Life is not in an equilibrium

Much of economics is built upon the idea of equilibrium: supply equals demand, and if there are opportunities to drive down price to equilibrium, they will immediately be taken.  Economists assume this because it is hard to predictions otherwise.  Important assumption though this is, this can be hard to empirically test; all such tests are necessarily indirect approximations.  So what happens when you have a virtual economy and can empirically test this?  Well, it turns out that the economy is frequently out of equilibrium:

The data makes it look like external shocks take you out of equilibrium (unsurprisingly) and that equilibrium returns fairly quickly.  But just look at how often the economy is out of equilibrium!  It’s all the bloody time!  It almost looks like instead of a fixed point we’ve got a limit cycle with varying amplitude.  This shouldn’t be a surprise, but it is nice to get real data.  Next the question is: which are the equilibrium and which are the non-equilibrium situations, how often do they each occur, and how big are the differences between markets?

4 thoughts on “Life is not in an equilibrium

  1. Nice point! We get so accustomed to norms, standards of efficiency, fixing problems (or having “no problem”) as aspects of urban modernity. I was thinking of the equilibrium issue in terms of health. We have exacting standards for a person’s good-health equilibria but we are usually a little low on the energy or a little high on the blood pressure or some other variable. When I have a bout of some malaise, it reminds me of novels and journals from by-gone centuries in which people often refer to feeling a little sickly over the course of the winter, or suffering through the summer with this or that. Being in non-equilibrium healthwise seemed a part of life. A gentler, patient approach–though I guess I’ll take modern medicine if it came down to a choice.

  2. I am a big fan of questioning at-equilibrium or near-equilibrium assumptions. However, I am not sure if toy model economies (like small-ish gaming economies) are a good source for evidence. The ratio of outside-factors to internal dynamics is just too high in a toy model to provide meaningful comparisons to real economies, and the simplicity (and efficiency) of the internal dynamics is such that equilibration times are unreasonably quick. I still prefer the theoretical computer science approach to showing that equilibrium is unattainable, by for instance noting that most reasonable models of markets are PLS-complete or harder and thus it is unreasonable to assume that we can converge to equilibrium in a reasonable time (even if we had total information and optimal decision making).

    • I am pretty convinced by the complexity arguments, too, though I have a lot of CS in my background so maybe I am biased 😉 I was pretty disappointed when I saw a similar argument presented at (Good Econ Grad School) and get nothing but hostility from the students.

      But I am a huge believer in studying gaming economies. Economics isn’t supposed to be specific to a physical economy; it is supposed to be the general study of transaction and consumption of goods. If it breaks down in small open economies, well that seems interesting to me, too (is there a phase transition?).

      • I am trying to pursue connections between computational complexity and evolution and ecology right now (see this question for some background), and facing some similar hurdles. People don’t seem to take kindly to complexity theoretic results unless they are already part of the cstheory choir. It is always a hard sell, especially when you add the double-trouble of biologists being generally uncomfortable with math :(.

        I agree that econ should be in the business of explaining both large and small economies, dead-tree or virtual. I also find some of the bigger virtual economies (like Eve Online) to be really fascinating. However, it often seems like people want to use toy economies as direct evidence on which to base decision about real economies, as opposed to just as a way to investigate small economies for their own sake. This attempt at a direct link, without careful theoretical justification as to why your small toy model resembles a real economy in any way is what bothers me. Studying small economies for the sake of small economies is good though.

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