Discussion Paper

No. 2008-37 | December 10, 2008
The Nature of Equilibrium in Macroeconomics: A Critique of Equilibrium Search Theory

Abstract

The standard Walrasian equilibrium theory requires that the marginal value product of production factor such as labor is equal across firms and industries. However, productivity dispersion is widely observed in the real economy. Search theory allegedly fills this gap by encompassing apparent disequilibrium phenomena in the neoclassical equilibrium framework. Taking up Lucas and Prescott (1974) as a primary example, we show that the neoclassical search theory cannot explain the observed pattern of productivity dispersion. Non-self-averaging, a concept little known to economists, plays the major role. Empirical observation suggests strongly the presence of disturbing forces which dominate equilibrating forces due to optimizing behavior of economic agents. We must seek a new concept of equilibrium different from the standard Walrasian equilibrium in macroeconomics.

Paper submitted to the special issue “Reconstructing Macroeconomics

JEL Classification

D50 E50 J64

Cite As

Masanao Aoki and Hiroshi Yoshikawa (2008). The Nature of Equilibrium in Macroeconomics: A Critique of Equilibrium Search Theory. Economics Discussion Papers, No 2008-37, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2008-37

Assessment



Comments and Questions


Anonymous - Referee Report
February 09, 2009 - 09:05

see attached file


Anonymous - Referee Report
February 11, 2009 - 09:16

see attached file