What are the strengths and weaknesses of general equilibrium as an organising concept - Essay Example

?Macro & Micro Economics Contents Contents 2 The Concept of General Equilibrium 3 General Equilibrium as an Organising Concept 5 Strengths of GeneralEquilibrium as an Organising Concept 7 Weakness of General Equilibrium as an Organising Concept 9 References 12 The Concept of General Equilibrium The concept of general equilibrium is considered to be an integral part of theoretical economics. It desires to present a hypothetical model of market equilibrium in the context of economic theory. The concept of general equilibrium acts best in regards to some propositions that can be underlined as follows. Firstly the concept of general equilibrium takes into count the entire economy or the holistic economy to reflect its true nature. In regards to the entire or whole economy the general equilibrium attempts to evaluate the demand, supply, and price parameters. The second proposition upon which the theory of general equilibrium rests concerns the markets operating in an economy. In that the theory of general equilibrium in sharp contrast to partial equilibrium endeavours to understand the equilibrium in relation to large number of interactive markets (Balasko, 2011, p.124). Thus where in case of partial equilibrium the price structure prevailing in the economy is studied in regards to a single market the case for general equilibrium on the contrary evaluates the same in regards to large number of markets. The third proposition held by the general equilibrium theory holds that a uniform group of prices prevail in regards to the large number of interactive markets. The price set evaluated in regards to the whole economy is considered to be the main factor that generates equilibrium for the general equilibrium model. In the general equilibrium model the prices held are generally held to be long-term ones and thus the realistic price structure is taken to be a deviation from the equilibrium price structure in case of general equilibrium (Starr, 2011, p.3-4). The theory of general equilibrium model considered a hypothetical model in economics was first rendered by Leon Walras, an economist pertaining to France. In the modern era the theory of general equilibrium earns a more specialised note and a different terminology known more popularly as the theory pertaining to the value. In the modern theory pertaining to value the theory takes into account certain important propositions. The first proposition is concerned in regards to differentiation of the products in regards to the different localities to where such products are delivered by the producers or manufacturers. The second proposition holds that different products are differentiated based on the time or periods in which they are distributed to the different localities. In the third case the proposition held is in regards to the different contracts which decide both the time and place of transfer of products from one owner to another. The three propositions can be combined to form the new general equilibrium model propounded by the modern economists (Ginsburgh and Keyzer, 2002, p.3-4). General Equilibrium as a concept propounded by economist Leon Walras thus tends to avoid a chaotic situation in an economy and in contrast helps the economy to form a balancing position. In that Walras tends to find a harmony behind the different economic agents to help the economy attain the required uniformity. The harmony behind the different economic agents can be derived on the basis of a suitable interdependence which would help in blending the different economic factors to one another. Further the general equilibrium model also proceeds in finding out different price sets that would in turn trigger the economy to find a situation of stability for itself (Krauss and Johnson, 2006, p.14). Observation shows that such harmonious or uniform position gets dismantled if the economic agents working in an economy fail to attain the required resources or commodities that would help them to attain or sustain the due stability. Hence optimum level of active resources is required to be maintained in an economy that would help in turn to meet the desired stability conditions. Active resources entail such commodities that would help the economy generate the required demand and thus would heavily reduce the position or prevalence of excess or dead stock. In this fashion the concept of general equilibrium tends to organise the different factor sets to help attain the required state of equilibrium. General Equilibrium as an Organising Concept The concept of general equilibrium becomes largely applicable in regards to organising the economical parameters of a country or state. This theory is found to be best applicable in being able to rightly administer the unemployment conditions prevailing in a region. The general equilibrium model finds large scale suitability in regards to the designing and planning of several nationalistic policies. The theory pertaining to general equilibrium generally holds that unemployment is a false situation and does not prevail in the realistic society. It holds that the parameters of demand and supply in regards to both tangible and intangible commodities like labour acting in equilibrium mode would help in reducing the effects of unemployment (Weintraub, 1993, p.130-131). The demand and supply mechanics applied to the labour forces is considered to effectively manage the gaps prevailing in the society both in terms of getting the right labour for the right work and the enhanced flow of labour forces in the economy. In the second proposition the general equilibrium theory also holds that the large number of market transactions pertaining to the labour and other markets get fully sorted that in turn help in clearing up the entire economy. Such a cleared economy in turn would help in the optimal absorption of labour forces and other such resources in the total economy (Tieben, 2009, p.1-2). The general equilibrium theory focuses on the understanding of setting a certain price equilibrium that can be generated by monitoring other factor considerations. More specifically it can be observed that to reach to the definite price equilibrium the general equilibrium requires the factor considerations pertaining to technology, other economic resources like land earn a constant position or citrus paribus. Keeping other factor considerations in the general market constant the supply and demand forces for the factor under view earn