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Source link: http://archive.mises.org/5546/the-economics-of-groundhog-day/

The Economics of Groundhog Day

August 30, 2006 by

Art may imitate life, there is one instance where life cannot imitate art. The movie Groundhog Day (1993) illustrates the importance of the Mises-Hayek paradigm as an alternative to equilibrium economics by illustrating the unreal nature of equilibrium theorizing. It illustrates an important concept: one that we can never observe in real life. Because perfect competition is completely unreal we need other concepts that enable us to understand how the world really works. Fortunately, such concepts already exist in the writings of Ludwig von Mises and FA Hayek. FULL ARTICLE

{ 25 comments }

Ron Legere August 30, 2006 at 10:40 am

Great article. I love the movie Groundhog Day, but never made this connection to using it to illustrate a very basic but also very much misunderstood aspect of economics.

Curt Howland August 30, 2006 at 11:19 am

http://digg.com/business_finance/The_Economics_of_Groundhog_Day_2

Someone sabotaged the article link, so I put in the blog link.

TGGP August 30, 2006 at 11:19 am

Austrians often talk about the uselessness of the equilibrium concept in mainstream economics. However, both Mises and Rothbard used the idea of an Evenly Rotating Economy. What is the difference between the ERE and mainstream equilibrium? I know that Mises and Rothbard that the ERE was a fiction that does not actually occur, but don’t mainstream economists say the same thing about their equilibrium?

Duodecimal August 30, 2006 at 11:20 am

Murray’s character’s first reaction to having perfect knowledge was to attempt suicide, repeatedly.

I think that also gives us some insight on the absurdity of using equilibrium sophistry in prediction human action.

Curt Howland August 30, 2006 at 11:25 am

TGGP, the problem is that “mainstream” economists use the concept of perfect competition to promote policies supposedly designed to move toward their idea of perfect competition.

It’s not used merely as a tool for discussion, these people really do think that perfect competition can be achieved or at least that trying to achieve it is a GoodThing(tm).

adi August 30, 2006 at 11:50 am

Friedrich von Hayek is somewhat himself responsible for the concepts discussed in this article. Hayek’s (1928) article “Intertemporal Equilibrium” introduced agents who had perfect knowledge.

We must remember that Hayek was once professor at LSE and teacher of John Hicks. John Hicks extended Hayek’s ideas further in his (1939) “Value and Capital” which I think is one of the classics of neoclassical econ. By reading this book even modern Austrians could notice that it has several elements common with Austrian econ ( along with Walrasian elements ).

This fixation with the perfect competition has come later since you couldnt find it in the earlier works.

Student August 30, 2006 at 12:00 pm

D.W.,

You’re saying that “some” economists insist on focusing on static equilibrium? And that these economists cry for government intervention when reality differs from their static ideal? Okay. So, which economists are you talking about? Any examples?

Could it be that darn interventionist Paul Krugman? Well. No. He actually wrote a short book, called “The Self-Organizing Economy”, about applying dynamic models to economic phenomena.

Could it be Joe Stiglitz, Nobel-prize winning economist who also regularly argues for market intervention? Well. No. He edits a journal on the dynamic nature of capitalism with that other darn statist Jeff Sachs!

All three of these guys are as main-stream-interventionist as you can get. So, if you’re not talking about them, then who are you talking about?

Francisco Torres August 30, 2006 at 12:39 pm

All three of these guys are as main-stream-interventionist as you can get. So, if you’re not talking about them, then who are you talking about?

For one, my economics teacher when I was studying for my MBA. He told us students that government was needed as a counterbalance to “predatory” market forces and showed us P = MC as proof.

Ken Zahringer August 30, 2006 at 2:11 pm

Good article, and good point.

In using concepts like “equilibrium” and “perfect competition”, modern economists remind me of medieval astronomers. They decided that heavenly bodies were geometrically perfect spheres, utterly smooth-surfaced, moving in perfectly circular orbits, because that was their idea of the “perfection” that was appropriate for Heavenly Bodies. Unfortunately, nobody told the planets. Planets and stars are what they are, and the dynamics of human economic behavior are what they are. We do much better to attempt to understand the real world we live in, rather than dream up idealized constructs and lament the fact that the real world doesn’t fit them.

