When I took undergraduate macro, I was deluged with graphs, lines, and intersections. Problems would be introduced, lines drawn (almost always from SW to NE and from NW to SE, with the occasional vertical or horizontal line thrown in there for good measure), the lines shifted, and those problems “solved”. At first, I fought hard to figure out what was going on from first principles and then trying to translate that back to the graphs — difficult because economists insist on swapping the axes of all their plots. Eventually though, I was worn down enough that I just stopped seeing the axes. By the final I was blindly moving curves “to the left” or “up” without any regard to the significance of what I was doing.
The problem with this isn’t what you’d expect. It’s not the fact that I did a terrible job of learning some simple models. And it’s not the simplicity of those models themselves — there’s an awful lot you can represent well in two dimensions. The problem is the intrinsic structure of two dimensions — of only having one variable to adjust — encourages thinking that moving to an equilibrium is somehow profoundly easy.
After all, in two dimensions, the notion of an equilibrium from intersecting lines is straightforward. Just follow the gradient, duh. But once you start expanding the number of variables, and those variables start interacting in funny ways, this idea falls apart. Surprisingly, maybe even shockingly, adjusting the prices of over-demanded things up and the prices of under-demanded things down does not lead to equilibrium generally, even “in the long term” and even for reasonably well-behaved and well-defined preferences.
While the idea of instantaneous equilibrium — that at every single instant of time everything is in General Equilibrium — has fallen out of favor, the notion that the economy is “equilibrium seeking” in a way that moves things “close to an equilibrium” in the “long term” is pervasive. Paul Krugman, in his gushing New Yorker profile says this:
“Economics is really about two stories. One is the story of the old economist and younger economist walking down the street, and the younger economist says, ‘Look, there’s a hundred-dollar bill,’ and the older one says, ‘Nonsense, if it was there somebody would have picked it up already.’ So sometimes you do find hundred-dollar bills lying on the street, but not often—generally people respond to opportunities. The other is the Yogi Berra line ‘Nobody goes to Coney Island anymore; it’s too crowded.’ That’s the idea that things tend to settle into some kind of equilibrium where what people expect is in line with what they actually encounter.”
The notion of settling into an equilibrium is simple, straightforward, and natural: reinforced with every graph you draw on a white board. And it’s only when you start trying to compute an equilibrium using gradients that you find out it doesn’t actually work. Strangely enough, they don’t teach that in undergraduate macro.
