Failure of Demand Supply
This page is now of historical interest only -- it contains submission history of a paper which attacks the S&D model, a fundamental pillar of modern economics. As usual, orthodoxy does its best to suppress such attacks.
The main page on Supply & Demand materials is linked below. To access it, you must join the AZ-Research-Group AFTER joining the group, you will be able access Links to Literature on Failure of Supply and Demand
SUBMISSION HISTORY of paper GIVEN BELOW -- ONLY OF HISTORICAL INTEREST
CONFLICT Between GE and PE S&D Models
Below is the sad submission history of paper entitled: Conflict Between General Equilibrium and the Marshallian Cross. {Click on name to download most recent version of the paper -- it is currently under revision 22 March 2014 -- STILL working on UPDATE -- see LINK for current version drafts.} There are several spinoffs of this idea which would be useful to writeup. One would be based on the following abstract:
S&D models work on the standard analytical principle that a complex situation should be broken down into separate simpler parts. Putting together the results from the separate analysis will lead to better understanding of the complex outcome. HOWEVER, this strategy fails because supply and demand are always deeply inter-related and cannot be analyzed in isolation. It follows that conventional S&D analysis is radically misleading. NOW follow textbook illustrations of S&D and EXPLAIN why they are systematically misleading.
Another is based on advanced analyses by Frederic Lee and co-authors. These present realistic alternatives based on radically different models to the conventional S&D analysis.
See also Efficiency Wage Theories, which discusses failure of supply and demand in the labor market.
Subject: Submission to MECA completed successfully
Date: Tue, 8 Jan 2013 11:11:24 -0500
From: "Aurora Maltinti" <maltinti@ec.unipi.it>
To: "Ismail Saglam" <ismail.saglam@etu.edu.tr>
Dear Dr. Saglam:
This email is to confirm that you have successfully completed your submission, titled
The Conflict Between General Equilibrium and the Marshallian Cross
to Metroeconomica.
Latest version submitted to Cambridge Economics Journal.
below is the rejection decision of cje.
the referees, or at least one of them, seem to have a position against the main idea in the paper.
however, some of the critiques by the referees are helpful.
i will try to make some minor revisions next week, before a possible submission elsewhere.
best regards,
ismail
-------- Original Message --------
Subject: Cambridge Journal of Economics - Decision on Manuscript ID CJE-2012-244
Date: Wed, 19 Dec 2012 09:12:57 -0500 (EST)
From: cje@econ.cam.ac.uk
19-Dec-2012
Dear Professor Saglam,
I am writing with regard to manuscript # CJE-2012-244 entitled "The Conflict Between General Equilibrium and the Marshallian Cross", which you submitted to the Cambridge Journal of Economics.
Unfortunately the Editors have decided that they are unable to offer publication of the manuscript in Cambridge Journal of Economics. I am attaching comments from the referees to the end of this message. Please note that while the Editors may or may not agree with all referee comments they are included here for your information. All papers are subject to a careful assessment procedure and the Editors do regard this decision as final.
Thank you for considering the Cambridge Journal of Economics for the publication of your research. I hope the outcome of this specific submission will not discourage you from submitting to the journal in the future.
With best wishes,
Yours sincerely,
Jacqui Lagrue
Managing Editor
Cambridge Journal of Economics
Referees' Comments to Author:
Referee: 1
Comments to the Author
I have the following comments.
1. When you use Marshallian does you means Marshall or the partial equilibrium coming after Marshall--Paigou, Robinson, Hicks, etc.? For example Marshall used the term free competition which is not the same as perfect competition; and his explanation of the consumer demand curve does not include an income effect whereas the modern version, following Hicks, does have an income effect. Sraffa's 1925/26 attack deals with a version of partical equilibrium that falls between Marshall and the partial equilibrium that emerged by the mid-1930s. Your paper seems to me is not a critique of Marshall per se but of the partial equilibrium that emerged after Marshall. It is clear that they are closely connected so that a critique of one spills over into a critique of the other. So in light that some Marshall purists will read the paper, it might be worth to spend a little time on being very clear what is being critique and its relationship to Marshall's own work.
