Tuesday, March 28, 2017

Are We Ever Really in Equilibrium?

From AIER:

One mistake made frequently by economists is to focus on the destination rather than the journey. We like setting two sides of an equation equal, solving for a variable and focusing on that neat and tidy result.

But a little common sense shows that even the most canonical equation in the field, “supply equals demand,” requires a process to become true. Firms don’t know the magical market clearing price, they must experiment to find it, and every time there’s a shock an adjustment process must ensue. If shocks are frequent enough, that process would never end—a complex real-world economy might be all journey and no destination.

Alexander Salter has an interesting post at the Sound Money Project about nominal versus real interest rates that echoes the scenario above. Economists like to think central banks can only influence real variables in the short-run.

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