Academic Book on Finance and Economics

General Equilibrium: Theory and Evidencehttp://www.worldscientific.com/worldscibooks/10.1142/6875
By W D A Bryant (Macquarie University, Australia)ISBN: 978-981-281-834-8 (hardcover)Category: Economics & FinanceCopyright 2010
481 pages 
£ 94.00; $ 125.00Zentralblatt MATH Database 1931 – 2013©2013 European Mathematical Society, FIZ Karlsruhe & Springer-Verlag


Reviewed by Krzysztof Cichy (Poznań) originally for  ZentralblattMATH:

General equilibrium theory (GET) is one of the most classic branches of mathematical economics, dating back to the work of Leon Walras in the 19th century. After so many years it is still an area of broad research and many questions have remained unanswered. Its main aim is to thoroughly analyze the properties of market economies. It focuses on four main areas, dealing with the conditions that ensure the existence of equilibrium,the optimality of the equilibrium state, the stability of equilibrium and the relation between model equilibria and real economic data.

 

The book by W. D. A. Bryant deals with theoretical and empirical aspects of general equilibrium. The principal aim of the author is “to achieve an understanding of what general equilibrium theory has to say about the circumstances in which deregulated market economies function well, along with circumstances where this is not the case”. The book begins with an overview of GET (Chapter 1). The basic Walrasian conjecture that the deregulated market mechanism leads to optimal outcomes is stated and it leads to the basic questions of GET about the existence, uniqueness, stability, optimality of equilibrium states, the role of parameter values for the properties of these states and the empirical congruence of GET models. Next, some applications of GET are discussed, i.e., branches of economics that rely on general equilibrium assumptions, such as international trade, new-classical economics and economies in transition.

 

Chapter 2 deals with the fundamental issue of sufficient conditions for the existence of equilibrium. Basic notions are carefully defined, such as commodity, consumption sets and preference orderings. They serve to define Walrasian equilibrium and freedisposal equilibrium. A non-mathematical discussion about the possibility of having such equilibria is provided. Next, sufficient conditions for the existence of equilibrium are thoroughly analyzed (the theorems by Arrow and Debreu (1954), Debreu (1962), Arrow and Hahn (1971), Moore (1975), McKenzie (1981) and others).

 

In Chapter 3, the author moves on to necessary conditions for the existence of equilibria, showing that the common belief that Walrasian equilibria exist under weak and general conditions might not be justified. He argues that the “conditions necessary for existence require potentially restrictive relationship conditions to hold across the primitives which define the economy”.

 

Chapter 4 deals with the issue of irreducibility, i.e., the assumption that each agent in the economy is the owner of something which other people are interested in purchasing. In particular, the notion of McKenzie-irreducibility is analyzed from the point of view of its empirical justification. This notion is very important in establishing the existence of a Walrasian equilibrium. Different views emerging from empirical data are thoroughly reviewed and commented on.

 

In Chapter 5 some alternative approaches to establishing the existence of a Walrasian equilibrium are analyzed, with a focus on the ones that avoid strong relationship conditions, such as assumptions of irreducibility. It is explored how such important properties as the individual agents’ survival can appear without such assumptions. In particular, policy induced existence results, as well as ones related to voluntary transfers and altruism are discussed.

 

Chapter 6 deals with the existence of a Walrasian equilibrium in non-Arrow-Debreu environments. This includes the existence of equilibrium in a temporary equilibrium setup of Hicks, in the presence of money and in a Keynesian setup.

 

In Chapter 7 the uniqueness of equilibrium is discussed. This is one of the most fundamental and interesting questions in GET and a subject of intense debate. The conditions that need to be fulfilled in order that uniqueness is guaranteed are carefully elucidated. The author shows that they are rather restrictive. Next, the much less-restrictive case of finitely many isolated equilibria is analyzed.

 

Chapter 8 addresses the question of the stability of equilibrium. The discovery of a universal and globally stable adjustment process is believed by many to be the Holy Grail of GET. A variety of adjustment processes are analyzed, such as classical tâtonnement, global Newton process, discrete time adjustment processes and random adjustment processes. The author argues that all of them yield interesting, but not fully-satisfactory results, therefore implying the need for further research.

 

In Chapter 9, the author moves to the issue of optimality of equilibrium. The fundamental theorems of welfare economics are discussed. It is shown that there exist conditions under which equilibria are optimal, but no universal connection between equilibria and optima can be established, thus leading to the necessity of considering this connection in particular economic environments.

