Contemporary Economics

Rating:
Summary: Good, although dated
Review: I used this book for a Micro course and thoroughly enjoyed reading it. The quality of scholarship is unsurpassed. My only real beef is that it only has one paragraph about environmental concerns, and with the impending ecological crisis, such cursory treatment is insufficient. Also, the 1993 publication date means that there is little-to-no coverage of such recent developments as NAFTA and the WTO. Maybe the author will come out with a Ninth Edition?

Rating:
Summary: Good, although dated
Review: I used this book for a Micro course and thoroughly enjoyed reading it. The quality of scholarship is unsurpassed. My only real beef is that it only has one paragraph about environmental concerns, and with the impending ecological crisis, such cursory treatment is insufficient. Also, the 1993 publication date means that there is little-to-no coverage of such recent developments as NAFTA and the WTO. Maybe the author will come out with a Ninth Edition?

Rating:
Summary: Very readable example of standard neo-classical nonsense
Review: The text by Spencer and Amos is a readable source of the misconceptions that are taught to students and believed by too many economists. This text is noteworthy in presenting a chapter on 'General Equilibrium Theory' (or 'Welfare Economics'), which explicitly exhibits misconceptions about the notion of stability of equilibrium. The book seems to have been written with a supply-side rather than Keynsian prejudice..

The text starts by defining 'capital' in such a loose way that trees, e.g., are defined as capital, which presumes a common 'value-judgement' that is accepted in the US but not always in various parts of W. Europe where there are remain some strong restrictions on the economic 'development' of farm and forest land. The 'curves' in the book, as in Samuelson, represent no dynamcs and are generally not derived from real data. Instead they are drawn representing expectations based on the typical incomplete misunderstanding of neo-classical theory that is pervasive in economics and finance, where the dynamics of that theory have not been worked out except under the most unrealistic assumptions. An example is the so-called 'Laffer curve' on page 347. From the beginning, e.g., equilibrium is presummed to be the normal state of affairs and it is assumed to be stable, in disagreement with real liquid market data. The quotes from the text and my commentary follow next.

"Is Perfect Competition a Fantasy?" (pg 536): " ..no, ... like the assumption of a frictionless state in physics..this assumption creates an idealized situation that permits simplification of a problem so that it may be analyzed." This assertion represents a deep misconception. In physics we have real data, namely local motion in a gravitational field, where the assumption of force-free motion can be tested and verified as a good approximation (on the moon even better than on earth). Force-free motion is not merely a good approximation but lies at the foundation of physics. Economists and finance theorists have not understood this. The other side of the coin is that perfect competition, as defined in the text (requiring stable equilibria) does not exist in the world as a decent approximation to anything that occurs socio-economically.

From chapter 30 (pp 632-3) on General Equilibrium Theory: "Equilibrium was defined in earlier chapters as a state of balance between opposing forces. An object is in equilibrium when it is at rest. ... In economics "objects" may be prices, quantities, incomes, or other variables. You cannot consider a problem solved if, at the point you terminate your analysis, the variables are still changing. Only when the variables settle down to steady levels, or only when the future equilibrium positions can be predicted, can you consider the solution complete." Unfortunately, no real economic data behave even approximately in this way. A data analysis can be 'forced' to approach equilibrium only by abandoning real data and replacing it by a wrong model with stable equilibria. Continuing, "The study of equilibrium is not an end in itself. Economics is concerned with understanding the forces that can disturb an equilibrium and the policy measures that may have to be undertaken to restore it." Given that there are no stable equilibria in real economic systems, the assertion is meaningless in practice. Continuing with the text, on page 633 Exhibit 1 shows three figures, (a) a cone sitting upright on it's flat base, (b) the cone balanced perfectly on it's point, and (c) the cone lying on it's side. Figure (a) is compared with the authors' cartoon of a price vs quantity 'graph' showing the intersection of supply and demand curves as equilibrium. That is, the existence of the equilibrium point in the cartoon is advertised by the authors as 'stable', which of course is wrong. There is no implication of stability in the existence of any equilibrium point, a mistake that is sometimes made by freshman students in physics. The authors go on, " Figure (a) illustrates a case of stable equilibrium. this represents the normal situation. In physical terms, it may be depicted by a cone resting on it's base. In economic terms, it can be represented by the intersection of ordinary supply and demand curves. If the system is subjected to an external "shock" or disturbance sufficient to dislodge it from equilibrium, self-corrective forces will cause it to return to it's initial position." Real markets never behave even approximately in this way. Whenever anything likeAdam Smith's hand can be found in the data, which is seldom, it is destabilized by noise. There are no equilibria, much less any stability in finance data, which are so far the best economic data available, for the most liquid markets. I define a liquid market is one where you can approximately reverse the trade over a short enough time scale, as in the stock market when it's not crashing.

Real data are shown in exhibit 5 on page 397, where meaningless 'Phillips curves' are illegitemately drawn through a terrible scatter of points that in reality cannot be represented by a curve at all (see also Ormerod's 'The Death of Economics').

The text repeats the usual misconception that utility maximization is an equilibrium condition. enough said. What's a good text on economics? It hasn't been written yet.