Re: Time?

[Bruce McFarling <ecbm@xxxxxxxxxxxxxxxxxxx>]

On Tue, 04 Jun 2002 12:51:33 -0700,
Mason Clark <masonc@xxxxxxxxxxxxx> wrote:

>Educate me, please.

>I seem forever to be seeing in economics theory the ignoring of time.

>Not taking sides or commenting on this particular quotation, but as an
example
>that happened to catch my eye this moment:

>"familiar proposition that doubling everybody's nominal purchasing power
>overnight doubles the price level"

>Frequently I seem to see relationships -- formulas -- stated that assume an
>instant reaction.  But the economy is never in equilibrium (?); all states
are
>transitory; and  **the transitions are the essence**.

>Am I confused?

No, you are not confused.  The exactly correct statement of the
proposition of the neoclassical macroeconomic model is that that
doubling everybody's nominal purchasing power instantly doubles
the equilibrium price level.  Only by adopting rational
expectations or a similarly bizarre add on to that model could
you get to overnight doubling of the ACTUAL price level.

See the Spring 2002 JPKE for a presentation of the maths of the
neoclassical model which shows how that works (on the way to
making an argument that the model itself is internally
inconsistent).

Obviously, IF it takes time, something else could happen to
disturb the adjustment to the "equilibrium", and if people
were rational and KNEW that further unexpected events could
interupt the adjustment to the current equilibrium, then
it would not be rational to hold to strict rational expectations.
Odd that.


--
Dr. Bruce R. McFarling, PhD
Bus. Office 1.72 -- (02) 4348-4078
School of Business
Faculty of the Central Coast
Newcastle University, Ourimbah