Student August 30, 2006 at 2:15 pm

Ken,

Modern economists such as Paul Krugman, Joe Stiglitz, and Jeff Sachs? Economists that study the dynamic nature of the economy as I just demonstrated?

Please give me a few in-print examples of these economists/medievel astronomers you speak of.

DW MacKenzie August 30, 2006 at 2:36 pm

Joe Stiglitz has published a vast number of articles that depict market equilibria that fall short of absolute perfection. His typical answer to these “problems” is for government to implement optimal taxes and subsidies.

Some mainstream economists do use models of dynamic equilibrium. These models are not dynamic in the Mises-Hayek (evolutionary) sense. That is to say mainstream dynamic models typically refer to recurring patterns or paths to static equilibria. Mises and Hayek thought in terms of continual non repeating evolutionary change.

Mainstream economists will occasionally recognize that capitalism is dynamic, and will sometimes refer to Schumpeter’s thing about creative destruction. However, static equilibrium theorizing is still dominant in the economics profession. This is certainly true of textbooks and classroom instruction. Yet, maintream economists do in fact use static theory to justify government intervention. While some economists do occasionally allude to dynamic elements of capitalism, this does not show up in much of their professional work. The fact that some mainstream types occasionally recognize dynamic elements in capitalism does not exonerate them. On the contrary, this just means that they should know better than to condemn markets based on models that flatly contradict reality.

R.P. Churchill August 30, 2006 at 4:35 pm

A weakness of many modern economists (aside from their obvious collectivist ideological mindset) is their reliance on mathematical models. These models are by their nature static. They cannot handle dynamic phenomena like substitution effects. They only obliquely deal with phenomena like improved productivity or technological improvement yielding improved quality or lower price. They use aggregate quantities like inflation instead of modeling from first principles from which aggregate values then arise. They don’t appreciate that idea from chaos theory that the predicted outcomes of the operation of complex systems is highly sensitive to small changes in initial conditions.

If it can’t be expressed in terms of a complicated pile of mathematical equations it might as well not be discussed. It seems to me to be the socialist calculation problem writ modern.

Student August 30, 2006 at 5:27 pm

D.W.

Maybe you should clarify what you mean by “equilibrium”, because I am confused. Like TGGP, I was under the impression that Austrian economists had some sort of concept of “steady state” that markets tend toward.

For example, in Roger Garrison‘s explaination of the Austrian Business Cycle, we start at full employment, some things happen in between, then we wind up back at full employment. What is that if not an “equilidbrium” point? And what is the ABC theory than a description of how we move away from and back to that equilibrium point?

On a side note, I disagree with your characterization of Stiglitz. Like I said before, he is certainly an interventionist (meaning he thinks the government can intervene with the market to reach more efficient outcomes), but that doesn’t mean he pretends the economy must constantly be in a state of static equilibrium.

Stiglitz best arguments regard how asymetrical information will divert the market process to inefficient outcomes. And sometimes (when the conditions are right) government intervention can mitigate those problems.

Really, I think Stiglitz more than understands Austrian arguments, he just happens to disagree with their conclusions.

But I am not a professional economist, so I will let him speak for himself.

“According to Hayek, neoclassical economics got itself into trouble by assuming perfect information to begin with. A much better approach, wrote Hayek, is to assume the world we have, one in which everyone has only a little information. The great virtue of free markets, he wrote, is that they allow each person to efficiently use his own information, and do not require that anyone have all the information. According to Hayek, government planning requires the impossible—that a small body of officials have all this information.

The new information economics substantiates Hayek’s contention that central planning faces problems because it requires an impossible agglomeration of information. It agrees with Hayek that the virtue of markets is that they make use of the dispersed information held by different participants in the market. But information economics does not agree with Hayek’s assertion that markets act efficiently.”

