Disequilibrium macroeconomics

Disequilibrium macroeconomics is a tradition of research centered on the role ofdisequilibrium in economics. This approach is also
known as non-Walrasian theory, equilibrium with rationing, the non-market clearing approach, and non-ttonnement
theory.[1] Early work in the area was done by Don Patinkin, Robert W. Clower, and Axel Leijonhufvud. Their work was formalized
into general disequilibrium models, which were very influential in the 1970s. American economists had mostly abandoned these
models by the late 1970s, but French economists continued work in the tradition and developed
fixprice models.

Contents
1 Macroeconomic disequilibria
2 Disequilibrium and unemployment
3 Disequilibrium extensions of ArrowDebreu general equilibrium theory
4 See also
5 Notes
6 References

Macroeconomic disequilibria
In the neoclassical synthesis, equilibrium models were the rule. In these models, rigid wages modeled unemployment at equilibria.
These models were challenged by Don Patinkin and later disequilibrium theorists. Patinkin argued that unemployment resulted from
disequilibrium.[2] Patinkin, Robert W. Clower, and Axel Leijonhufvud focused on the role of disequilibrium.[3] Clower and
[4]
Leijonhufvud argued that disequilibrium formed afundamental part of Keynes's theory and deserved greater attention.

Robert Barro and Herschel Grossman formulated general disequilibrium models,[5] in which individual markets were locked into
prices before there was a general equilibrium. These markets produced "false prices" resulting in disequilibrium.[6] Soon after the
work of Barro and Grossman, disequilibrium models fell out of favor in the United States[7][8][9] and Barro abandoned Keynesianism
and adopted new classical, market-clearing hypotheses.[10] However, leading American economists continued work with
disequilibrium models, for example Franklin M. Fisher at MIT, Richard E. Quandt at Princeton University, and John Roberts at
Stanford University.[11][12][13][14]

Disequilibrium and unemployment

While disequilibrium economics had only a supporting role in the US, it had major role in European economics, and indeed a leading
role in French-speaking Europe.[16] In France, Jean-Pascal Bnassy (1975) and Yves Youns (1975) studied macroeconomic models
with fixed prices. Disequilibrium economics received greater research as mass unemployment returned to Western Europe in the
1970s.[17][18][19] Disequilibrium economics also influenced European policy discussions, particularly in France and
Belgium.[18][20][21] European economists such as Edmond Malinvaud and Jacques Drze expanded on the disequilibrium tradition
[22]
and worked to explain price rigidity instead of simply assuming it.

Malinvaud used disequilibrium analysis to develop a theory of unemployment.[23] He argued that disequilibrium in the labor and
, leading to unemployment.[24] Malinvaud adopted a fixprice framework and
goods markets could lead to rationing of goods and labor
argued that pricing would be rigid in modern, industrial prices compared to the relatively flexible pricing systems of raw goods that
dominate agricultural economies.[24] In Malinvaud's framework, prices are fixed and only quantities adjust.[25] Malinvaud considers
an equilibrium state in classical and Keynesian unemployment as most likely. He pays less attention to the case of repressed inflation
[26]
and considers underconsumption/unemploymenta theoretical curiosity.[26] Work in
the neoclassical tradition is confined as a special case of Malinvaud's typology, the
Walrasian equilibrium. In Malinvaud's theory, reaching the Walrasian equilibrium
case is almost impossible to achieve given the nature of industrial pricing.[27]
Malinvaud's work provided different policy prescriptions depending on the state of
the economy.[26] Given Keynesian unemployment, fiscal policy could shift both the
labor and goods curves upwards leading to higher wages and prices. With this shift,
the Walrasian equilibrium would be closer to the actual economic equilibrium. On
the other hand, fiscal policy with an economy in the classical unemployment would
only make matters worse. A policy leading to higher prices and lower wages would Diagram based on Malinvaud's
be recommended instead.[28] typology of unemployment shows
curves for equilibrium in the goods
"Disequilibrium macroeconometrics" was developed by Drze's, Henri Sneessens and labor markets given wage and
(1981) and Jean-Paul Lambert (1988).[29] A joint paper by Drze and Sneessens price levels. Walrasian equilibrium is
inspired Drze and Richard Layard to lead the European Unemployment Program, achieved when both markets are at
equilibrium. According to Malinvaud
which estimated a common disequilibrium model in ten countries.[30] The results of
the economy is usually in a state of
that successful effort were to inspire policy recommendations in Europe for several either Keynesian unemployment,
years.[20][21] with excess supply of goods and
labor, or classical unemployment,
with excess supply of labor and
Disequilibrium extensions of Arrow excess demand for goods.[15]
Debreu general equilibrium theory
In Belgium, Jacques Drze defined equilibria with price rigidities and quantity constraints and studied their properties, extending the
ArrowDebreu model of general equilibrium theoryin mathematical economics. Introduced in his 1975 paper, a "Drze equilibrium"
occurs when supply (demand) is constrained only when prices are downward (upward) rigid, whereas a preselected commodity (e.g.
money) is never rationed. Existence is proved for arbitrary bounds on prices. A joint paper with Pierre Dehez established the
existence of Drze equilibria with no rationing of the demand side. Stanford's John Roberts studied supply-constrained equilibria at
competitive prices;[31] similar results were obtained by Jean-Jacques Herings at Tilburg (1987, 1996).[32] Roberts and Hering proved
the existence of a continuum of Drze equilibria. Then Drze (113) proved existence of equilibria with arbitrarily severe rationing of
supply. Next, in a joint paper with Herings and others (132), the generic existence of a continuum of Pareto-ranked supply-
constrained equilibria was established for a standard economy with some fixed prices. The multiplicity of equilibria thus formalises a
trade-off between inflation and unemployment, comparable to a Phillips curve. Drze viewed his approach to macroeconomics as
examining the macroeconomic consequences of ArrowDebreu general equilibrium theory with rationing, an approach
complementing the often-announced program of providingmicrofoundations for macroeconomics.[18]

