Orthodox economists, including New Keynesians such as Paul Krugman, think that economies eventually converge to equilibrium. This thinking can lead to the idea of a “return to normal” after any recession or depression, when the depth and especially the length of the recession might instead lead to a lowering of expectation by investors and a consequent lowering of the long-term growth rate.
It is very helpful to abandon equilibrium as an organising concept in understanding the processing at work during recessions and in forming expectations about climate change mitigation and carbon prices. It is helpful to realise that the interacting economies in the world system are not in equilibrium (or disequilibrium for that matter) but in a chaotic but remarkably orders dance with some outcomes more stable through time than others. Abandoning equilibrium also downgrades the search for the global social optimum in modelling. We can expose the absurd assumptions of the benign global dictator required to solve integrated assessment models (IAMs) of climate change economics such as William Nordhaus’s DICE family of models.

Terry Barker

4CMR, University of Cambridge