Francisco Torres August 30, 2006 at 5:46 pm

Stiglitz best arguments regard how asymetrical information will divert the market process to inefficient outcomes. And sometimes (when the conditions are right) government intervention can mitigate those problems.

Student, just where the HECK do you think Stiglitz draws his “asymetrical information” argument from, if not from a static equilibrium theorem? For information to be “asymetrical”, there must be a “symetrical” benchmark, and that only exists under conditions of “pure and perfect” competition. BTW, asymetrical information is an interesting concept for academic discussion, and a non-issue.

Angelo August 30, 2006 at 10:28 pm

Good article, but I feel upset that Groundhog Day is described as an “entertaining” movie. It’s an absolutely great and touching movie, and shows wonderfully how Murray’s character arcs from superficial despair and superficial happiness, to discovering true despair and true happiness.

TGGP August 31, 2006 at 8:21 am

How do we know what despair/happiness is “superficial” and what is “true”? I bet most feelings you describe as “superficial” seem rather “true” to people who are experiencing them at the time. Perhaps they are subjective, rather than objective.

DW MacKenzie August 31, 2006 at 3:16 pm

There are several problems with Stiglitz’s publications.

1. His does use static models to prove market failure. If you do not see this, then you are unfamiliar with his research on asymmetric information.

2. He also commits the nirvana fallacy with great frequency. His comparisons of markets with AI to 1st best pareto conditions is a false comparison. Stiglitz rarely admits to government imperfections (see http://mises.org/daily/1035)

3. Stiglitz’s critique of public choice in his globalization book is laughably wrong. See http://mises.org/journals/scholar/MacKenzie4.pdf

4. Stiglitz has no clue about the socialist calculation issue- which would be fine if he did not try to comment on this debate. In his coauthored article on the debate Stiglitz claims that the debate boils down to a comparison of capitalist managers to socialist bureaucrats- his standard agency problem stuff. This is absolutely false. Mises repeatedly denied the relevance of this problem to his critique. In the Whither socialism book Stiglitz references nothing that Lange and Hayek wrote during the Interwar Debate on Socialism. He references none of the articles that Lerner or Knight published in this debate. It references nothing by Mises, Robbins, Durbin, Dickinson, or Dobb at all. The only article from this debate that Stiglitz read was Taylor’s 1929 article- the worst one from the socialist side. Stiglitz also ignores the work of interpreters of this debate. He does not reference Bergson, Heilbroner, Lavoie, Kirzner, T Hoff, Roberts, Murell… In other words, Stiglitz barely scratched the surface of what was actually written in this debate- yet HE claims that THEY did not know what they were talking about. Of course, he did do some research for this book. Stiglitz referenced 126 of his own publications. Stiglitz has no clue about Austrian theory here- entrepreneurial alertness and discovery, market process rivalry, and all. Nor does stiglitz have a clue about what Lange and the other socialists wrote about capital accumulation and social dividends. Stiglitz has not read this material and has no understanding of either side of this debate- which would be fine if he would keep quiet. Yet he insists upon commenting upon a debate which he simply does not understand. So the idea that Stiglitz more than understands Austrian economics is demonstrably false.

The bottom line with Stiglitz is that he is an ideologically driven second rate mathematician posing as an economist. Even the Marxists I know regard him as an ignoramus and a fraud. I don’t take the content of his work seriously, though the influence of his work must be taken seriously.

DW MacKenzie

adi September 1, 2006 at 5:53 am

If you are to say that markets produce inefficiencies then you must have a ideal standard which to compare real markets…
So what are these inefficinecies anyway?

Austrian economics is economics in time not economics with time; human action happens in time and is inherently dynamic. Human appraisal of alternative actions and resources at his disposal is difficult to analyze by means disposal of typical neoclassical economist.

BTW there are good reasons why some “market failures/inefficiencies” exist; information is costly to gather and hidden actions of some agents are difficult to monitor. Still there are practises which have evolved spontaneously to manage these like warranties and ratings by some independent agencies.