 

Chapter 10 deals with comparative statics of equilibrium states, i.e., the role of parameter values for the properties of equilibria and the response to shocks. This is especially important from the point of view of policy implications of GET models. A special attention is paid to welfare comparative statics.

 

In Chapter 11, the link between the theory and empirics is analyzed. In other words, it is investigated whether GET captures the essential features of real world economies and under which circumstances. Various tests of GET are discussed, in particular ones using microeconomic data (consumer and producer side, market clearing). It is shown that GET can indeed produce meaningful and testable results, but it can not provide fully satisfactory results in all cases - it can not be regarded as the universal theory valid anytime and anywhere. Still, it is argued that there is compelling empirical evidence that under certain conditions and in some economies it yields interesting results and provides a good description of the analyzed real world economies.

Chapter 12 offers a general outlook on the successes and failures of GET. The most important results of the book are discussed and summarized.

 

One of the most important virtues of this book is the abundance of references (over 40 pages) and the thorough discussions of historical achievements of GET, making it a good starting point for an exploration of many subtle details that had to be omitted from the book if it was to remain reasonable in length. Therefore, it will be invaluable to any researcher interested in GET.

 

Krzysztof Cichy (Poznań)

Keywords : general equilibrium theory; existence of equilibrium; uniqueness of equilibrium; stability of equilibrium; optimality of equilibrium; empirical tests of general

equilibrium theory

 

Classification :

*91-02 Research exposition (Social and behavioral sciences)

 91B50 Equilibrium in economics

 91B02 Fundamental topics on applicability to economics

 91B26 Market models

 

 

 

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The New Book Review is blogged by Carolyn Howard-Johnson, author of the multi award-winning HowToDoItFrugally series of books for writers. It is a free service offered to those who want to encourage the reading of books they love. That includes authors who want to share their favorite reviews, reviewers who'd like to see their reviews get more exposure, and readers who want to shout out praise of books they've read. Please see submission guidelines on the left of this page. Reviews and essays are indexed by genre, reviewer names, and review sites. Writers will find the search engine handy for gleaning the names of small publishers. Find other writer-related blogs at Sharing with Writers and The Frugal, Smart and Tuned-In Editor.

Reader Decides How To Make Money Is Good Thing

Title: You Will be Forced to Become Wealthy
Author: Finifid
Genre: Non Fiction

Reviewed by Ray Bank

I purchased this book for one simple reason – to make money, because a lack of it is my constant problem! I had to read this book two times (slower the second time) until I fully realized that it is really about how to make money. That is my strong opinion. Moreover, I plan to read it again since I feel that this book realistically jacked up my mood and desire to move ahead in my endeavors. In fact, as a result of the influence this book has had on my life, I have recently started up a business of my own, and this is only the beginning! I am so impressed with this work that I had to share my excitement with other people and that is the reason I decided to post this commentary here. I recommend that everyone own a copy of this book. This is a tiny investment into endless possibilities.

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The New Book Review is blogged by Carolyn Howard-Johnson, author of the multi award-winning HowToDoItFrugally series of books for writers. It is a free service offered to those who want to encourage the reading of books they love. That includes authors who want to share their favorite reviews, reviewers who'd like to see their reviews get more exposure, and readers who want to shout out praise of books they've loved. Please see submission guidelines on the left of this page. Reviews and essays are indexed by author names, reviewer names, and review sites. Writers will find the index handy for gleaning the names of small publishers. Find other writer-related blogs at Sharing with Writers and The Frugal, Smart and Tuned-In Editor. As a courtesy to the author, please tweet and retweet this post using the widget below:

Pro and Cons of "Free Trade Doesn't Work"

TITLE: Free Trade Doesn’t Work: What Should Replace it and Why

AUTHOR: Ian Fletcher
GENRE: Nonfiction
TOPIC: Globalization/Economics/Political Science
PUBLISHER: U.S. Business & Industry Council
ISBN-13: 978-0578048208
WEBSITE: www.freetradedoesntwork.com
FORMAT: Paperback, 348 pages, $24.95 on Amazon.com


Reviewed by Simon Lester for International Economic Law and Policy Blog

“Free Trade Doesn’t Work”
That’s the title of a new book by Ian Fletcher. (I came across it as a sponsored link in a Google search.) There are a number of different reasons people criticize free trade, so I was curious to see what exactly he had in mind. I asked him for a copy of the book so that I could review it on the blog, and he was kind enough to send one.

(Spoiler alert: If you don’t feel like reading to the end to see what he is proposing, it’s for the U.S. to impose an import tax, of about 30%, on all foreign goods and services).