2. Opocher and Steedman (2008) is not listed in the references.
3. You need to summarize the Vives (1987, 1999), Miyake (2006) and Hayashi (2009) results and put it in a footnote.
4. On p. 9--at the beginning of the model, you state that each consumer has a utility function U(W,R) - WR; but you dod not say that the utility function is the same for consumers and that it is homothetic; but on the next page you intorduce the representative consumer (and producer). Should you not make clear the nature of the utility function which is being introduced--and this also goes for the production function being introduced. Although it might seems a bit redundant, but I think it might make for a bit more clarity.
5. p. 15 Your third conjuncture is interesting, but since all Marshallian frameworks are situated in a circular flow diagram (which is found in every textbook), it is not clear to me theoretically that it is appropriate to separate the producer from the consumer. However, the imploication of all partial equilibrium analysis is that they are separate and different. Perhaps you might want to expand on this point a little bit. In any case, you mention that you examined several levels of separation--you might want to summarize your results. The reader would view your claim with skepticism otherwise.
6. p. 16 I found the second paragraph a bit unclear--especially the last sentence.
7. Lee (2011) should be Lee (2012)--it is still forthcoming.
Referee: 2
Comments to the Author
The objective of this paper is to reinforce and extend elements of Sraffa’s well-known critique of the Marshallian partial equilibrium framework of the 1920s. It is argued that Sraffa’s critique had demonstrated that supply and demand analysis can only be an exceptional special case, and price determination in typical markets cannot be analysed via partial equilibrium analysis. More specifically, it is concluded that Marshallian supply curves and general equilibrium supply curves are ‘incompatible under perfect competition’. Moreover, studies are indentified which question the extent to which a Marshallian demand function is well behaved and where the partial equilibrium analysis is applicable, in light of the required set of commodities and utility functions. These issues are considered further in a two-good production economy where individuals who face both production and consumption decisions have demand schedules that are dependent on supply schedules. This study identifies only a very restrictive economic domain that will ensure the coherence of the partial equilibrium analysis. The general conclusion reached is that Marshallian supply and demand is to a significant extent in conflict with general equilibrium, and because of logical contradictions, these conflicts cannot be resolved for a majority of restrictions on economic environments.
The original criticisms of the Marshallian analysis raised by Sraffa and others have yet to be satisfactorily resolved, as is demonstrated in the useful survey of the textbook treatment provided in the paper. However, the extent to which these issues have been further clarified in this paper is questionable. Moreover, the paper fails to adequately consider the intended role of the partial method in economics, as perceived initially by Marshall. It is unclear that the partial method should be rejected simply because this useful abstraction cannot be strictly reconciled with the functional forms found in general equilibrium analysis. Given the serious logical difficulties associated with general equilibrium analysis, it is not clear that such as reconciliation is warranted. Further elaboration of these aspects of the paper is listed in the points below.
• It is difficult to see how the very rudimentary 2 commodity model presented in the paper progresses the critique of partial equilibrium analysis significantly beyond what is already known and summarised in the paper. The properties of the simple model are also incompletely or unclearly specified. For example, on the demand side of this ‘economy’, it is difficult to envisage the nature of preferences; is it the case that the model’s complete symmetry in rice and wheat that there is an implicit assumption that rice and wheat are perfect substitutes?
• The relevance of the ‘positive result’ derived from the rudimentary rice-wheat economy needs to be established ; i.e. ‘Heuristically, we can argue that joint production joins the two industries into one, and solves the problem of Sraffa by eliminating the possibility of shifting factors of production from one industry to the other.’ Is this a meaningful solution to ‘Sraffa’s problem?’ In what sense can this result be generalised to pricing theory?
• Further, if real world economies were as rudimentary as the one presented in the paper, there would be no reason to use the partial method. This ignores the essential importance of the partial method which only really comes into its own in a many commodity world where general equilibrium becomes too complex to say anything meaningful. This is precisely what is stated, but not fully considered, by the following statement in the paper:
‘The complexity of general equilibrium, where everything depends on everything else, does not help us in understanding price formation’.
