Sunday, June 10, 2012

Mises on the Tendency to Equilibrium in Market Economies

I want to follow up on my last post and show that there is some similarity between Walras and Mises’s ideas on the tendency to equilibrium.

The trouble with Mises is that he had three different concepts of equilibrium, as follows:
(1) the “plain state of rest”;
(2) the “final state of rest,” and
(3) the “evenly rotating economy” (ERE).
Vaughn explains these concepts:
“[sc. Mises] posits not one, but three notions of equilibrium that he claims underlie his analysis. The first, the ‘plain state of rest,’ is a temporary state in which all currently desired transactions have been made and, for the moment, no one wants to trade. His example of such a state is the close of the trading day in the stock market ....

The second equilibrium notion Mises employs is the “final state of rest,” the state toward which the market tends if there is no change in the data. This apparently is Mises’ analogue to general equilibrium. Whereas the plan state of rest is a phenomenon that is routinely found in markets, the final state of rest is an “imaginary construction” in that it can never be achieved in reality, although it is a necessary analytic tool for understanding the direction of price changes.

Finally, Mises posits yet a third equilibrium notion, the “evenly rotating economy,” or the “ERE.” This, too, is an imaginary construction of what the market would be like if there were no changes in the data. In this construction, however, people continue to be born, to live and to die, and capital is accumulated at a rate just sufficient to maintain current patterns of consumption and investment. It is a condition in which the same products are consumed and produced over and over again, and all prices equal the prices established in the final state of rest .... Whereas the first two notions have their analogues in contemporary economics, the ERE seems to be unique to Mises.” (Vaughn 1994: 81–82).
It is obvious that it is Mises’s “final state of rest” that is the closest concept he has to neoclassical general equilibrium.

If we turn to Human Action, in a section called “The State of Rest and the Evenly Rotating Economy,” we see that the real world exhibits a tendency to this ideal state of equilibrium, or, as Mises says, the market “at every instant is moving toward a final state of rest”:
“The notion of the plain state of rest is not an imaginary construction but the adequate description of what happens again and again on every market. In this regard it differs radically from the imaginary construction of the final state of rest.

In dealing with the plain state of rest we look only at what is going on right now. We restrict our attention to what has happened momentarily and disregard what will happen later, in the next instant or tomorrow or later. We are dealing only with prices really paid in sales, i.e., with the prices of the immediate past. We do not ask whether or not future prices will equal these prices.

But now we go a step further. We pay attention to factors which are bound to bring about a tendency toward price changes. We try to find out to what goal this tendency must lead before all its driving force is exhausted and a new state of rest emerges. The price corresponding to this future state of rest was called the natural price by older economists; nowadays the term static price is often used. In order to avoid misleading associations it is more expedient to call it the final price and accordingly to speak of the final state of rest. This final state of rest is an imaginary construction, not a description of reality. For the final state of rest will never be attained. New disturbing factors will emerge before it will be realized. What makes it necessary to take recourse to this imaginary construction is the fact that the market at every instant is moving toward a final state of rest. Every later new instant can create new facts altering this final state of rest. But the market is always disquieted by a striving after a definite final state of rest.” (Mises 1998: 246).
This is quite similar to what Walras had to say about the tendency to general equilibrium, although that state is never attained.


BIBLIOGRAPHY

Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition, Mises Institute, Auburn, Ala.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

1 comment:

  1. "For example, if we estimate that the modern economy has 1010 SKUs (stock keeping units) in it, and if we assume that every decision in the economy is made at the speed of the worlds fastest supercomputer, then it would take something like 4 quintillion years for the economy to reach general equilibrium after an (each!) exogenous shock. Just a note, as a best-guess, the universe is only about twelve billion years old."

    Such an analysis seems absolutely ludicrous.

    --successfulbuild

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