Science and Economics: The Case of Uncertainty & Disequilibrium

1. Neoclassical Economics & the “General Equilibrium” System

1.1 Supply and Demand in a Static “Perfect” Equilibrium

The act of selling or buying goods always takes place at a given moment or instant in time, at which a price is agreed and paid. The general economic system is considered by standard economics to be based on a “General Equilibrium” which represents the various transactions taking place in the overall economic system. Prices agreed for transactions represent the equilibrium point between supply and demand. Price, in this sense, is extremely important because it functions as the yardstick for measuring the real value of goods transacted (the exchange value) and is the measurement criterion for either the notion of sup­ply (added value) in classical economics or the subjective, demand -based notion of value in neoclassical economics.

Price thus represents a situation in which equilibrium is self-evident: equilibrium where supply is by definition equal to demand. The reference to time and equilibrium in this context is equivalent to that which dominated Newtonian science in the 18th and 19th centuries in Europe: the equilibrium between supply and demand is clearly analogous to the Newtonian equilibrium of our solar system. The planets, the sun and the moons of the various planets find themselves in a situation of “instant” equilibrium, which can be reproduced by, for example, photography. Reality is then contained, in its entirety, in an instant moment of time from which considerations of real time or time duration are excluded. This is in fact the application of “Cartesianism”, which posits that reality can be discovered by segmenting or isolating each part of any event or phenomenon in discrete (separate) units of time and space. As noted by Clark, this notion of instant time is the complement of the notion of universal time which pertains to the realm of metaphysics or religion.1 The historical value of equilibrium theory in economics based on a monetarized price system relates to the fact that one of the essential features of the Industrial Revolution has been the monetarization of the economy as a tool for solving the logistic problems of exploiting ever higher levels of technology. However, giving the notion of price equilibrium uni­versal significance and a kind of definitive scientific validity (ba­sed on the definition of science before Einstein) is much more a matter of belief or even ideology than a truly scientific approach.

The notion of equilibrium is not really a concept or an explanation, but rather a tautology (“something that is right because it is right”), which has been given the value or status of an axiom (those basic self-evident truths used in mathematics for developing subsequent logical deductions). Understanding this notion of equilibrium, where supply is equal to demand, is essential because it explains why economic theory has from the beginning always tended to be one-sided. The notion of economic equili­brium, as the key preoccupation of classical economists in reducing scarcity or of their neoclassical successors in defining the behaviour of consumers, has engendered such attitudes as: ” If supply and demand are of necessity equal, once we have clearly understood one part of the equation, we have also, by definition, defined the other side” .It is tantamount to a contradiction in terms. This simplification has proved to be a tricky one, for it has caused classical economists, for 150 years, to fail to understand that demand had to be expanded to cope with deflationary economic crises, and that it has, more recently, prevented neoclassical economists, concerned essentially with demand mechanisms, from getting to grips with the problems of rigidities of supply.

The notion of a general equilibrium at each instant in time is also bound up with the 19th century’s quest for certainty. In a positivist oriented scientific culture, certainty was equated with scientific evidence. ” If we have not yet achieved perfect equilibrium, or if our grasp of a given situation still falls short of total certainty, then, says the ideology, it is merely a matter of time.” Sooner or later perfect certainty will be ours.

The theory of perfect, instant (fundamentally timeless) equili­brium (which is in reality “certain” only because of a tautology) has thus become the premise for a system of thought and analysis which views the world as a piece of “contingent” imperfection. But imperfections and disequilibria are not “contingent”, they are the permanent hallmarks of development and dynamic reality.

Over the last decades, the imperfections of general equilibrium have been closely scrutinized by a large number of economists. The notions of incomplete and of asymmetric information have entered the jargon of economic theory and analysis, in recognition of the many obstacles to achieving a perfect equilibrium.2 But these notions are still used as if a perfect equilibrium could ever be achieved. The utopia of the scientists and positivists is still there to suggest that we can increase the level of information on market functioning to such a point that perfect equilibrium will one day be achieved. This reasoning simply shows that the notions of time of the pre-Einstein era, the idea of isolating instant moments of time outside reality, are still with us. Once we enter real time, uncertainty and disequilibrium become the reference criteria of reality. Introducing the notion of real time into the economics of supply and demand (in modern terms, service based production and consumption) is a radical alternative to the view of the economic process as being based on timeless (instant) equilibrium. Accepting time duration, i.e. real time, implies that any decision to produce is inevitably taken in a situation of greater or lesser uncertainty as regards the moment in time when the products or services will be available to the market. In this dynamic view of the economic process, it is recognized that any decision to produce is taken extant of the traditional moment of any economic equilibrium, and that any real price (or cost) definition is always ex-post taking into account all of the costs for distribution, utilisation, repair, maintenance, and recycling.

The moment in time when the price is fixed in the market is only a part, a subsystem, of the wider economic system. In the succession of decisions over time, from research to production, and then to distribution, and from the point of sale further on to utilization based activities down to the disposal and recycling of waste, the market function of fixing a price is an important event in the process, but only one element in the greater economic system. And in this greater economic system, uncertainty is not an instance of “imperfection”, but a given fact containing incompressible risk components. Any economic activity or endeavour is based on some unknown and uncertain factors or possibilities, simply because its objective and utilisation lie in the future.

