"Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful." - George E.P. Box
Markets fail. Assumptions are violated. The trick to understanding or appreciating the results we talk about in economics is to understand and appreciate which assumptions are more likely to fail, how badly those assumptions fail, and how relevant those failures are to the validity of the results of the analysis.
This recent post tears a one of the most highly regarded theorems in economics to shreds, in a sense. Basically, it's saying that the idea that a (perfectly) competitive equilibrium exists is hooey because:
1. markets aren't perfectly competitive;
2. information (about the present and future) is not perfect or even symmetric ("perfect information" here is not actually taken to mean "everyone knows everything", more like "there is uncertainty, but everyone knows the underlying probability distribution");
3. markets for the same good in different places or different times aren't necessarily separable;
4. markets aren't complete (especially futures markets).
How problematic any of these assumptions might be depends in part on the nature of a particular market. Which assumptions seem most egregiously violated TO YOU?
Ever since we started taking introductory level economics classes at St. Ambrose University we were taught the concept of perfect competition or pure competition. Perfect competition is a concept in which markets have no participants large enough to have the market power to set the price of a homogeneous product.By being taught this we were led on to believe there was such thing as a perfectly competitive market. I truly don't believe it is possible to have a perfectly competitive market when you start to look at the characteristics of a perfectly competitive market. In specific looking the fact that there are a large number of buyers and sellers and the fact that the products are homogeneous (qualities and characteristics of good or service don't vary between suppliers). I believe its impossible to have every supplier producing the same exact good in the same exact way. Then again why would they even want to do such a thing? Suppliers want to set themselves apart from other suppliers so you buy there good over there competitors. So in the end I think you can come close to a perfectly competitive market but can't be 100% perfect.
ReplyDeleteThis article is very negative concern. We are live in global not autarky or without trade. There is nothing about perfect result by economist assumption or theory, but we depend on their assumption to prevent something big digester. It is like we depend on whether cast by a meteorologist no matter what their forecast is right or not because it is better than nothing.
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