INFLATION AND UNEMPLOYMENT – BOOM AND BUST

INFLATION AND

UNEMPLOYMENT – BOOM

AND BUST

The wonderful, automatic mechanism of market forces has
a powerful hold over the mindset of most economists. Unrestricted
competition between buyers and sellers leads to the evolution of
a market price that equates scarce supplies to effective demand.
Market equilibrium results with costs close to revenues, normal
profits rewarding enterprise and prices signalling what, how and for
whom goods should be produced. The role of government in such
an ideal world is to establish market institutions and enforce the
rules of trade – especially outlawing monopolistic practices that
threatened the public interest.
There are many critics of such a system of economic organisation,
however. Many ordinary people complain about its inequity:
incomes are determined by the fickle nature of consumer demand;
essential goods may be priced out of reach of those in need; precious
environmental assets may be degraded. This is an argument of
normative economics: one that accepts that the market mechanism
works – but it produces outcomes which some people consider
socially unacceptable.
The argument that will concern us first, however, is one of positive
economics – one which expresses doubt about the market
mechanism’s efficiency.Will it actually work to equate demand and
supply of all resources as its advocates say it will? Economists have
argued between themselves for decades about whether or not the
© 2004 Tony Cleaver
unregulated market is capable of reaching and sustaining general
equilibrium for a country as a whole. This is the ongoing debate
over MACROECONOMICS.
There is no doubt that markets work very efficiently in the
production and distribution of fresh food. They have for centuries –
from mediaeval market places to sophisticated modern supermarkets.
As mentioned in Chapter 2: we take such complex organisation
for granted, but producing and distributing such perishable produce
as coffee, milk, oranges and so on is generally amazingly successful.
We neither trip over rotting fruit and vegetables in city centres nor
are we starved of choice – markets clear with no waste. Vast populations
are catered for around the world in a mind-boggling maze of
trading relations that ensures demand meets supply.
If the market for perishable fruit achieves balance then surely all
markets together will similarly secure GENERAL EQUILIBRIUM of an
economy as a whole?