As a preliminary point, let me just note that the book is mainly about tariffs and quotas. There’s not much about IP, labor rights, investor-state and similar recent additions to trade agreements. (Although, as indicated in the spoiler, services, another recent addition, is covered).

Now to the substance. The first four chapters contain a number of critiques of arguments and policies the author doesn’t like (including bad arguments for and against free trade). I’m going to start with Chapter 5, which deals with comparative advantage. Given the nature of the book (i.e., one that is critical of free trade), I was pleasantly surprised that he did a pretty good job of setting out this concept and explaining why it serves as an important basis for the free trade view. He acknowledges its value, and criticizes those who dismiss it out of hand. (In fact, this part was so good it could be used in a pro-free trade book!) However, he then identifies a number of “flaws” with comparative advantage. I’m just going to deal with one of these. (Otherwise this post would become far too long -- it’s already quite long as it is.)

To illustrate what he considers to be one flaw in the theory of comparative advantage, he asks, “What if a nation’s exports are unsustainable?” For example, a country may be exporting non-renewable natural resources, if this is where its comparative advantage lies. This will, he contends, maximize short-run efficiency at the expense of long-term prosperity. To deal with this problem, he notes, you would have to tax or restrict such exports, which is “not free trade.”

I hear this issue raised now and then in various contexts. However, I’m not convinced there is much to it. It is certainly true that, in most cases, you would not want to use up all your natural resources. But I don’t think the theory of comparative advantage requires you to do so. Even for free traders, comparative advantage is not the only basis for policy making. A country might have a comparative advantage in slaves, but it wouldn’t engage in slavery because we believe slavery is wrong. Similarly, if you have a comparative advantage in a particular natural resource, you don’t have to extract/produce it. If you want to deal with the threat of using up your resources, and you want to do it in a way that is consistent with “free trade,” just restrict their production, not their export. Doing it this way is likely to be permissible under trade rules. (There are some arguments you could make that production quotas violate trade rules, but my sense is most people don’t find these arguments very convincing). So, I’m not sure I see how the issue of non-renewable natural resources is a flaw in the theory of comparative advantage. It’s just a policy issue to be dealt with outside the context of trade.

Going further with comparative advantage, we now get a foreshadowing of the core idea of the book. He says that a nation’s wages are determined by its productivity in sectors where it has a comparative advantage. What he means by this, in essence, is that you would rather have a comparative advantage in high-wage industries. So, for example, it is better to have your comparative advantage in making airplanes than in cutting hair.

At this point, he takes us through a bit of free trade history. He explains that the British only became free traders after they used protection to establish themselves as the leading producers in industries such as wool-making. Similarly, the U.S. and Japan also used protection to develop their industries.

I don’t disagree with his contention that these three countries, and also other developed countries, were quite protectionist during their development period. I do, however, question whether this protection was the cause of their development. Speaking very generally, it seems to me that all countries have been fairly protectionist, at various times and in various industries. However, not all have developed. As a result, I’m not sure it’s sufficient to identify a correlation between protection and development in some countries and claim that this demonstrates cause and effect. To his credit, he does have an explanation of why protection worked better in East Asia than in Latin America, an issue which I’ve seen some critics of free trade overlook. (P. 202) However, one of his points here was that perhaps Latin America did not emphasize education enough, which, if true, suggests to me that education may be more important for development than protection.

In addition, I’m not sure that a comparison across eras has much value. It is true that the U.S. protected its domestic industries from their British competitors. But today, it might make more sense to offer your country up to a foreign company as a place to invest, instead of protecting domestic competitors. Why spend years with inefficient domestic industries when you could have a foreigner come over and build a state of the art factory tomorrow? That wasn’t an option for the U.S. in the 19th century, but it is for developing countries now.

Next up, in Chapter 8, he bashes the WTO, NAFTA and other trade agreements. This part seems to reflect criticisms of people like Lori Wallach and Dani Rodrik. Most readers are probably familiar with these arguments, so I’m going to skip them.

In Chapter 11, we get back to his key point, which is that it is better to have a comparative advantage in some industries than in others. He says you want industries with “increasing returns” (for a given increase in inputs, returns go up by more than the increase). And how do we achieve that? He proposes a “natural strategic tariff.” As an example of this, he suggests “a flat tax on all imported goods and services” as the best approach. He mentions a figure of 30%.

