Disequilibrium Economics

Economic literature is full of confusing terminology. Like Humpty Dumpty, many authors not only wilfully make words mean what they choose them to mean, but they also apply definitions that are not even internally consistent.

Prices and quantities are determined in markets where individuals meet and exchange goods. A market is in equilibrium when the volume of trading remains constant and prices are not forced to change either; in other words, when no one has an incentive to modify his behaviour. There are various reasons why one might expect markets not to be in equilibrium. First, there are general external influences on the economy as a whole affecting all markets to a certain extent: for example, a bad summer, a change in the rate of population growth or some political event. But there are also specific influences for a particular market, such as a change in tastes brought about by a successful advertising campaign, the effects of which may be hardly noticeable in other markets. In the first case, the approach to the explanation of price and quantity changes is one of general analysis. In the second case, when isolated markets are dealt with, partial analysis is applied. This latter approach is followed here, when first one, and then just two interrelated markets are analysed.

Macro-disequilibrium economics deals traditionally with systems such as the dynamic multiplier, the multiplier-accelerator mechanism and inventory models. More recently a fascinating development in economic analysis has taken place, centred around markets operating under conditions of insufficient information. The implications for macro-economics are most important. A discussion of the ‘new’ macro-disequilibrium analysis based on the ‘Keynes versus Classics’ controversy is therefore included.

In a Neo-Classical world governed by the omniscient auctioneer the need for policy seems absent and transactors just hop blithely from one set of equilibrium values to another. Any error due to an unanticipated exogenous disturbance is eliminated with almost embarrassing speed. No values are observed other than equilibrium values. The world seems perfect.