Edited by Dimitri B. Papadimitriou and L. Randall Wray
Chapter 8: Innovation and Equilibrium?
Martin Shubik Introduction This chapter is written in fond memory of Hyman Minsky whose writings on the possibilities for instability in a modern economy with many financial institutions have had considerable influence on the way economists view the strengths and weaknesses of our increasingly finance oriented economies (see Minsky 1986). Hy had a considerable skepticism about the uses and abuses of mathematical economic theory, especially general equilibrium theory’s emphasis on equilibrium. His skepticism has been shared by many macroeconomists of both left and right persuasion. Starting as far back as Schumpeter in the early part of the twentieth century a provocative picture of the capitalist innovating economy was painted. Although the proponents of Schumpeter’s approach have grown considerably over the last twenty to thirty years, primarily in Europe (see, for example, Nelson and Winter 1982 and Dosi et al. 1988), so, since the late 1950s, have the general equilibrium theorists. The thesis presented here is that the reconciliation of equilibrium microeconomics and disequilibrium financial economics and macroeconomics is both feasible and depends far less on correcting errors or misperceptions in either than on understanding the highly different questions being answered by each; and identifying the gaps in the models utilized by both that need to be filled if a reconciliation is to take place. Keynes described and dealt with disequilibrium. Jim Tobin regarded the overall macroeconomic system as having a general equilibrium structure but with many changing parameters that needed to be reestimated frequently. Lejonhufvud, Davidson and many others have...
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