What he likes about this approach is that industries differ in “sensitivity and response to import competition.” Thus, a 30% tariff would not be enough to cause apparel production to come back to the U.S., as our competitiveness in such industries is far behind that of other countries. However, it would be enough to cause high-tech products like semiconductors to come back (as we are much closer there), which is great because these are the kind of increasing return, high-wage industries we want.

All right, that’s the crux of his argument. Now for some of my responses.

First off, let’s just ignore the WTO, NAFTA, etc. violations inherent in his proposal. He’s not interested in that part. Let’s just talk policy.

I’m going to start with a positive. There is one thing I like about his proposal: Because it is a flat rate for all goods/services, it removes the discretion a government has to give higher tariffs to some industries (often based on the effectiveness of their lobbying). I’ve always seen this as a huge flaw in the current system (and I very much like Chile’s one tariff rate approach).

But aside from that, not surprisingly, I have some concerns. I’m not going to go through them all, though, but rather just pick out some favorites I want to talk about. (Readers should feel free to add other thoughts in the comments).

One big concern I have is on competition within specific protected industries. Won’t taxing foreign competition at such a high rate turn many industries into domestic oligopolies? On p. 244, he suggests that domestic companies actually compete more intensely against each other than against foreigners. I’m pretty skeptical of this point. Unfortunately, it may be difficult to prove one way or the other empirically. But logically, it makes no sense to me. How is fewer competitors better? Imagine if there were no cars made by foreign-owned producers sold in the U.S. Wouldn’t U.S. consumers be considerably worse off if the U.S. auto makers had been competing only against each other all these years? Is there any doubt we’d be seeing more expensive, lower-quality cars?

A second big concern is the foreign response, which I think he vastly underestimates. He goes through some possible responses foreign governments might have -- such as subsidies, currency devaluation, and retaliatory tariffs -- if the U.S. were to adopt such a tariff but dismisses them pretty quickly. For example, with tariffs, he notes that foreign countries would probably raise their tariffs “somewhat,” but the process would not “get out of control.” Indeed, he suggests it might even cause them to lower some of their own barriers, if, after the strategic tariff is imposed, lower U.S. tariffs are subsequently offered as an incentive for them to lower their barriers. (P. 246)

In reaction to this, let me point out first that it’s hard to predict how our trading partners would respond to such a policy. It is extremely unlikely it would ever be adopted, so not many people have given a response serious consideration. But I’ll give it a shot anyway.

I know it is commonly said (and the author implies at various times) that most other countries are more protectionist than the U.S. (and thus in part this “natural strategic tariff” would just counterbalance foreign protectionism). But regardless of who is most protectionist, there is a good deal of support for relatively free trade in much of the developed world. As a result, I don’t think the response would be anything like he hopes. If I had to guess here, I think much of the rest of the world would band together in a free trade agreement of their own, and let us go our own way. More specifically, it seems to me that a possible response by the rest of the world (and especially the EU, Japan and other developed countries) would contain two elements:

-- impose an identical 30% tariff on all U.S. goods and services.

-- form a free trade agreement amongst themselves.

Now, in the 1950s or 1960s, his argument about the foreign response might have been more plausible. But today, the U.S. market, while very important, may not command the same power it once did. There are a lot of other markets in which to sell, and many foreign companies might be happy to have U.S. companies at such a disadvantage in their own markets.

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The New Book Review is blogged by Carolyn Howard-Johnson, author of the multi award-winning HowToDoItFrugally series of books for writers. It is a free service offered to those who want to encourage the reading of books they love. That includes authors who want to share their favorite reviews, reviewers who'd like to see their reviews get more exposure, and readers who want to shout out praise of books they've loved. Please see submission guidelines on the left of this page. Reviews and essays are indexed by author names, reviewer names, and review sites. Writers will find the index handy for gleaning the names of small publishers. Find other writer-related blogs at Sharing with Writers and The Frugal, Smart and Tuned-In Editor.
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A Book with Hope for a Boom

Beyond the Crisis: The Future of Capitalism
By Adjiedj Bakas

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The New Book Review is blogged by Carolyn Howard-Johnson, author of the multi award-winning HowToDoItFrugally series of books for writers. It is a free service offered to those who want to encourage the reading of books they love. That includes authors who want to share their favorite reviews, reviewers who'd like to see their reviews get more exposure, and readers who want to shout out praise of books they've loved. Please see submission guidelines on the left of this page. Reviews and essays are indexed by author names, reviewer names, and review sites. Writers will find the index handy for gleaning the names of small publishers. Find other writer-related blogs at Sharing with Writers and The Frugal, Smart and Tuned-In Editor.