I'm a little confused on what separates the definitions between plain state of rest, general equilibrium, and final state of rest. On page 116 of MES, Rothbard defines the equilibrium price as "where supply equals demand." This definition is consistent with the typical neoclassical equilibrium that is commonly portrayed by S/D graphs, i.e, the price defined by the intersection between the two curves that sellers come to through the elimination of shortages and surpluses (this is also how Rothbard describes the formation of equilibrium price).
On page 143, Rothbard describes the plain state of rest when "a market tends to "clear itself" quickly by establishing its equilibrium price, after which a certain number of exchanges take place, leading toward what has been termed the plain state of rest-the condition after the various exchanges have taken place." In this context I thought this sounds pretty similiar to the equilibrium price he described above, especially because of the fact that he includes equilibrium price in his definition. In addition, as he described earlier on page 142, I thought that the plain state of rest was the time when "the relatively most capable possessors own the stock, and the market for this good has come to a close....the market has ended, and there is no longer an active "ruling market price" for either good because there is no longer any motive for exchange." So basically I thought that the plain state of rest was the general equilibrium price that resulted when the supply and demand right now equaled each other.
He then goes on to describe the final state of rest on the same page as "certain long-run equilibria in accordance with the demand schedule and the effect on the size of stock produced", which I thought embodied the final price that would result from the intersection of supply and demand if all data ever relevant to the market would be known.
For example, if we somehow knew that in a farmers market where someone was trying to sell 20 oranges, the intersection of supply and demand for oranges was $5 (meaning the equilibrium price was $5), then if the farmer correctly estimated demand and priced his 20 oranges at 5 dollars, then after the 20 oranges were traded, a plain state of rest and equilibrium occured. No one demands any more of the farmer's oranges, the farmer has not supplied any more oranges, and there is "no longer an active "ruling market price"" for the oranges. The final state of rest in the market however, would be the equilibirum price of the farmer's oranges if all future data were known in the market.
However Salerno, in this lecture http://mises.org/media/2538 starting around 40:45 describes the plain state of rest as the state that exists after every exchange. He even goes on to describe his own plain state of rest, which occurs after he bought every marginal unit of every good he wanted at Wal mart. This definition differs from mine in the sense that it isn't the equilibirum price (Rothbard's description of supply equaling demand), but rather is a term to describe the aftermath of every exchange. So, for example, if I go to a pizza store and buy a slice of pizza for $2, after I buy that marginal unit of pizza a plain state of rest occurs regardless of whether or not the market was cleared (meaning true equilibrium had not been attained).
My question is, does the plain state of rest, the final state of rest, or neither describe the equilibrium price Rothbard describes and what is so commonly associated with neoclassicalism?
Thanks.
Listening to Jefferey Herbener's lecture (it starts around 16:00 http://mises.org/media/2569, he says that a plain state of rest is when QS=QD, but then later describes a plain state of rest as when someone goes to a store, buys two loaves of bread, and then leaves. It seems like either they are contradicting themselves, or I am just confused. Perhaps a plain state of rest is what occurs after every exchange, and a state of rest occurs when equilibrium is reached? Any help would be appreciated.
Have you read this ?
http://mises.org/humanaction/chap14sec5.asp
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Yes, but at least from what I'm telling Mises didn't elaborate on what I'm asking. Perhaps I made my question too long. Since from the lecture's I've figured out that the plain state of rest is the equilibrium that occurs after every exchange (regardless of whether that price was necessarily a q/s=q/d price), does that mean that the final state of rest is the equilibrim price that is commonly seen in S/D graphs that is never attained? Or is that just a "state of rest", because it can't be the pain state of rest, since from what I'm hearing the plain state of rest occurs after every exchange, and not every exchange needs to be made at the Q/D=Q/S price.
Thanks
Anyone? Thanks
can you say a bit more about "q/s=q/d price" ?
I'm going through the 1st 185 pages of MES at the moment anyway, so I'll try to get back to you by the end of the day.
"When the King is far the people are happy." Chinese proverb
For Alexander Zinoviev and the free market there is a shared delight:
"Where there are problems there is life."
http://en.wikipedia.org/wiki/File:Price_of_market_balance.gif
Thats the typical economic equilibrium where the quantity supplied equals quantity demanded. At a higher price the QS>QD, and a surplus would develop. At a lower price the QD>QS, and a shortage would develop. This is the equilibrium Rothbard also talks about.
Basically, what I'm asking is if the plain state of rest, or the final state of rest, or neither, describes this market equilibrium. From the lectures I've listed, it seems that the plain state of rest is what happens after every exchange (though this isn't what I thought originally), while the final state of rest is supposed to describe the final equilibrium price that is never attained. I feel like I answered my question, and that this equilibrium is not described by either the plain state or the final state. I think (correct me if I'm wrong):
Plain state of rest: "Equilibrium" that occurs after every exchange. I go to grocery store, buy two bags of chips at $2 each, and then leave.
