Thursday, December 08, 2005

Equilibrium is a Convenient Myth

I gotta say - this whole Equilibrium idea has brainwashed the macroeconomists of the world.
Even in its simplest form - a supply & demand graph that intersect at equilibrium, where's the evidence of ANY market that follows a graph like that? Show me the static and knowable supply and demand curves (if they're not static, equilibrium is meaningless).
You would think the commodities trading pit would be the simple and pure example of a market where supply and demand set the price and so equilibrium is nothing else but the price paid. But how can you call it equilibrium when the price jumps from second to second? Maybe it's an equilibrium for that millisecond. The curves are not just jumping around constantly, but they're not continuous (so all that calculus in the textbooks can be chucked. Calculus presumes smooth unbroken curves). You can have a sudden jump if there's a rumor. You can have a steep section appear if people think there's a supply constraint above some volume of production. You can have the price manipulated by speculation (where's speculation in supply/demand equilibrium). Where's credit/margin. I don't see how you can say that doesn't alter price.
So even in the simplest and purest of limited markets, the idea of supply/demand equilibrium is absurd. Of course I'm not saying supply and demand forces don't determine the markets. They do. But they do not reach any meaningful equilibrium. Extrapolations from an assumption of equilibrium (which dominates macroeconomics) are a very dubious abuse of logic.

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