This point was readily understood by both Sraffa and Marshall. General equilibrium theorising had been considered by Sraffa (1926) as a potential remedy for the conceptual difficulties that were being confronted in the Marshallian cost controversies of the 1920s, specifically because of the inability of the ‘particular equilibrium’ method to specify the interrelationships among the production costs of various industries whenever non-proportional costs and external economies existed. It was an approach ultimately rejected by Sraffa at the time on the grounds that the complexity of this ‘well known conception’ prevented it from bearing fruit ‘at least in the present state of our knowledge, which does not permit of even much simpler schemata being applied to the study of real conditions’ (Sraffa 1926: 541). Likewise, Marshall had elected not to pursue further the flickering of ‘general equilibrium’ tucked away in the mathematical notes (xiv and xxi) in successive editions of the Principles because the requisite theoretical requirements conflicted with the study of ‘real conditions’. Marshall plainly rejected the notion that the properties of a complex economic system corresponded to the sum of the properties of its parts.
• As is well known, general equilibrium analysis developed subsequent to Marshall, has been characterised by fundamental logical inconsistencies, ranging from an inability to represent departures from perfect competition and the existence of scale economies in economically meaningful functional forms, through to the implications arising from the SMD theorem. The internal contradictions within general equilibrium analysis arise from the restrictive assumptions and functional forms required to allow the analysis to be formulated. These difficulties would appear to more damaging than are the limitations associated with the abstractions required when the partial equilibrium method is used.
• The historical introduction to the paper is seriously incomplete, leading to a rather simplistic view of the nature of the issues that were being debated in the 1920s and beyond. These controversies were concerned with the inability to reconcile perfectly competitive equilibrium with the existence of returns to scale. Sraffa demonstrated that the methods that had been used by Pigou in particular could not resolve this issue. However, Marshall was not trying to reconcile increasing returns with perfect competition; he explicitly distanced the analysis from conditions that resemble perfect competition. Marshall sought to reconcile an equilibrium based theory of relative prices constructed with techniques borrowed from mechanics, with explanations of economic growth and development which was recognised as being continuous in time and evolutionary in nature. These difficulties arise in the context of either partial or general analysis, as was highlighted in Allyn Young’s famous 1928 Economic journal paper, and earlier by writers such as Schumpeter and Knight. It has been Pigou who had abandoned Marshall’s theory, well before Sraffa’s call for the abandonment of what he incorrectly labelled ‘Marshall’s theory’.
• The points raised in footnote 2 could have been developed further; an implication is that the complications arising from departures from perfect competition and the existence of discretionary pricing behaviour cannot be incorporated into general equilibrium analysis. Instead partial analysis is required. Awareness of the importance of u shaped cost curves to get over the product exhaustion problem could also have been noted. On page 6, it is remarked ‘Although this controversy has never been settled’ – talking about the capital controversies; there is a big difference between not being settled and being ignored! Nor can it be argued that those at Cambridge England were ‘Sraffian (or neo-Ricardian)’.
• Discussion of the nature of price changes in the final paragraph on p.13 is very unclear
• The sources of the ‘conjectures’ listed in Section 4 should be fully referenced.
• There are some typographical (etc) errors that should be corrected.
p. 1 line 8: place “,” after “...in Economic Journal”
p. 2 line 4, delete “in” after “structures within...”
p. 3 note 1, third line, add “,” after “...and Robert Triffin”
p. 6, second paragraph, end of line 2, change to “England got involved in the 1950s ...”
p. 7 second paragraph, first line, add “the” after “... general ignorance of...”
p. 7 note 2, line 3, add “the” after “... analysis of perfect competition during”
WORKING PAPER NO. 1219 BY ISMAIL SAGLAM AND ASAD ZAMAN TITLED "" IS
PUBLISHED ON OUR WEBSITE.
There is a conflict in the mechanism for price determination used in a
Marshallian partial equilibrium supply and demand framework and the
Walrasian general equilibrium framework. It is generally thought that
partial equilibrium is a simplified approximation to the complexities of
the general model. The goal of this paper is to show that there is a
strong conflict between the two models - intuitions and heuristics
suggested by partial equilibrium are contradicted by extensions to the
general equilibrium case. We review the literature on the conflict and
also provide a very simple model where partial equilibrium analysis
fails completely. Several intuitively plausible remedies fail to restore
partial equilibrium results. We show that Marshallian analysis can be
made to work only under rather stringent conditions requiring joint
production with low fixed costs and decreasing returns resulting in
identical production proportions by all producers.
All publications are accessible through ERF website
(http://erf.ku.edu.tr [6]).
Latest Versions is June-28-2012 Saglam-Zaman. Under revision for resubmission to AJES / Frederic Lee.
