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Adam Smith's invisible hand is unstable: physics and dynamics reasoning applied to economic theorizing

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  • McCauley, Joseph L

Abstract

Neo-classical economic theory is based on the postulated, nonempiric notion of utility. Neo-classical economists assume that prices, dynamics, and market equilibria are supposed to be derived from utility. The results are supposed to represent mathematically the stabilizing action of Adam Smith's invisible hand. In deterministic excess demand dynamics, however, a utility function generally does not exist mathematically due to nonintegrability. Price as a function of demand does not exist and all equilibria are unstable. Qualitatively, and empirically, the neo-classical prediction of price as a function of demand describes neither consumer nor trader demand. We also discuss five inconsistent definitions of equilibrium used in economics and finance, only one of which is correct, and then explain the fallacy in the economists’ notion of ‘temporary price equilibria’.

Suggested Citation

  • McCauley, Joseph L, 2002. "Adam Smith's invisible hand is unstable: physics and dynamics reasoning applied to economic theorizing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 314(1), pages 722-727.
    • Handle: RePEc:eee:phsmap:v:314:y:2002:i:1:p:722-727
    DOI: 10.1016/S0378-4371(02)01063-4
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    References listed on IDEAS

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    1. McCauley, Joseph L., 2000. "The futility of utility: how market dynamics marginalize Adam Smith," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 285(3), pages 506-538.
    2. Joseph L. McCauley, 1999. "The Futility of Utility: how market dynamics marginalize Adam Smith," Papers cond-mat/9911291, arXiv.org, revised Feb 2000.
    3. McCauley, Joseph L., 1999. "The Futility of Utility: how market dynamics marginalize Adam Smith," MPRA Paper 2163, University Library of Munich, Germany.
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