Looking back at our lives, it is easy to point out the pivotal choices that determine where we are today. These decision-pebbles create ripples in the outcome-ponds of our lives. Often, we harp on the seemingly mundane decision that caused a traumatic event. “Had I just picked up the phone, I could have prevented X from happening!” or “Gosh, had I just chosen to go my usual way home, I wouldn’t have totaled my car!” It seems as if that one decision put our whole lives off balance.
Those unremarkable decisions with remarkable implications illustrate what Leon Walras was getting at when he attempted to explain this type of “butterfly effect” in the economy through mathematics. Not only did Walras try to explain it, but he also tried to solve the uncertainty of choices. He wanted to predict the ripples. Alas, don’t we all…
When we decide to take a different route home for the hell of it, we fall out of equilibrium. We are in disequilibrium. This disequilibrium in the “driving home market” creates ripples causing disequilibrium in other markets, say the “getting home on time to watch Jeopardy market.” Which, then may affect the “sleeping soundly market” because you ended up shoveling a TV dinner into your face later than usual. You get the idea.
A Quick Refresher
Whenever someone mentions economics, one of the first things that pops in our minds is a graph with a big X on it, depicting the famous supply and demand curves. The upward curve is supply and the downward curve represents demand. It is often used to describe a single market. For example, if the price of gas goes up for whatever reason, the supply and demand graph shows that people demand less of it. At the same time, suppliers want to supply more gas at the higher price. But, with less gas demanded, all that extra gas is sitting around not being purchased, i.e. there is a surplus of gas. This means the gas market is in disequilibrium. In order to get it back into equilibrium, the price must go down to the point where supply and demand meet. Easy peasy.
But, diving a little deeper, we see that the gas market does not operate in a vacuum. The gas market affects automobiles, rubber, steel, groceries, pretty much any market you can imagine. Thus, the disequilibrium in one market creates a bunch of disequilibriums in other markets.
Conversely, what Leon Walras attempted to prove is that when one market is in equilibrium, all the other markets must be in equilibrium. Walras was no crazy person; he did not think that markets actually reach equilibrium. (Shit happens all the time, amirite?)
Adam Smith, the alleged father of economics, is famous for his “invisible hand” metaphor, implicitly claiming that markets, with people acting in their own interests, head toward equilibrium on their own, “as if guided by an invisible hand.” Walras simply sought to prove this through mathematical equations.
The idea that markets are interconnected is not new. Smith was well aware of the relationships between goods and services. The money earned from selling the slab of meat can go toward purchasing some bread, which then can go toward a pint of beer at the local brew pub, and so on.
But attempting to explain this ecology of markets with mathematics was novel for the late 1800s. Walras was criticized, but his methods have become mainstream. Modern economics is obsessed with using a system of equations and other complicated mathematical and statistical techniques to explain reality. However, the theory only works in a world that is near perfect, where people are magically endowed with money, or where products are all the same. Imagine waking up to a wad of hundred-dollar bills in a world where there is no difference between a Mercedes Benz and a Toyota Corolla—sounds like heaven.
Though it was a good try, solving the economic problem using mathematics is still a relatively fruitless endeavor. It comes up empty, not simply because we are in disequilibrium, but because the idea an equilibrium actually exists is a fundamental dispute with Walras’ theory. The world is constantly changing, improving in some ways and un-improving in others.
All we can do is continue making the best decisions we can and try not to replay past decisions. Equilibrium ain’t so fun anyway.