There are many ways to show the failures of the standard economic theory of how prices are determined by equilibriating demand and supply.
Many additional references supplied by Ismail, need to incorporate before revise and resubmit
---------------------------------------------------------------------
Article 1- Sraffa, 1925:
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The critical part of the paper is at the very end: Part V
The author explains if or when increasing and decreasing costs are
compatible with an equilibirum of free competition.
There are critical passages one can cite:
For example: The last sentence at the end of page 39:
"That is to say (1) the supply curve must be independent, both of the
corresponding demand curve,
and also of supply curves of all the other commodities; ..."
---------------------------------------------------------------------
Article 2- Pigou, 1927:
---------------------------------------------------------------------
Studies the laws of diminshing and increasing costs.
In parts 7,8 and 9, the paper also discusses the relevant parts of
Sraffa (1925).
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Article 3- Robertson, Sraffa and Shove, 1930:
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Contains presentations in a symposium on Marshallian Economic
Analysis. There are critiques to Article 1, as well.
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Article 4- Lee, 1981:
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Summarizes the history of the Oxford challenge to Marshallian
supply and demand analysis.
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Article 5- Maneshi, 1986:
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Summarizes and discusses Sraffa (1925) and Sraffa (1926,
The Economic Journal version of 1925 article).
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Article 6- Panico, 1991:
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Discusses Sraffa (1925) and reinterprets and defends it against the
criticisms (especially those of Paul Samuelson).
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Article 7- Samuelson, 1991:
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Contains some critiques on Sraffa (1925) and on the relevant
literature (e.g. Panico, 1991).
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Article 8- Ozanne, 1996:
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Contains the empirical relevance of the Sraffian critique of
neoclassical production economics. Using UK agricultural data, the
paper shows that neoclassical distinction between inputs and output
may be misleading.
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Article 9- Aslanbeigui and Naples, 1997:
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A discussion on the cost controvery about the return to scale and
costs between 1926-1942.
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Article 10- Freni, 2001:
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Discusses and reinterprets Sraffa's 1925 and 1926 papers.
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Article 11- Opocher, 2003:
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A discussion on Sraffa's critique of partial equilibrium.
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Article 12- Rosselli, 2005:
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Discusses the critiques of Sraffa (1925, 1926) to Marshallian
approach.
OTHER RELEVANT ARTICLES:
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Article 13- De Vroey, 1999:
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Compares/Contrasts the Marshallian and Walrasian approaches.
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Article 14- Lee and Keen, 2004
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Involved in our reference list but is not cited in the paper.
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Article 15- Steedman, 1988
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Involved in our reference list but is not cited in the paper.
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Article 16- De Vroey, 2007:
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An extension of De Vroey, 1999: Compares Marshallian and Walrasian
Theory.
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Article 17- Collander, 1995:
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A discussion on Marshallian general equilibrium analysis.
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Article 18- Kriesler, 2007:
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A short discussion on Marshallian partial equilibrium analysis.
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Article 19- Miyake, 2006:
---------------------------------------------------------------------
Shows a new economic domain where the Marshallian partial
equilibrium analysis is applicable.
---------------------------------------------------------------------
Article 20- Hayashi, 2009:
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A paper you sent to me.
Efficiency Wage Theories show that changes in wages result in unobservable changes in efficiency of work, and therefore cannot be used to equilibriate demand and supply.
My paper on the Conflict Between General Equilibrium and the Marshallian Cross makes a fundamental theoretical objection. Because the paper argues that the most basic tool used by economists is wrong. The most recent version of the paper is: az-sep-2010.pdf
This is attached below -- see bottom of page.
Card's paper showing that increasing minimum wage does not lead to increased unemployment is linked [here].
Duncan Foley has written on the Flaws in Fundamental Welfare Theorems which is also relevant and interesting.
Submission History: Aug 31, 2009
Response by JET: (Christian Hellwig) This is well-known !!!
The fact that the single-market, partial equilibrium framework relies on restrictive assumptions that are not consistent with general equilibrium reasoning is well known. In particular, its foundations, as you note, keep prices in other markets constant, and abstract from wealth effects of prices that result when producers and consumers are the same individuals. It is important to note these underlying assumptions, but since the subject is well understood, this ought to be part of any good textbook discussion of the partial equilibrium model, but is not material for a journal article in a leading theory journal.
