Neoclassical Theory: Under-Determined, Over-Determined, or Unable to Move?

Complete stock-flow intertemporal equilibrium “reconciles” traditional neoclassical theory, in which the value of capital is a given parameter, with neo-Walrasian general equilibrium theory, in which a vector of capital goods is a given parameter. ¹ As Garegnani (1976, 1990, 2005) has argued, however, “the associated ‘dynamic’ sequence of equilibria … appears to be of doubtful [theoretical and empirical] significance” (Garegnani, 1990). Just such equilibria have become central to mainstream neoclassical theory, especially in macroeconomics, despite the generally recognized instability of the associated saddle-path solutions to various models. ² Saddle-paths have the property that, in the face of any shock, prices must “jump” discretely onto a new “convergent” path even though they cannot be “approached” from any point off the equilibrium path. In this theory, prices therefore lack persistence in the face of shocks. The classical forces of competition are entirely emasculated (Eatwell, 1982), as is the process of production “as commonly understood” (Garegnani, 1990, p. 55).