MAXIMIZING, ACTION, AND MARKET ADJUSTMENT: AN INQUIRY INTO THE THEORY OF ECONOMIC DISEQUILIBRIUM

During the past decade, economists have devoted much effort to providing a microeconomic foundation for their macroeconomics. One such effort was an unpublished paper by Axel Leijonhufvud entitled, "Varieties of Price Theory: Which Microfoundations for Macroeconomics?"; The question is pertinent; all microtheory is not alike. In his paper Leijonhufvud contrasted the price adjustment of Walras with the quantity adjustment of Marshall. The focus of my inquiry has been somewhat different. I compare Walrasian stability analysis, Austrian process analysis, and search theory, with a special emphasis on the fundamentals of each approach. In other words, this dissertation is about the foundations of our microfoundations.; I chose the three approaches, in part, because they rest on three different bases. The basis of stability analysis is maximizing determinate functions; the excess demand functions by which the economy is assumed to adjust are derived from agents maximizing subject to constraints. The basis of process analysis is human action; agents are presumed to formulate and carry out plans, and the theory explores what happens when these plans are incompatible. The basis of search theory is maximizing probability functions; agents are presumed to face a probability distribution and to incur costs to search over the elements of the distribution. Agents then maximize the net benefits of searching.; Chapter one gives an overview of each approach. It describes the problem the economists in each tradition were trying to solve and the means they adopted.; Chapter two compares maximizing determinate functions with human action as a basis for disequilibrium theory. The main comparison is between what agents have to know to maximize and what they have to know to act. The main conclusion is that maximizing requires far more knowledge than does acting.; Chapter three compares maximizing determinate functions with maximizing probability functions. Again, the focus is on knowledge, and the main conclusion is that probability functions do permit agents to be less informed and less certain than do determinate functions, but not much less. Probability functions do not permit nearly as much ignorance and uncertainty as the concept of action does.; The fourth chapter applies process analysis to price and quantity adjustment. In a simplified market setting, it shows how agents will exercise judgment and alertness to formulate their plans, and to change those plans when they are incompatible with the plans of others. The result of these plan changes is the market process.