Response by Economic Theory: Sept. 19, 2009
Debraj Ray: This is well-known !!!
The issues that you raise are, in my opinion, valid but well appreciated. The
Marshallian device is pure simplification that can never be valid in any gen-
eral equilibrium model. Perhaps the best use of it is for a particular market
in which the vast majority of consumers are not producers of the product in
that market, so that one can separate income changes from price changes.
That such an approach is at best a simplification is well-understood.
Now co-authored with Ismail Saglam [ismail.saglam@etu.edu.tr]
Economics
The Open-Access, Open-Assessment E-Journal, Sep 17, 2010
[Note contradiction well-known result and conceptually flawed]
could not be accepted for publication as discussion paper in Economics
because a conceptual flaw underlies the argument made. In deriving
demands, income must be held fixed. Then, given this demand, it must be
established whether an internally consistent equilibrium configuration can
exist
Journal of Economic Methodology:21 Sept, 2010
Conceptual Flaw in Supply and Demand is not "Methodology" !!
Thank you for sending your manuscript, RJEC-2010-09-0043, entitled "The
Conflict Between General Equilibrium and the Marshallian Cross," to the
Journal of Economic Methodology. However, on editorial review, we have
determined that the subject matter of your paper does not fit the profile
of the journal. Accordingly we cannot consider it for publication and have
withdrawn it from the submission process. Thank you nonetheless for
considering JEM as a possible outlet for your research.
Review of Political Economy: Submitted 2 Oct, 2010
No response; sending withdrawal email
Dear Professor Gary Mongiovi (Editor, RPE);
I am writing regarding my article submitted on October 2, 2010 - co-authored with Asad Zaman and entitled “The Conflict Between General Equilibrium and the Marshallian Cross” - to Review of Political Economy.
Since my submission, I have sent two messages, one in May and the other in the last month, requesting information as to the status of the submitted article. Sadly, I have not received any response from you. Given the situation and the considerable length of time since the initial submission of the paper, my co-author (to whom this message is cc'ed) and I have decided to withdraw our paper from Review of Political Economy as of September 16, 2011.
Sincerely,
Ismail Saglam
Slight revision has been prepared and uploaded to:
i have just deposited the article on munich repec at the address:
http://mpra.ub.uni-muenchen.de/33256/1/MPRA_paper_33256.pdf
25-Oct-2011
Dear Prof. Zaman:
A manuscript titled The Conflict Between General Equilibrium and the Marshallian Cross (Oct-2011-0156) has been submitted by Prof. Asad Zaman to The American Journal of Economics and Sociology.
You are listed as an author for this manuscript. The online peer-review system, Manuscript Central, automatically creates a user account for you. Your The American Journal of Economics and Sociology - Manuscript Central account information is as follows:
Site URL: http://mc.manuscriptcentral.com/ajes
USER ID: asadzaman@alum.mit.edu
PASSWORD: Different: 2 double points e(5)
You can use the above USER ID and PASSWORD (once set) to log in to the site and check the status of papers you have authored/co-authored. You may log in to http://mc.manuscriptcentral.com/ajes to check and update your account information via the edit account tab at the top right.
Thank you for your participation.
Sincerely,
The American Journal of Economics and Sociology Editorial Office
taylorkath@umkc.edu
25-Oct-2011
Dear Prof. Saglam:
Your manuscript entitled "The Conflict Between General Equilibrium and the Marshallian Cross" by Zaman, Asad; Saglam, Ismail, has been successfully submitted online and is presently being given full consideration for publication in The American Journal of Economics and Sociology.
Co-authors: Please contact the Editorial Office as soon as possible if you disagree with being listed as a co-author for this manuscript.
Your manuscript ID is Oct-2011-0156.
Please mention the above manuscript ID in all future correspondence or when calling the office for questions. If there are any changes in your street address or e-mail address, please log in to Manuscript Central at http://mc.manuscriptcentral.com/ajes and edit your user information as appropriate.
You can also view the status of your manuscript at any time by checking your Author Center after logging in tohttp://mc.manuscriptcentral.com/ajes .
Thank you for submitting your manuscript to The American Journal of Economics and Sociology.
If you don’t have access to The American Journal of Economics and Sociology, please use the attached form and subscribe or recommend this journal to your library today.
Sincerely,
The American Journal of Economics and Sociology Editorial Office