>In an earlier missive in this thread, I wrote: >>Sen and de Long are saying >that even with close-to-perfect markets (or even perfect ones), people can >starve, simply because they don't have enough money to buy food when the >price goes up. That's a pretty damning indictment of markets, but it >doesn't explain why people don't have the money. << > >After writing this, the little neoclassical homunculus in my head (a result >of college and graduate school indoctrination) woke up and said: "wait a >'sec. If markets were _really_ perfect, as in the Arrow-Debreu Walrasian >General Equilibrium Model, no-one could starve. After all, the potentially >starving person could borrow money on the perfect futures market, taking >advantage of his or her potential to earn wages in the future .... if you are going to earn wages in the future, then yes. But even in a perfect-capital-markets world there are two rational-expectations equilibria: one in which the money lenders think that you are likely to be dead, hence don't loan you any money, and you die; a second in which money lenders think that you will remain alive (and will be able to find employment at some wage), lend you money to buy foo, and you live. These two equilibria both maximize different objective functions--different weighted sums of individual utilities. But they are both equilibria: there is nothing in the formalism to say that the market will attain the "nice" one... Brad DeLong -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- "Now 'in the long run' this [way of summarizing the quantity theory of money] is probably true.... But this long run is a misleading guide to current affairs. **In the long run** we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again." --J.M. Keynes -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- J. Bradford De Long; Professor of Economics, U.C. Berkeley; Co-Editor, Journal of Economic Perspectives. Dept. of Economics, U.C. Berkeley, #3880 Berkeley, CA 94720-3880 (510) 643-4027; (925) 283-2709 phones (510) 642-6615; (925) 283-3897 faxes http://econ161.berkeley.edu/ <[EMAIL PROTECTED]>
