At his blog Rajiv Sethi quotes someone saying:
“perhaps the fundamentals move faster than the markets adjust, so FX is never in equilibrium. Perhaps (in the language of statistical mechanics) the relaxation time is much longer than the average time between forcings.” OK makes sense: We are always forced out of an existing equilibrium before the system makes the adjustments to arrive at it. Well I never did get the economists' vision that the economy is best understood as making price and output adjustments to arrive at a given equilibrium when there is over or underproduction. For example, the consequence of being out of equilibrium as the economy always in fact is--for example, supply exceeding demand as it so often does--is often enough a shift of the aggregate supply curve such that a new equilibrium price is being set. The market does not work by adjusting supply to demand at the already existing theoretical equilibrium price (oversupply may be dumped at below equilibrium prices but this does not mean that the economy is adjusting by reducing supply so that there is supply and demand equilibrium at the already existing equilibrium price); in fact supply will not eventually be reduced. It will be increased. That is the consequence of overproduction. In other words, the responses of market actors to disequilibrium do not bring about adjustment towards the already existing equilibrium but rather the creation of a new equilibrium price, usually the result of jumps in the supply curve in response to overproduction. And those jumps are also brought about by bigger, more powerful firms at the expense of smaller ones. Bankruptcy and real competition (as most people, not economists, define it) is an essential part of the so-called "adjustment" process which is not really an adjustment process. It's a process of creative leaps and destruction. The market is presented as a serene system of peaceful marginal adjustments to arrive at equilibrium. But capitalism is actually a system of dynamic disequilibrium. But my question for the economists: how do you explain what the market consequences are to disequilibrium?
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