Teleology and Market Equilibrium: Manifesto for a General Theory of Prices

Fixing the Economists Article of the Week

by Philip Pilkington

Neoclassicals are a slippery bunch indeed. The moment you think that you’ve pointed out a flaw in their theoretical armor they turn around and say that the theory can accommodate the criticism. Soon after, you see them once again making the same mistake you were pointing to. This leaves you mystified: are they liars or are they just stupid?

I’ve come to think that a great deal of this is down to neoclassicals not actually understanding what their theories mean. Much of the theoretical framework is mathematical and geometric but in order to be relevant for the discussion of economics such mathematics or geometry must be interpreted in an economic way. This is where most neoclassicals fail. Hypnotised as they are with the tidiness of the mathematics they never really think through what it means.

A very good example of this is the typical supply and demand curve presentation.

At first glance this appears easy to interpret. The point at which the supply and demand curves intersect is the point at which price is set together with the quantity bought. Great. Right? Well no.

Actually there’s two ways of interpreting this graph. One way is what I call the “teleological” interpretation. The teleological interpretation is essentially that the curves are set in stone and that the market will always tend in this direction. The outcome then is pre-determined and thus the graph contains ex-ante predictive power: it can tell you what will happen in a market.

The other interpretation is the non-teleological interpretation. In this interpretation the supply and demand curves are not set in stone. We can play with them, manipulate them and give the all sorts of shapes. For example, we might look at the housing market in the run-up to the 2008 recession. Here is a case where demand increased as prices rose because people thought that these prices would rise forever. In such a case the above graph would have to be altered so that the demand curve was upward-sloping and basically overlapped with the supply curve.

This interpretation appears to prove that the neoclassical presentation can, for example, be used to understand speculative market dynamics. But really this is not the case; or at least not in any meaningful, substantive sense. Once the curves in the supply and demand graph are allowed to be arbitrary we can set them anywhere we want and they cannot tell us anything about the future. I.e. they no longer have an ex-ante predictive power and are instead a rather pointless formal way to present already known ex-post empirical observations (e.g. “we now know that the housing market was being driven by speculation so here is a nice little supply and demand graph to illustrate this after the fact”).

Here is my theory of neoclassical chicanery in light of this observation: neoclassicals actually hold to the teleological view of the curves almost all the time. Then when they are confronted with facts that do not fit the teleological view they fall back on the empty non-teleological view. This allows them to make predictions about how markets will react based on the teleological view and then when these predictions fail they simply say that they were never really adhering to this teleological view at all and instead they try and paint the supply and demand graphs as merely a way to present an empirical observation. (What the point of doing so is then left vague).

Such trickery is not, however, the work of knaves. Rather it is the work of fools who do not understand their own theories coherently because they cannot properly interpret them. The sophistry that emerges is not the cynical manipulation of the argument but rather a defensive posture adopted — largely unconsciously — to prevent the interlocutor from exposing the incompetence of the neoclassical in question.

The only way to solve this problem is to overthrow the presentation itself. The supply and demand graph presentation contains within it a hint of teleology that fools those who try to use it. Thus, the only way to ensure that people stop getting it wrong is to exorcise from the theory of prices any teleology. It is this that I am currently working on and which I should finish in the coming months.

The maneuver is the same as what Keynes did in 1936. Keynes argued that the neoclassical view of the macroeconomy was merely a special case — what Joan Robinson would later call a “golden age” — and he instead provided a framework for a more general theory. For Keynesians — real Keynesians, not the fakers you see all over the place — the neoclassical theory of output and employment is a highly unlikely special case, while there is no real “general case” but rather an unending series of particular cases. So, what we must do is apply a general framework to particular cases as they arise in order to interpret them in their singularity and individuality.

My goal is to lay out a general theory of prices in the same way Keynes laid out a general theory of employment and output. This will provide a framework in which the neoclassical case of downward-sloping demand curves and upward-sloping supply curves is a highly unlikely special case. With such a framework we can then approach particular cases as they arise in a properly empirical manner. In doing this I hope to be able to introduce the Keynesian theory to pricing; and with that, I think, the neoclassical doctrines will be utterly destroyed and a full, coherent alternative will be available. Fingers crossed!