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Who said markets have to clear?

Steve Randy Waldman has a good post which is nevertheless completely wrong.   I’m normally a fan of interfluidity, so I feel like I have to respond.

The basic argument, coming mostly from macro- and international economics types is that micro-economic involves just as many silly unrealistic assumptions as macro-economics… unless we take our lessons from macro!

This is an argument that I’ve seen come up several times online now, but so far every example people want to make are the simplifications that non-micro specialists make about microeconomics, not the actual study of micro as it is done by micro-specialists.

Waldman’s post is a great example of this.   He goes on at length to explain that consumer surplus and welfare are not the same things.   Who knew!   Of course, I forgot to mention consumer surplus specifically in that post (I knew I forgot a few measures of efficiency, but so it goes).    This is supposed to be his case against market clearing.   Hmmm.   See the problem with that is that “market clearing” is not an assumption of microeconomics.   Oh sure, there are microeconomic models in which market clearing is assumed.   In fact there’s a name for the class of models assuming market clearing: general equilibrium (all markets clear at endogenous prices).   That’s just the microeconomic model used in the micro-foundations of macroeconomics.   It’s not the fault of the microeconomists that you macro-types are using a model you don’t like.

He then goes on to rant about the problems with using willingness-to-pay as a measure of surplus.   To which I ask: who’s using willingness to pay?   In an intermediate-level microeconomics class, your prof should have told you that willingness to pay is not well defined unless the utility function is quasi-linear (a very special functional form!).   As an aside, the demand curve also requires quasi-linearity.

Don’t get me wrong… there really are understudied problems in micro.   “Dynamic Efficiency” which Waldman mentions in passing happens to be one–there really isn’t any neutral measure of dynamic efficiency: how to trade production today for production tomorrow is inherently bound up in the problem of choice, and we know that the time-separable constant discount factor utility which we use for the purpose doesn’t actually work (it can’t explain lifetime savings data, for example).   It’s just that  no one knows what to do about that, but this is an active area of microeconomic research.   Weirdly, though, this isn’t the issue that is animating Waldman.

So we in micro have our problems, but these are never the problems we’re criticized for.   Instead Waldman (and others) criticize us for the dumb simplifying assumptions macroeconomists make and then blame us for the resulting jumble.

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