations can be described with utility functions, the behavior of every agent can be understood as an individual optimization strategy. He thus seeks to maximize his utility. However, while the core assumption of neoclassical models is that due to the “invisible hand” such egoistic individual behavior leads to an optimal result for all agents, reality is often defined by “Prisoners Dilemma” situations, in which individual optimization leads to the worst outcome for all. One advantage of NCDmodels over standard models is that they are able to describe also such situations, where an individual optimization strategy does not lead to an optimum result for all agents. This will be illustrated in a simple example.
In conclusion, the big merit and effort of Newton was, to formalize the right terms (physical force, inertial mass, change of velocity) and to set them into the right relation. Analogously the appropriate terms of economics are force, economic power and change of flow variables. NCDModels allow formalizing them and setting them into the right relation to each other.
Item Type:  MPRA Paper 

Original Title:  Why and How to overcome General Equilibrium Theory 
English Title:  Why and How to overcome General Equilibrium Theory 
Language:  English 
Keywords:  Newtonian Constrained Dynamics, Disequilibrium Dynamics, Economics of Power, Closure, Prisoners Dilemma, Economics and Physics 
Subjects:  B  History of Economic Thought, Methodology, and Heterodox Approaches > B2  History of Economic Thought since 1925 > B22  Macroeconomics B  History of Economic Thought, Methodology, and Heterodox Approaches > B4  Economic Methodology > B41  Economic Methodology C  Mathematical and Quantitative Methods > C0  General > C02  Mathematical Methods C  Mathematical and Quantitative Methods > C6  Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C60  General C  Mathematical and Quantitative Methods > C7  Game Theory and Bargaining Theory > C72  Noncooperative Games E  Macroeconomics and Monetary Economics > E1  General Aggregative Models > E10  General 
Item ID:  66265 
Depositing User:  Erhard Glötzl 
Date Deposited:  25. Aug 2015 15:21 
Last Modified:  25. Aug 2015 15:31 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/66265 