The Nature of Equilibrium in Macroeconomics: A Critique of Equilibrium Search Theory

14 Pages Posted: 18 Dec 2010

See all articles by Corrado Di Guilmi

Corrado Di Guilmi

Universita' Politecnica delle Marche, Ancona - Department of Economics

Hiroshi Yoshikawa

Rissho University

Date Written: 2008

Abstract

The standard Walrasian equilibrium theory requires that the marginal value product of production factor such as labor is equal across firms and industries. However, productivity dispersion is widely observed in the real economy. Search theory allegedly fills this gap by encompassing apparent disequilibrium phenomena in the neoclassical equilibrium framework. Taking up Lucas and Prescott (1974) as a primary example, we show that the neoclassical search theory cannot explain the observed pattern of productivity dispersion. Non-self-averaging, a concept little known to economists, plays the major role. Empirical observation suggests strongly the presence of disturbing forces which dominate equilibrating forces due to optimizing behavior of economic agents. We must seek a new concept of equilibrium different from the standard Walrasian equilibrium in macroeconomics.

Keywords: Equilibrium, search theory, productivity dispersion, power-law, non-self-averaging

JEL Classification: J64, E50, D50

Suggested Citation

Di Guilmi, Corrado and Yoshikawa, Hiroshi, The Nature of Equilibrium in Macroeconomics: A Critique of Equilibrium Search Theory (2008). Economics Discussion Paper No. 2008-37, Available at SSRN: https://ssrn.com/abstract=1726693 or http://dx.doi.org/10.2139/ssrn.1726693

Corrado Di Guilmi (Contact Author)

Universita' Politecnica delle Marche, Ancona - Department of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
+39 071 2207110 (Phone)
+39 071 2207102 (Fax)

Hiroshi Yoshikawa

Rissho University ( email )

4-2-16, Osaki, Shinagawa-ku
Tokyo 141-8802
Japan
+81334927529 (Phone)

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