The big misunderstanding at the core of economics
'Equilibrium is merely one of many conceivable states of that world; there’s no particular reason to believe that the economy would naturally tend toward it'
The economist Kenneth Arrow, who died last month at age 95, was a model academic - brilliant, creative, precise, unfailingly modest. If only his fellow economists would stop misrepresenting his work. In the 1950s, Arrow and others proved a theorem that, many economists believe, put a rigorous mathematical foundation beneath Adam Smith's idea of the invisible hand. The theorem shows - in a highly abstract model - that producers and consumers can match their desires perfectly, given a particular set of prices. In this rarified atmosphere of “general equilibrium,” economic activity might take place efficiently without any central coordination, simply as a result of people pursuing their self-interest. It’s an insight that economists have used to argue for de-unionization, globalization and financial deregulation, all in the name of removing various frictions or distortions that prevent markets from achieving the elusive equilibrium.
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