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Microeconomic Analysis

Hal R. Varian

posted on 29 May 2002

reviewed by Joe McCauley

Maybe the clearest, most readable description of neo-classical economic belief. I used it to to read about utility (after reading Samuelson's
papers), also to learn about the (utility-free) capital asset pricing model, which is presented via a simple derivation. A description of Scarf's
counterexample in 'equilibrium dynamics' is also presented, if too sketchy. One would have liked to see Radner's '67 paper discussed here
as well, and the proof that even if textbook demand-price, supply-price curves existed individually, the aggregate curves could be anything,
including no curve at all, just a scatter of points. Osborne showed earlier that the textbook supply-demand curves do not exist empirically
and explained quanlitatively why they do not exist in the individual case. I explained quantitatively in a paper 'The Futility of Utility' (Physica
A, 2000) why such curves do not due to nonintegrability of the underlying dynamics of production, thereby resolving Mirowski's thesis in an
unexpected way.

So what's the problem? The theory is presented as if it would qualify as an internal logic system, not as science, it's presented as if data did
not exist (theory without data, whereas econometrics is data without theory). There is essentially no comparison with empirical data in this
text, and there is a good reason for that: all comparisons with real markets show that the utility-based theory is totally wrong. Not only is
the standard assumption of 'equilibrium'(and the implicit assumption of stability) not a good zeroth order approximation to markets, these
ideas do not even provide a BAD zeroth order approximation to market dynamics, which markets are totally unstable and far from
equilibrium in every known case. The retort of the academic economists (the empiricist Greenspan does not belong to that school) that 'we
are only trying to understand the ideal case' is so far off the mark as to be ridiculous. One might compare neo-classical economic theory
with Aristotelian 'physics', except that the latter has one advantage: it does take into account a (wrong) qualitative description of air
resistance, whereas utility maximization describes nothing that happens in real markets. To the claim that, 'but we need utility maximization
to derive the CAPM' (which also does not describe real markets!), I reply, nonsense! ...


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