Are we all in it together and alone?!
The ongoing economic crisis have helped develop various possible ideas about the real and sometimes even magic forces(Ben Bernanke, the chairman of Fed, is probably already dreaming about having a magic stick that would grab the economy out of the crisis) that can save our economy from default. Some argue that the world's end would have been the more desirable outcome than what we face now. But let's start from the grassroots.
There is a broad convention that the whole world economy is led by the 'invisible hand', which plays role of the market mechanism. According to it, the decisions of consumers and producers intercept in order to determine the efficient allocation of resources that brings the welfare to both. The magic tool was once discovered and identified by Adam Smith in his masterpiece 'An Inquiry into the Nature and Causes of the Wealth of Nations'.
From, my own experience of reading a book, I can say that the concept of the economic rescuer was mentioned quite vaguely and wasn't the main focus of Scottish philosopher.However, in some chapters he clearly stated that the markets if led only by the free choice of consumers and producers, might fail easily and thus some guidance needed.
The existence of the 'invisible hand' brings us to the idea of the equilibrium where all market forces are in balance and there is no tendency to change the behavior of households and firms. Therefore, the basic economic problem is at last solved and infinite wants are satisfied with the finite resources. We can also assume that there are no barriers to entry into the market, the product is homogeneous, the information is perfect and there is a great number of buyers and sellers. These are the conditions of the competitive equilibrium, but another type also exists called normative equilibrium.
Normative equilibrium implies that only one economic actor is successful in pursuing its goals. For example, businesses might be maximizing their profits by producing all range of goods and services, however at the same time people can be starving. That can happen when consumers change their behavior suddenly or most of the goods produced going out of the country (i.e. exports).
The Great Famine in Ireland is an example.The food was mainly exported since firms were gaining more profit from foreign trade than from domestic market. So while the equilibrium was achieved between domestic producers and foreign consumers, the domestic citizens were excluded from benefiting.
Can it be called a partial equilibrium or is it an equilibrium at all? Should an equilibrium satisfy all the consumers or just ones who are able and want to purchase goods? How about the poor or will 'invisible hand' save them?
For me it seems that the whole concept is rather obsolete if used in the modern world economics. Nowadays, most economies are open ones, which imply that foreign trade and satisfaction of foreign needs is the prime task. Exports are especially attractive if combined with devaluation of the currency. However, there are still closed economies called autarky like North Korea or Argentina. The latter welcomes just exports not imports.
The type of the economy is also crucial. Planned economy is hugely associated with equilibrium, where government ensures the distribute of goods and services and since the satisfaction of wants and needs of the population. But does the equilibrium exist in the market economy where each economic actor tries to achieve its own welfare?
In the case of simple demand-supply diagram, is it possible to reach equilibrium for Giffen goods? These are goods demand for which rises when price rises. What if the slope of demand and supply is the same, does it mean that the equilibrium can never be reached?
There are also confusions about the nature of the equilibrium. Some argue that it is a fixed single point in the economy, which once reached would ensure the rich and happy life for everybody. But I wonder whether there can be more than one point of equilibrium for different goods? Does the point for complement goods need to be the same? For instance, the market clearing price for suitcases is the market clearing price for holidays as they are in joint demand. What if I just like collecting suitcases which doesn't seem to be real but still. In the case of the more traditional example of milk and cereals it can be easier seen that since milk is in composite demand, the equilibrium for cereals doesn't need to be the same.
Let's take the case of substitutes. These products satisfy the same wants and needs, so the equilibrium must be the same. However, due to the great number of sellers and huge competition, some goods may lack demand and can be completely forced out of the market. As for me, much greater influence has nowadays shifted from the 'invisible hand' towards economic actors themselves. They on their own determine the equilibrium point or points of goods and services in the economy.
The general equilibrium can also be seen as the stable PROCESS of reaching the market balance. In our fast-moving world there are a lot of exogenous factors like change in consumers' preferences that can influence the position of the equilibrium. Also the change in the type of the economy, type of market and the scarce nature of resources can alter the market balance. So if the process itself is known as equilibrium, does it mean that we are constantly in equilibrium and thus there is no particular point we need to stop at?
Economic crisis. Financial default.Unemployment.Poverty...
That what we have nowadays while waiting for the rescue by Adam Smith's hand.
But isn't it too late to still hope for the best?!
P.S. Probably not a nice gesture was shown to them!Something like this...)
