Marshall’s Tendencies GastonEyskens Lecture Series Dollars,Debts, andDeficits,RudigerDornbusch, 1986 Geography andTrade,Paul Krugman, 1991 Marshall’s Tendencies: What Can Economists Know? John Sutton, 2000 Marshall’s Tendencies What Can Economists Know? John Sutton Publishedjointly by Leuven University Press Leuven, Belgium and TheMITPress Cambridge,Massachusetts London, England (2000MassachusettsInstituteofTechnology Allrightsreserved.Nopartofthisbookmaybereproducedinanyform byanyelectronicormechanical means(includingphotocopying,record- ing, or information storage and retrieval) without permission in writing fromthepublisher. ThisbookwassetinPalatinoon‘3B2’byAscoTypesetters,HongKong. PrintedandboundintheUnitedStatesofAmerica. OrderingInformation:AllordersfromBelgium,theNetherlands, andLuxembourgshouldbesenttoLeuvenUniversityPress (ISBN:9058670473;D/2000/1869/44). LibraryofCongressCataloging-in-PublicationData Sutton,John,1948– Marshall’stendencies:whatcaneconomistsknow?/JohnSutton. p. cm.—(GastonEyskenslectureseries) Includesbibliographicalreferencesandindex. ISBN0-262-19442-2(hc.) 1.Economics—Mathematicalmodels. 2.Marshall,Alfred,1842–1924. I.Title. II.Series. HB135.S825 2000 330—dc21 00-029196 ToJean Ahumanlovesanexplanation,andifagoodoneisnotavailable,abad one will be confabulated. We see patterns where there are none, and planouractionsaroundthem. —RogerScruton Contents SeriesForeword xi Acknowledgments xiii Preface xv 1 The Standard Paradigm 1 2 Some Models ThatWork 35 3 Relaxing the Paradigm 59 4 Testing 87 Notes 107 References 113 Index 121