Wednesday, August 30, 2006

The impossibility of equilibrium

Interesting article states equilibrium is an impossible state to achieve. Firstly there is a problem of having enough information, then there is the issue of events repeating identically in order to be able to make an accurate measurement and comparison.
"For any one individual, constancy of the data does in no way mean constancy of all the facts independent of himself, since only the tastes and not the actions of individuals can be assumed to be constant. As all those other people will change their decisions as they gain experience about the external facts and about other peoples' actions, there is no reason why these processes of successive changes should ever come to an end" (Hayek 1937 [1948] p49)."
Why, rather when, does the process converge? More importantly, does the convergence happen while people are still interested in the event? As a random example, if the price of horse driven carriages stablized in the year 1950, a number of decades after people stopped using them and had moved on to cars, then is this convergence of any import? All decisions made with imperfect information when the market was still in flux must have influenced the rest of the economy in myriad ways. How does one account for that, if at all?

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