12 - Growth and fluctuations in economic disequilibrium (1993)

Summary

Restraints of disequilibrium on growth and fluctuations

The late 1960s witnessed a great stride made in disequilibrium theory. In his two papers, “The Keynesian counter-revolution: a theoretical appraisal” and “A reconsideration of the microfoundations of monetary theory,” American economist Robert Wayne Clower came up with a notable argument on disequilibrium theory: Economic instability comes not from a specific market but from discordance between markets, a discordance that stems from the incompleteness of these markets and of the information transmission mechanism between them. If this argument on disequilibrium is applied to analysis of economic growth and fluctuations, the result will be obvious: Not only will the equilibrium equation of growth predicated on the complete conversion of savings into investment and the full utilization of the production capacities thus yielded become void, but the supposition about fluctuations that lists the restrictions of income and its changes on effective demand as a major destabilizing factor in an economic system will also be considered as having major limitations.

Shortly afterwards, Swedish economist Axel Leijonhufvud published On Keynesian Economics and the Economics of Keynes among other books. Like Clower, Leijonhufvud reinterpreted the Keynesian economic theory with a disequilibrium approach, and made his own analysis of the causes behind economic stability and instability. He maintains that between labor supply and commodity sales on the economic chain in real life, there are intermediary links, including employers hiring workers, workers producing commodities, employers paying workers, workers buying commodities with their wages, and employers selling commodities.