See also
Cash-in-advance constraint
Involuntary unemployment
Disequilibrium (economics)
Credit rationing
Labour shortage
Effective demand

Notes
1. Backhouse & Boianovsky 2012, p. 8.
2. Beaud & Dostaler 1997, p. 122.
3. Beaud & Dostaler 1997, pp. 121123.
 4. Tsoulfidis 2010, p. 288.
5. Barro, Robert J.; Grossman, Herschel I. (1971). "A General Disequilibrium Model of Income and Employment".
American Economic Review. 61 (1): 8293.
6. De Vroey 2002, p. 383.
7. Hoover 2003, p. 419.
8. Mankiw 1990.
9. Snowdon & Vane 2005, p. 72.
10. Barro 1979.
11. F. M. Fisher. Disequilibrium Foundations of Equilibrium Economics.New York: Cambridge University Press.
Econometric Society Monographs. 1983.
12. Richard E. Quandt wrote several books on disequilibrium economics:

(with Stephen M. Goldfeld), Nonlinear Methods in Econometrics, North Holland Publishing Co., (1972).
The Econometrics of Disequilibrium, Blackwell Publishing Co., Oxford (1988).
13. Quandt, Richard E.; Rosen, Harvey S. (1988). The conflict between equilibrium and disequilibrium theories: The
case of the U.S. labor market. Kalamazoo, Michigan: Upjohn Institute.
14. Luc Bauwens, Michel Lubrano, Jean-Franois Richard. 1999.Bayesian Inference in Dynamic Econometric Models
.
Oxford University Press.
15. Tsoulfidis 2010, p. 294.
16. Quandt & Rosen (1988, p. 5) wrote

The debate between protagonists of the equilibrium paradigm and the disequilibrium paradigm has a
strong ideological flavor. Proponents of one view frequently think that the alternative view is worthless or
downright silly. A few years ago, one of us gave several seminars on the question of how one would test
the null hypothesis that [potential data is generated] from an equilibrium as opposed to a disequilibrium
specification. On some occasions (mostly in the U.S.), five minutes into the seminar it would be
interrupted with the remark, 'What you are trying to do is silly, because everybody knows that prices
always clear markets and therefore there is nothing to test.' At other times (mostly in Europe) the
interruption took the form, 'What you are trying to do is silly, because everybody knows that prices never
clear markets and therefore there is nothing to test.'

17. Jacques H. Drze. 1987. "Underemployment Equilibria: From Theory to Econometrics and Policy" [First Congress of
the European Economic Association, Presidential Address]European Economic Review, 31: 934. Reprinted in
Drze 1993: Underemployment Equilibria: Essays in Theory, Econometrics and Policy, Cambridge University Press,
Cambridge, 1991.
18. "From uncertainty to macroeconomics and back: an interview with Jacques Drze", Pierre Dehez and Omar
Licandro. Macroeconomic Dynamics, 9, 2005, 429461.
19. The rise of European unemployment prompted several books byEdmond Malinvaud:

"Theory of Unemployment Reconsidered", 1977.