Student September 1, 2006 at 6:18 am

D.W.,

I never said Stiglitz doesn’t use static models. I said that he doesn’t believe that the economy must constantly achieve ideal state of competitve equilibrium. In other words, he doesn’t commit the mistake you attribute to “some” economists in your article.

In fact, Stiglitz argues that an economy CAN NOT always be in competitive equilibrium.

So Stiglitz is obviously not someone you had in mind when you said “The idea that we cannot achieve the ideal state of perfectly competitive market equilibrium might seem pessimistic. Some economists insist upon holding the capitalist system to a standard of competitive equilibrium. Failure to meet this standard constitutes a “market failure” that warrants government intervention.

So, who are these economists that insist that on holding the economy up to a standard of competitive equilibrium? Who were you talking about? And why do they represent the “mainstream”?

DW MacKenzie September 1, 2006 at 6:43 am

Student,

Joe Stiglitz has argued repeatedly that “failure of the capitalist system to achieve the ideal state of perfectly competitive market equilibrium warrants government intervention”. I have reqad dozens of his articles where hi argues exactly that. So he does truly “insist upon holding the capitalist system to a standard of competitive equilibrium”. Of course Stiglitz argues that markets never achieve CE- he could not make his faulty case otherwise. His problem is that he ignores government failure almost all the time. He therefore commits the fallacy of false comparisons, known in economics as the Nirvana fallacy. This is a simple point, and I am tired of repeating it.

DW MacKenzie September 1, 2006 at 6:50 am

AS for other econommists who do this, Ken Arrow, Paul Samuelson, Joan Robinson, Abba Lerner, and and Harold Hotelling did much of the classic nirvana economics during the mid 20th century. As for more recent examples, most New Keyneisans are guilty of using static models to make false comparisons, including Greg Mankiw.

Student September 1, 2006 at 7:22 am

D.W.,

Does Stiglitz argue that government intervention is required because the market doesn’t meet competitive equilbrium (an odd assertion since it doesn’t believe it can be achieved when information is costly) or does he simply advocate government intervention when he thinks the goverment can achieve more efficient outcomes than the market (a different point than the one you made in the article)?

It’s an honest question. Like I said, I am not a PhD economist so I’m sure you’ve done more reading on the subject and I would like to know.

I’d ask a similar question on Makiw. Any examples of where he makes the mistakes you attribute to him?

DW MacKenzie September 1, 2006 at 8:07 am

Stiglitz has argued, on many occasions, that government intervention is required because the market doesn’t meet competitive equilbrium. He assumes that government does not suffer from similar or worse problems. This is literally true, he is in print on this well over a hundred times. He condemns markets for failing to attain CE, and claims that these problems with “optimal taxes and subsidies”. Of course, government taxes and subsidies are never optimal, but always imperfect (as are markets). Demsetz (1969), Coase (1959), and Mises (1949) demolished this approach to economics, yet Stiglitz and others contiune to commit false comparisons. As for Mankiw, his stuff on “menu costs” points to trivial imperfections in markets as a cause of the business cycles. Mankiw is not as bad as Stiglitz, but he does pay far too little attention to government failure.

D Mack September 1, 2006 at 8:09 am

correction- he that these problems CAN BE SOLVED with “optimal taxes and subsidies”.

I must move on to other things

Student September 1, 2006 at 8:21 am

Well, I can’t speak for everything Stiglitz wrote, but he seems to recognize the incentive problems facing politicians and goverment officals in at least one piece on the role of the state (here). This seems to be consistant with your characertization of Stiglitz in your piece “The Myth of Market Failure” where you describe him as wanting to make goverment more efficient.

But I would also point out that your Groundhog Day article wasn’t concerning the fact that many economists ignore goverment failure. It was regarding the fact that “some” economists demand the market to always and everywhere achieve competitive equilibrium or be corrected with goverment action.

And I just wonder if that’s really the case for most mainstream economists.

But I understand you gotta run. I have to work too. Have a great labor day weekend and thanks for the discussion.

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