If somebody presented you with a static snapshot of weather patterns, it would be clear that the model was fairly useless; as it didn’t capture dynamics, it would have nothing to tell you about the weather. Similar problems apply to neoclassical models: once you attempt to incorporate dynamic events, they don’t just become ‘wrong’, they become completely irrelevant.
I posted recently about how CA is irrelevant for developing countries, but I’d like to expand: it is completely irrelevant for arguments about protectionism. The problem is that if you take into account the effects of tariffs on the productivity of the industries they are aimed at, it has nothing to say – not just for developing countries, but for any industry whatsoever. CA assumes that every country has an innate productive capacity in each industry that does not change over time. If you froze the world, CA might be a persuasive argument for free trade, but in a dynamic economy it completely irrelevant.
Say the price of a necessity goes up due to a supply shortage. Modelling this as a simple ‘price increase’ suggests that demand would go down. However, if people are expecting the supply shortage to continue or worsen, then isn’t it more probable that demand will go up? Mainstream economists might have an answer: the price increase can be modelled as a movement of the supply curve, whilst the new information about the supply shortage can be modelled as a movement of the demand curve:
(D1 to D3, S1 to S2)
Problem solved. Except this movement of the demand curve leads to a higher price, which in turn would cause people to alter their expectations of the shortage, leading to another movement, and so forth. This may be a highly specific example, but it touches on a central Sraffian criticism of these models, which is that the curves cannot move independently; a change in one creates ripple effects that violate ceteris paribus. Thus, taking a picture of the state of them at any one time tells you as much as a photo of a moving train tells you its velocity.
Both ‘curves’ are partially derived from expectations – one from expectations of returns on investments, and one from expectations of future needs for liquidity. Therefore, a similar criticism to Demand-Supply applies – movement of one curve alters expectations and so affects the other. This creates a feedback loop that simply cannot be captured by two intersecting curves. At any one moment, the diagram might be said to be ‘right’ (putting aside other objections), but this doesn’t mean it is useful.
I expect economists won’t appreciate a whistle-stop tour of their models that claims to have debunked them, but at the same time I expect they’d agree that the above ‘weather’ example would so obviously flawed that it would not need to be refuted formally. In order to avoid special pleading, economists will have to argue that the economy is at or close to equilibrium, rather than a dynamic system. I do hope nobody claims this after 2008 (or the recurrent crises for centuries before that).