a constant flow that help in setting the equilibrium level for the same. General Equilibrium model acting as an organising concept emphasizes on setting the wage structure based on optimum level. The wage structure of the labour forces in real wage conditions depends on the inflation level in the economy (Ayres, 1994, p.11). It is found that as the level of inflation rises the level of wage is also augmented. This rise in the level of wages crosses the optimum point leading to the emergence of unemployment in the economy. Thus as a key strategy in organizing the factor considerations the concept of general equilibrium proceeds to restrict the growth of inflation in the market. Ceasing the inflationary trend in turn would help in closing the wage gap owing to the constant rise in the wage structures. This constant rise in the wage structures needs to be effectively managed by working strategies to counter inflation (Arestis and Sawyer, 2000, p.159). Reducing inflation to significant levels is taken by general equilibrium model as a best approach in countering unemployment and thus acts as an effective organizing concept. Thus proper information published to the econometricians about the rate of inflation and the rate of increase in the wage structures can help them in devising adequate policies to counter the unemployment rate in the country. Thus the tenets of the general equilibrium model focus on organising the economic factors through the effective handling of economic issues pertaining to the inflationary climate of the state or nation (Milonakis and Fine, 2009, p.293). The concept of general equilibrium working as an organising concept desires to evaluate the economy on the basis of static models. However though the economic model tends to evaluate the economy based on static methods yet the model does not imply that the economy needs to maintain or sustain the equilibrium state. Again as an organising concept the general equilibrium model states that the economy though not being tempted to take a stable or equilibrium position tends to shift towards another equilibrium state that which is less subjected to a stream of constraints (O’Hara, 2001, p.480). In this regard two paths may be studied in which the first states that there may be the existences of a large number of equilibriums which in turn help the economy to shift to a stable position. Again the second path states that the economy would by itself shift towards such equations as would help in creation of a stable economy. Thus the economies acting based on the general equilibrium model based on the aforesaid paths tend to move to an equilibrium position. In that the general equilibrium model endeavours to relate and organise the different factors in the economy to help in formation of the required stability and thereby satiates the organising function (Sardoni, Kriesler and Harcourt, 1999, p.402). Strengths of General Equilibrium as an Organising Concept The main strength of the general equilibrium model acting as an organising concept is that it states that the total number of markets in the economy is positive and well organised and constituted in nature. Further the markets are perfect in nature and thus help in the effective setting of prices. The parameters relating to the different factors and price variables are highly flexible in nature in this type of a general equilibrium condition. Further the market operations in the general equilibrium condition highly depend on the pricing signals as derived from the external markets (Faucheux, O’Connor and Straaten, 1998, p.121). The general equilibrium model earns potency owing to the fact that it helps to clear up the markets at such positive set of prices. In the general equilibrium model the markets trading in the economy are taken to be almost complete leading to emergence to a definite set of positive prices. The conditions of general equilibrium focus on creating such markets that are positive and forward looking in nature (McCalla and Nash, 2007, p.221). These markets projected by such equilibrium situation help in generating positive information regarding the demand and supply situation of the products and services in the economy. Information regarding demand and supply conditions thus generated help in the easy forecasting of economic events in the region. Thus again another strength provided by the general equilibrium situation is helping in the making of key and important economic decisions for the region. In the second case different types of commodities capital and otherwise can be traded effectively in the well organised markets (Hardill, 2006, p.59). The well organised markets largely help in rendering effective flexibility to the production and manufacturing systems in its endeavour to produce commodities for the economy. Henceforth the economy acting on the general equilibrium situation can become very flexible to help in rendering customized prices and products and to fit different types of emerging situations. Similarly the creation of the general equilibrium situation also helps in creation of an open economic situation wherein several technological and economic adaptations can be rendered from time to time (Rowe, 2009, p.135). This fact in turn helps in enhancing the competitive position of the economy by generating additional competitive advantage factors. New innovation and production systems being generated in the existing economy would make it become further strong and thereby effectively gains the advantage of the emerging opportunities. The concept of general equilibrium acts in a much potential manner in regards to present conditions rather than to future conditions. In such equilibrium situations the decisions taken are generally based on a spot notice and thus serve the economy for the current period in an effective manner. The different decisions that are taken pertaining to the economy can be effectively changed subjected to different periods and thereby reflect high amount of flexibility for the economy in general (Rennard and Philippe, 2007, p.199). Further the concept of general equilibrium studied in the above cases can also be found to render large amount of flexibility and independency for the growing markets. It is found that owing to the potency of the general equilibrium the developing or the emerging economies can largely liberalize and internationalise. In turn these economies can become highly competent in the long run. Through the process of liberalization the developing economies can largely develop