COMPLETE AND INCOMPLETE EQUILIBRIUM
Some further attention to these various analytical approaches is in order, and will help us, incidentally, toward a clearer grasp of the market process. A market process, we have seen, is essentially a process of adjustment. In this process, individuals adjust their actions to take advantage of the opportunities offered by the market; that is, they adjust their actions to “fit” the actions of other market participants. So long as unexploited opportunities exist that can be grasped through a change of action, the process of adjustment is not yet complete; somebody’s plans must go unfulfilled—equilibrium has not yet been attained. Until the attainment of equilibrium, there will be unspent forces at work in the market. These forces will impel men, sooner or later, to produce different quantities or qualities of goods, to try to buy or to sell at different prices, to move in or out of industries, and so on. All these forces, it will be borne in mind, are set in motion by the simultaneous existence of two sets of factors: first, a given set of basic buying and selling attitudes (imagined by the theorist to be continuously maintained); and second, a set of prevailing decisions by market participants that have not yet been “shaken down” through the market process into a harmoniously fitting, self-renewing pattern.
Now, it must be emphasized that the twin notions of adjustment and equilibrium, while seeming to pertain only to a world of unchanging basic attitudes, are in fact the tools with which the theorist analyzes the effects of change. A new tax is imposed, a new oil field discovered, a wave of immigration is expected, a revolution in tastes is considered—the theorist explains the consequences of these changes by means of the analysis of adjustment and the description of equilibrium. In all these problems the theorist imagines a market that, before the occurrence of the change, had been in equilibrium; he imagines the state of disequilibrium such a market would be thrown into by the postulated change; he traces through the process of adjustment that would be touched off by this disequilibrium; and he finally describes the new state of equilibrium that can be attained when all the forces of adjustment have worked themselves out, imagining, of course, that throughout the adjustment period no other change in basic attitudes has occurred.
In his analysis of the consequences of such a change in the basic data, the theorist frequently finds that ripples of market forces set off by the change do not completely spend themselves until adjustments have been made in market actions far removed from the initial change. The discovery of a new oil field not only affects the price and sale of oil, but eventually affects numerous other industries; and so on. If the theorist ignores any of the adjustments—however remote—that must sooner or later be made, his system will, of course, not be one of full equilibrium. Nevertheless, economists frequently are content to trace out the market consequences of a particular event only insofar as it directly entails adjustments. The theorist may mark out either a time range, or a market area, within which he is especially concerned to discover the course of adjustment. When the forces which change the actions of market participants can be held to have spent themselves within this selected range—even though further adjustments will eventually have to be made beyond it—the theorist, loosely, may describe his selected range of the market as having attained equilibrium. Such an “equilibrium” obviously is quite incomplete; there are still market decisions (outside the “range”) that will be disappointed and will have to be revised.4 Nevertheless, it may clearly be expedient for the analyst to concentrate his attention on particular waves of adjustment, and the concept of “incomplete equilibrium”—although self-contradictory—may be of considerable usefulness.
Two kinds of incomplete equilibrium may be distinguished, depending on the criterion by which the theorist selects his “range.”
1. The theorist may discover that certain market forces work themselves out fully within a relatively short period of time, while other such forces are felt generally only after a longer interval. He may confine his attention to the first group of forces. When these have spent themselves, he may describe his system as being in equilibrium—as it may be, in fact, for the duration of the selected time period.5 The incompleteness of this kind of “equilibrium” is indicated by referring to it as short-run equilibrium—it being understood, of course, that the nature of the problem under consideration will dictate the “shortness” of the selected period, and also that a number of different such periods may be possible with corresponding equilibrium positions of different degrees of incompleteness.
2. The theorist may mark off, secondly, certain kinds of activity on the part of market participants that he believes to be more likely affected by the initial change in market data. He may believe, for example, that the discovery of a new oil field is likely to cause a more marked alteration in the willingness of oil producers to sell oil at given prices, than in the willingness of landlords to purchase new oil burners. The theorist might then confine his attention to the market activities of those buying and selling oil. When the decisions governing these activities are mutually compatible, then “the oil market” may be described as in equilibrium. The incompleteness of this kind of “equilibrium” is indicated by referring to it as partial equilibrium; that is, an equilibrium existing only in one selected “pocket” of the entire market system.6 The possibility, discussed in earlier sections of this chapter, of distinguishing separate “markets” between which definite interrelationships exist, arises, of course, out of the kind of analysis described here. The term “general equilibrium” is reserved for the condition where all adjustments have been carried through to completion, so that no decisions made in the entire system, however remote from the initial change, are found to be disappointed.7
THE PATTERN OF MARKET ADJUSTMENT
We have seen that a market system may be divided by the theorist into more or less distinct areas of activity where market forces bring about adjustments with especial speed and directness. In considering the particular course of economic forces within such a distinct area of activity, the area is referred to as a “market”—in the same way as the economy as a whole is called a market (when we are interested in the ripples of economic forces as felt throughout the system). The simplest form of market where the forces set up by human action can be analyzed is that marked out by considering only the activities of those buying and selling the same good or service.
We speak—and will be doing so frequently in this book—of a market for shoes, wheat, a particular kind of labor, and so on. We bear in mind at all times that any equilibrium achieved in such a market may be quite incomplete from the standpoint of the entire market system. It is the especial directness with which changes in the data in one part of such a market make their impact on actions through this market that justifies our undertaking this kind of separate analysis.
In the actions taking place in the market for any one commodity, such as wheat, there is always, we find, the same market process at work. In any such market there is a general tendency on the part of potential buyers and sellers to continually revise their bids and offers, until all bids and offers are successfully accepted in the market. This general tendency expresses itself in three specific ways. First, so long as there is a discrepancy in the prices offered by different would-be buyers, or in the prices asked by different would-be sellers, there will be disappointments and subsequent revisions in bids or offers.8 Second, so long as the quantity of the commodity offered for sale at any one price (or below it) exceeds the quantity that prospective buyers are prepared to buy at this price (or above it), some of the would-be sellers will be disappointed and will be induced to revise their offers. Third, so long as the quantity of the commodity offered for sale at any one price (or below it)