Equilibrium is Dead, Long Live Equilibrium

The other day, I wrote: “[T]he market is always (absent externalities, interference, taxes, asymmetric information, etc) in equilibrium.  In some sense this is true*, but it is not the whole story. ”  At the time, I promised a future blog post explaining what I meant.  This is that post.

The world is always at equilibrium and always in disequilibrium.

What I mean by “the world is always at equilibrium” is twofold: 1) equilibrium analysis, as provided by the standard supply and demand chart, is a useful analytical tool.  It provides a person with a good initial understanding of exchange and production and provides reasonable predictions for things like price floors/ceilings, minimum wage, taxes, tariffs, etc etc., and 2) Any given trade, by the virtue of the fact that it is a voluntary trade, can be said to be an equilibrium trade.  That is, any trade that occurs between two individuals can be said to establish an equilibrium.

What I mean by “the world is always in disequilibrium” is that there is no “global” equilibrium, no global steady state.  Supply and demand curves are functions of endowments, and as trade occurs, endowments change.  This necessarily leads to a different set of supply and demand curves, giving new prices and new trading opportunities, leading to new trades, leading to new endowments, leading to new supply and demand curves, on and on.

The world is always in equilibrium and always in disequilibrium.