owing to the reduction of duties and taxes pertaining to trade and production (Hsu, 1991, p.6). The concept of general equilibrium earns praise in that it tends to interdependence the different factors pertaining to the economy. The different factors of the economy are made to act in an interdependent mode over each other in a certain economic situation without tending to take any help of any external factor. Secondly the general equilibrium model acts in such fashion as triggering different economic elements to move towards an equilibrium position without subjecting them to future and present disturbances. This equilibrium model thereby focuses on finding a total equilibrium mode or stability for the entire economy. Henceforth the model for general equilibrium acts in an optimistic manner and thereby endeavours to render stability and help the economy to work more productively in a balanced climate (Shionoya, 1997, p.75). Weakness of General Equilibrium as an Organising Concept The general equilibrium model is considered as a highly hypothetical model of theoretical economics. To achieve an effective price situation the condition arises to achieve a static market condition in which the different factors of production seem to run in a constant flux without subjecting to changes. However in realistic situation the case is almost different where the factors of production need to be flexible enough to counter the changes in the external climate. The general equilibrium condition is also held to be subjected to a certain time period. Many economists tend to argue that no such equilibrium condition exists for an indefinite period of time but is subjected to periodic changes. Again the condition of general equilibrium is also argued by economists as relying on an uncertain context. The external climate constituted by people possessing different characteristics and also by different factors and processes of production. These elements tend to alter them in regards to different time periods. Thus the issue of general equilibrium comes under challenge being subjected to these factors that are amenable to changes. Factors and processes of production and also the tastes and preferences of the consumers largely alter with the change in the different periods. Thus large amount of innovations rendered owing to such changes also help in the reduction of price parameters of the products and services. Henceforth the condition of general equilibrium that mainly states the existence of a standardised price structure is considered to be a hypothetical model and thus fails to meet the realistic conditions (Hajela, 2008, p.63-65). The markets performing in real economy do not operate in a perfect manner. Rather the perfection attributed to the markets considered in the general equilibrium situation is highly disturbed by such changes as makes them imperfect in nature. Hence the perfectly competitive markets come to be transformed into imperfect ones examples of which are monopoly, monopolistic or duopolistic markets. Such imperfection observed in the case of markets operating in the real economy is found not to be attributed in cases of general equilibrium models. Further the case of general equilibrium also fails to depict the adjustments or changes brought about in the real life cases owing to the changes or alterations in the external climate. Thus failure to depict such adjustments made during the introduction of new policies also fails to depict the costs incurred in making such adjustments. It is learned that certain costs are incurred in the process of making necessary adjustments that happens to reduce the level of income. This cost factor needs to be exposed that in turn would help in setting the right price mix for the economic factors needed in the production processes. Thus the situation of general equilibrium being a failure to depict necessary adjustments also thereby fails to depict the true price structure for the different factor considerations in the economy. Owing to these facts the model of general equilibrium is considered to be only a hypothetical model without any true relevance to the real economic situations (FAO, 2005, p.51). The theory pertaining to general equilibrium is viewed to be not only hypothetical in context but also to a larger extent quite orthodox in nature. The orthodox nature of the general equilibrium theory happens to reduce the suitability and effectiveness of the same while applying such in case of realistic situations. In this case the general equilibrium theory suffers from a major weakness in which the desires or the preferences or the tastes of the different agents in the economy are taken to be constant in nature. In realistic situations however the preferences or the tastes of the different individuals are generally governed by different social and historical considerations that are aptly ignored in cases of general equilibrium theory. Henceforth the use of such general equilibrium models to derive important inferences fails to meet the market expectations. Further the general equilibrium situation also acts on a broader context in which the different factor considerations or agents are taken to be static. Thus less or no focus is rendered in regards to individual preferences or tastes that make the situation all the more complex (Skott, 1989, p.13). The theory of general equilibrium also suffers from an inherent weakness in which the income and wealth is taken to be distributed in an already fashion among the several economic factors. The proposition on which the theory rests regarding equal and undisturbed distribution of wealth and income is also held to be of a hypothetical nature and thus makes the base of the general equilibrium theory quite inadmissible while judging the reality (Rosser and Rosser, 2004, p.29). Thus all the above conditions justly prove that such an economic model does not effectively fit the real economic situations emerging in an economy. References Balasko, Y. (2011). General Equilibrium Theory of Value. Princeton University Press. Starr, R. (2011). General Equilibrium Theory: An Introduction. Cambridge University Press. Ginsburgh, V., and Keyzer, M. (2002). The structure of applied general equilibrium models. MIT Press. Krauss, M., and Johnson, H. (2006). General equilibrium analysis: a micro-economic text. Transaction Publishers. Weintraub, E. (1993). General equilibrium analysis: studies in appraisal. University of Michigan Press. Tieben, B. (2009). 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