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The nature of equilibrium in macroeconomics: A critique of equilibrium search theory

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  • Aoki, Masanao
  • Yoshikawa, Hiroshi

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.

Suggested Citation

  • Aoki, Masanao & Yoshikawa, Hiroshi, 2009. "The nature of equilibrium in macroeconomics: A critique of equilibrium search theory," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-9.
    • Handle: RePEc:zbw:ifweej:200937
    DOI: 10.5018/economics-ejournal.ja.2009-37
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    References listed on IDEAS

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    1. Hideaki Aoyama & Hiroshi Yoshikawa & Hiroshi Iyetomi & Yoshi Fujiwara, 2008. "Productivity Dispersion: Facts, Theory, and Implications," Papers 0805.2792, arXiv.org.
    2. Masanao Aoki & Hiroshi Yoshikawa, 2012. "Non-self-averaging in macroeconomic models: a criticism of modern micro-founded macroeconomics," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 7(1), pages 1-22, May.
    3. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
    4. Aoki, Masanao, 2008. "Thermodynamic limits of macroeconomic or financial models: One- and two-parameter Poisson-Dirichlet models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 66-84, January.
    5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    6. Masanao Aoki, 2000. "Cluster Size Distribution of Economics Agents of Many Types in Market," UCLA Economics Online Papers 102, UCLA Department of Economics.
    7. Aoki, Masanao, 2002. "Open models of share markets with two dominant types of participants," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 199-216, October.
    8. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    9. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
    10. Dale T. Mortensen & Christopher A. Pissarides, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 397-415.
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    Keywords

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    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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