On the World
Observation / Disequilibrium Economics
NEVATHIR
November 26, 2018
A critical feature of ordinary economics is equilibrium that market adjustments tend to produce. Equilibrium occurs at the intersection of supply schedules and demand schedules. It follows that markets self-regulate and exogenous intervention reduces welfare.
Ordinary economics shuns disequilibrium that places demand schedules strictly to the left of supply schedules with no intersection. Yet technological innovations modern economies depend upon often render previous technologies obsolete with new equilibrium for innovative technologies and disequilibrium for predecessor technologies.
Internal combustion engines and electricity replaced steam engines. Fiat money and credit drove out gold and silver currencies. Vacuum tube computers gave way to transistors and silicon chips.
While it's unwise for governments to suppress market innovations, market innovations open up possibilities for exogenous intervention that may increase welfare.
For example, Taiwan silicon chip machinofacture couldn't afford to build up industrial park infrastructure and human capital development together with public universities without government provision.
For modest economies, the establishment of global oligopolies relied upon economic strategists for product quality advancement and governments' favor for capital investment.
PRC government provided complementary regulatory order safeguarding the prospects of domestic digital market innovations against foreign substitutes.
Many economists holding the tenets of equilibrium economics universal oppose exogenous interventions. It turns out economists' prescription actually reduces welfare.
Financial sector is no exception. The fact that public sector banks may finance risky investments beyond the interests of private shareholders tells about the deficiency of private markets.
On closer examination of technological revolutions, government-financed research often facilitated necessary basic science and free communication of ideas that provided positive externalities across industries. Even for equilibrium economics, positive externalities large enough to shift supply and demand schedules may increase welfare. Opposition to appropriate exogenous intervention is groundless.
For disequilibrium economics, while obsolete capital might not recover, building up critical sectors with exogenous aid makes sense for the long-run. Labor displaced by technological revolutions or financial crises may benefit from public provision for adaptation to new environment as well.
Technological revolutions create/destroy value, but financial crises overwhelmingly destroy value. Keynesians are right to address short-run unemployment with monetary/fiscal expansions, but long-run structural policies that reduce the depth and duration of financial crises deserve additional consideration.