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The Futility of Utility: how market dynamics marginalize Adam Smith


  • McCauley, Joseph L.


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.

Suggested Citation

  • McCauley, Joseph L., 1999. "The Futility of Utility: how market dynamics marginalize Adam Smith," MPRA Paper 2163, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:2163

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    References listed on IDEAS

    1. Hadley, G. & Kemp, M. C., 1971. "Variational Methods in Economics," Elsevier Monographs, Elsevier, edition 1, number 9780720436013 edited by Bliss, C. J..
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    More about this item


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

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics


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