суббота, 29 октября 2011 г.

On the Equilibrium Conditions

Having read this article by Jorg Guido Hulsmann on realist approach to equilibrium I thought I should analyze one of his main points on an example to see if he is right.

The thesis in question is that both the mainstream economists and even Mises (with his Evenly Rotating Economy construct) have been in error with regard to the conditions that are sufficient for equilibrium to obtain, because for it to obtain it is not sufficient that all conditions cease to change, or that the market agents are omniscient (meaning that they know all the conditions, including the preferences of all other agents). 

To check whether the above statement is true, the following thought experiment is in order.
Imagine an uninhibited island where 6 people find themselves. Three of them decided to become gatherers and gather berries, and three – to become hunters. Suppose also that for some reason the people who are most best suited for hunting are vegetarians.

Suppose that in a given period 3 hunters (A, B and C) caught a small deer which gave them 60 kilos of meat which they divided equally among themselves.

The gatherers have achieved the following results: D - 40 kilos of berries, E - 50 kilos, and F - 100 kilos.

Let us further suppose that the agents are ready to sell their product at following minimum prices (for hunters expressed in kilos of berries per kilos of meat, and vice versa):

A 50/20
B 50/20
C 50/20

D 20/40
E 20/50
F 20/30

A price of, say, 50/20, for the purposes of this thought experiment means that the agent wants to sell 20 kilos of meat for a price of no less than 50 kilos of berries.

As follows from the preferences in the table, in this situation equilibrium (i.e. an outcome when all agents would sell as much as they wanted at least at the minimum price) cannot obtain. And even if the agents know each other’s preferences and nothing changes in the following period, equilibrium still won’t obtain, unless the preferences of the agents change.

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