Once we have accepted the dimension of real time, we can attempt to make any future event as probable as possible, but we cannot control it with absolute certainty because we cannot control future time, except by eliminating life. In nature as well as in economic systems, many competitive and often redundant produc­tion processes are continuously emerging, only some of which will ever reach the point of sale and/or the moment of utilization. Successful modern technologies are only a small part of all technologies, many of which have failed in spite of the money invested in them. One successful product on the market provides a source of compensation in a strategy based on many initiatives, a great number of which will fail. It is at this point that the role of demand, distinct in time from production, acquires a dimension and an importance which makes it an essential part of the econo­mic system, or indeed of any living system.

1.2 Demand as a Selection Mechanism

In economic as in biological reality, an enormous number of uncertain acts of production are constantly occurring before being selected by demand (through the individuals and/or through the environment). There is an enormous difference between a process whose purpose is equilibrium (of supply and demand), and one in which demand has a selection, not an equilibrium function.

A similar attitude is adopted by Karl Popper in his refutation of induction and defence of empiricism.

There is no induction: we never argue from facts to theories, unless by way of refutation or “falsification”. This view of science can be selective, as, for example, with Darwin’s theory. By contrast, theories of method which assert that we proceed by induction stressing verification (rather than falsification) are typically Lamarckian: they stress instruction by the environment, rather than selection. 3

Current neo classical demand-based economics views demand as giving instructions to the economy on how to do things and in so doing, provides evidence of the extent to which a fundamentally deterministic philosophy still permeates social sciences, economics in particular. By contrast, even if a process of selection can provide some hints and information as to its future operation, such hints will in practice always remain a hypothesis which can only be verified empirically later, by the facts. At the same time, an area of uncertainty will always persist because of the fundamental impossibility of forecasting a fully predictable environment if real time, evolution and dynamics are accepted as the attributes of real life.

It must be stressed and repeated that we are now in a dynamic situation in which a static, equilibrium theory of econo­mics cannot help to solve our major problems or simply provide a reasonable valid view of the economic situation. Our hypothesis is that economic equilibrium theories are fundamentally inefficient in their theoretical basis. But this evidence also precludes the possibility of simply returning to the older economic thinking that stresses the importance of supply. Time dimension gives a much broader meaning to the production function than it had in classical economics, and it also underlines the essential complementary role of demand. “Disequilibrium” theory requires a proper in-depth understanding of both demand and supply, and at different levels.

Whereas priority in economic theories could in the past swing from supply to demand, considered individually and separately as workable instruments, we now not only need to reassess the importance of the supply-side, but also the fact that the selection function of demand is an absolute necessity, a complement to the production function. By analogy with the quotation from Karl Popper, we could say that an economic system is obliged to produce on the basis of hypothesis (and may be even of dreams or of any other process stimulating action and initiative). This is the first essential step. But the demand process must also be as efficient as possible in its selective function (and must include criteria on how best to use material and human resources, and how best to reflect societal values).

All this of course does not mean that demand is totally unpredictable when production decisions are taken, but even the best market research on the modern economy always involve an incompressible level of approximation. We must accept that no certainty exists, but at the same time any approximation is better than no approximation at all. We have to live with an inevitable degree of uncertainty, which in itself provides the margin for improvement, modification, new ideas and progress.

In spite of appearing difficult at times, the selection function of demand is nonetheless essential. Production without control by selection can proliferate to the point of destroying the entire system. Cancer is a biological form of uncontrolled self-production with inefficient selection. Demand is efficient because of its ability to select. Deterministic philosophy which aspires to perfectly defined demand in advance, to pre-regulated production, is unnatural, can only be inefficient, and becomes a source of destruction of material and human resources. Ambitions can only survive through a path of “imperfections” in a way, imperfections are the great road to learning and improvement.

Over time, demand must determine whether in reality available productions are useful. Sometimes, after initial feverish success (as with computer games for example), it may fade out very quickly. In other cases, the fact that this selection mechanism exists at all guarantees the striving for a better quality of production. Mozart produced his operas among hundreds of other contemporary composers. He became the essential reference and demand has selected him and every time we listen to his music on the radio or in concert, the selection mechanism is still active.

In the new Service Economy, where utilization value implies taking into account real time, demand fulfils an essential role complementary to production. It is no longer a matter of concentrating on either the supply or the demand side, as within the framework of general equilibrium theory, but on the economy as a whole. Accepting uncertainty means that we are coming closer to reality.

Orio Giarini, Director, The Risk Institute, Geneva, Switzerland.
1. Ronald Clark, Einstein: sa vie et son epoque (Paris: Stock, 1980).
2. Kenneth Arrow, “New Developments in field Theory of Risk Allocation,” The Geneva Papers on Risk and Insurance 3, no. 8 (1978).
3. Karl Popper, Unended Quest (Glasgow: Fontana Collins, 1977), 86.

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