The case for a new economic theory of how markets really work without the Invisible Hand. Really!

Food for thought! However, I am not getting smart out of the abstract of this research article. It sounds like gibberish to me!

Is it possible that the authors here wrongly connected market clearing with the Invisible Hand? I bet!

Service economy is not a new concept! It has been around for several decades. So what is new here? Well, manufacturing is still very much alive and kicking too, because humans can not live by services alone, products are still needed.

"... In the real world, it is rare that markets “clear”—meaning that all the products reach customers thanks to the balancing of the invisible hand. Businesses must often commit to what they will charge and how much they will produce before they know what the actual demand will look like. 

A Model for the Service Economy

While traditional economic theories were built in an era of manufacturing, this research is particularly descriptive of the modern service industry [???], which now dominates the U.S. economy. ..."

From the abstract:

"Modern theories of the business cycle do not allow for the simultaneous rational choice of both prices and quantities, instead assuming that an “invisible hand” determines one of these variables to clear markets.

In this paper, we develop a macroeconomic framework in which both prices and quantities are chosen directly by firms, and exchange is both voluntary and efficient. Because of uncertainty about demand and productivity, individual product markets can be in excess supply or rationed.

The absence of market-clearing changes pricing and production in qualitatively important ways: markups are no longer determined solely by the elasticity of demand, and higher uncertainty reduces production and increases markups.

In equilibrium, production in rationed markets has a negative aggregate demand externality on demand in slack markets.

Differently from New Keynesian economies, monetary shocks propagate by reducing economic slack, raising aggregate labor productivity and consumption, while uncertainty shocks act as stagflationary cost-push shocks. We integrate our theory of disequilibrium in a dynamic, rational-expectations “New Old Keynesian Model” and demonstrate its implications for the business cycle."

The case for a new theory of how markets really work | Cowles Foundation for Research in Economics "A new framework shows how uncertainty and real world constraints break traditional models and offers a more realistic theory of pricing inflation and productivity."

Pricing And Production Without The Invisible Hand