Malinvaud and Fitoussi, editors, Unemployment in W
estern Countries.
"Profitability and Unemployment", 1980.
"Thorie macroconomique", 2 volumes, 1981-2.
"Mass Unemployment", 1984
20. *Drze, Jacques H.; Malinvaud, Edmond. 1994. 'Growth and employment: The scope for a European initiative',
European Economic Review38, 34: 489504.

Drze, Jacques, E. Malinvaud, P. De Grauwe, L. Gevers, A. Italianer, O. Lefebvre, M. Marchand, H. Sneesens,

A. Steinherr, Paul Champsaur, J.-M. Charpin, J.-P. Fitoussi & G. Laroque (1994) "Growthand employment: the
scope for a European initiative".European Economy, Reports and Studies 1, 75106.
21. Unemployment: Macroeconomic Performance and the Labour Market
, Richard Layard, S. Nickell and R. Jackman)
Oxford University Press, 2nd ed., 2005.
22. Beaud & Dostaler 1997, p. 123.
23. Tsoulfidis 2010, p. 293.
24. Tsoulfidis, p. 293.
25. Tsoulfidis, p. 294.
26. Tsoulfidis, p. 295.
27. Tsoulfidis 2010, p. 295.
28. Tsoulfidis, p. 296.

29. Sneessens, Henri B. 1981.Theory and Estimation of Macroeconomic Rationing Models

. Springer-Verlag Lecture
Notes in Economics and Mathematical Systems, Volume 191.
Lambert, Jean-Paul. 1988.Disequilibrium Macroeconomic Models: Theory and Estimation of Rationing Models
Using Business Survey Data. Cambridge UP.
30. Jacques H. Drze, Charles R. Bean, JP Lambert. 1990.Europe's Unemployment Problem. MIT Press. This book
has chapter-versions of the following refereed articles:

Henri R. Sneessens and Jacques H. Drze. 1986. "A Discussion of Belgian unemployment, combining traditional
concepts and disequilibrium econometrics."Economica 53: S89S119. [Supplement: Charles Bean,Richard
Layard, and Stephen Nickell, eds. 1986.The Rise in Unemployment. Blackwell]
Jacques H. Drze and Charles Bean. 1990. "European unemployment: Lessons from a multicountry econometric
study." Scandinavian Journal of EconomicsVol 92, No. 2: 135165 [Bertil Holmlund andGarl-Gustaf Lfgren,
eds. Unemployment and Wage Determination in Europe. Blackwell. 333. In Drze 1993.]
31. Roberts, J. (1987). "An equilibrium model with involuntary unemployment at flexible, competitive prices and wages".
American Economic Review. 77: 85674.

32. Herings, J. J. (1996), Static and Dynamic Aspects of General Disequilibrium Theory
, Kluwer.

References
Backhouse, Roger; Boianovsky, Mauro (2012). Transforming modern macroeconomics : exploring disequilibrium
microfoundations, 19562003. New York: Cambridge University Press.ISBN 978-1-107-02319-2.
Barro, R. J. (1979). "Second Thoughts on Keynesian Economics".The American Economic Review. 69 (2): 5459.
JSTOR 1801616.
Beaud, Michel; Dostaler, Gilles (1997). Economic Thought since Keynes. New York: Routledge. ISBN 978-0-415-
16454-2.
De Vroey, Michel (2002). "Involuntary unemployment in Keynesian economics". In Snowdon, Brian;ane,V Howard.
An Encyclopedia of Macroeconomics. Northampton, Massachusetts: Edward Elgar Publishing. pp. 381385.
ISBN 978-1-84542-180-9.
Hoover, Kevin D. (2003). "A History of Postwar Monetary Economics and Macroeconomics". In Samuels, W arren J.;
Biddle, Jeff E.; Davis, John B. A Companion to the History of Economic Thought
. Malden, Massachusetts: Blackwell
Publishing. pp. 411427.ISBN 978-0-631-22573-7.
Mankiw, N. Gregory (December 1990). "A Quick Refresher Course in Macroeconomics".Journal of Economic
Literature. 28 (4): 16451660. JSTOR 2727441. doi:10.3386/w3256.
Snowdon, Brian; Vane, Howard (2005). Modern Macroeconomics. Cheltenham, UK: Edward Elgar. ISBN 978-1-
84542-208-0.
Tsoulfidis, Lefteris (2010).Competing schools of economic thought. London: Springer. ISBN 978-3-540-92692-4.

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