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The Futility of Utility: how market dynamics marginalize Adam Smith

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  • McCauley, Joseph L.

Abstract

General Equilibrium Theory in econometrics is based on the vague notion of utility. Prices, dynamics, and market equilibria are supposed to be derived from utility. Utility is sometimes treated like a potential, other times like a Lagrangian. Illegal assumptions of integrability of actions and dynamics are usually made. Economists usually assume that price is the gradient of utility in equilibrium, but I observe instead that price as the gradient of utility is an integrability condition for the Hamiltonian dynamics of an optimization problem. I discuss both deterministic and statistical descriptions of the dynamics of excess demand and observe that Adam Smith's stabilizing hand is not to be found either in deterministic or stochastic dynamical models of markets nor in the observed motions of asset prices. Evidence for stability of prices of assets in free markets has not been found.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2163.

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Date of creation: Nov 1999
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Handle: RePEc:pra:mprapa:2163

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Keywords: Utility; general equilibrium; nonintegrability; control dynamics; conservation laws; chaos; instability; supply-demand curves; nonequilibrium dynamics;

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