Equilibrium: Price where Q/S=Q/D. With given supply/demand conditions of the chip market, the price of potato chips where quantity supplied equals quantity demanded is $2.50
Final State of Rest: Long run equilibrium that is never attained. The equilibrium price of the potato chip market might be $2.50, but after all of the current production/technological factors and consumer demand values run there course, ceteris paribus, the market would tend to a $3 potato chip bag price that would be bought in the ERE.
Thanks for the help, is the above thought process correct?
BlackNumero:My question is, does the plain state of rest, the final state of rest, or neither describe the equilibrium price Rothbard describes and what is so commonly associated with neoclassicalism?
I believe this paper should prove helpful in explaining the concept:
http://mises.org/journals/scholar/mackenzie12.pdf
By definition, equilibrium is the point where all possible exchanges are exhausted, such that no further exchange would occur that would make someone better off (or worse off) than before. Then once these exchanges are completed, such that nobody else wants to trade, then a market is said to enter a plain state of rest, at a particular price and quantity.
This plain state of rest happens after each and every exchange. Then thereafter the market bargaining restarts again until another trade is agreed upon, and so on.
For example, in the stock market, there is a double auction where buyers and sellers bargain with each other, until a buyer and seller agrees on a price and quantity, then the process starts all over again. In between trades, as reported on the ticker tape, is a plain state of rest.
For the equilibrium graph of supply and demand curves intersecting, the equilibrium can be in:
BlackNumero:Plain state of rest: "Equilibrium" that occurs after every exchange. I go to grocery store, buy two bags of chips at $2 each, and then leave. Equilibrium: Price where Q/S=Q/D. With given supply/demand conditions of the chip market, the price of potato chips where quantity supplied equals quantity demanded is $2.50 Final State of Rest: Long run equilibrium that is never attained. The equilibrium price of the potato chip market might be $2.50, but after all of the current production/technological factors and consumer demand values run there course, ceteris paribus, the market would tend to a $3 potato chip bag price that would be bought in the ERE.
In general, I believe you are correct in your thought process. However, it would be helpful if I further clarify these concepts as follows:
Plain State of Rest Ex Post. This is the historic equilibrium that has been observed by the market participants where a price and quantity had been previously agreed upon. This is what Mises and Rothbard are most likely referring to.
Plain State of Rest Ex Ante. This is the hypothetical equilibrium which may occur in the future, that is yet to be observed.
Final State of Rest Ex Ante. This is a hypothetical equilibrium which, in the long run, all future equlibriums will converge to. This will happen when:
(a) the general equilibrium (in the Walrasian sense) of the whole economy reaches the Mises/Rothbard Evenly Rotating Economy (ERE) where all trades converges and repeat at the same price and quantity for an indefinite period of time, with plain states of rest repeating in between.
(b) the market for a good ceases to exist, i.e. the last possible trade.
Here is an example at extreme simplification:
Let's say person A has an apple and person B has an orange. Person A prefers an orange over his apple, while person B prefers an apple over his orange. Both persons can potentially trade with a possible plain state of rest ex ante in the future.
The moment the two persons meet, bargain, and then come into an agreement about a trade, the market for the apple and the orange would then enter a plain state of rest ex post.
Now person A may still exchange the orange for something else. In this case, the orange can still be on the market with a potential number of trades in the future, and a potential number of plain states of rest in the future.
However persons A and B, upon the trade, immediately eats the orange and apple, respectively. Then the market for this orange and this apple has ceased to exist, thus the market has both entered into a plain state of rest and a final state of rest.
But the above apple and orange example is really a degenerate case, since we are more concerned with many identical goods traded as present goods (in stock) and as future goods (in stock or yet to be produced).
Thus in a many to many exchange, the final state of rest would be akin to an eschaton, something that can never be attained, except in a utopia or the end of the world.
Sorry, for some reason I can't quote, so I'm just going to adress your entire post all at once.
I read the paper, and while I found it slightly helpful, I still didn't find it answering my questions exactly (perhaps because i'm a picky person and I want to make sure my exact question is correct, who knows :) ). Perhaps I'm confused because I feel like Rothbard only wrote that market exchanges take place at equilibrium, or that my comments just need elucidation.
From what I'm understanding, the plain state of rest occurs after every exchange. This is what you said above with "the plain state of rest happens after each and every exchange." This is also what Rothbard says on p143 describing it as "the condition after the various exchanges have taken place."
Equilibrium in the sense that I am describing it in is what Rothbard writes on page 116, i.e, "it is evident that the price of the good will find a resting point where the quantity demanded is equal to the quantity supplied, i.e., where supply equals demand. At this price and at this price only, the market is cleared....in our example, this final, or equilibrium price..."
My original source of confusion was that I read his p143 footnote wrong and thought that the plain state of rest occurs only after equilibrium in the sense Rothbard describes on p142 and p116. Rothbard seems to describe every market exchange as occuring at an equilibrium price when it reality (at least in my view), they will not. Essentially, although a plain state of rest occurs after a market is cleared (exchanges take place at the equilibrium price), they are distinctly different things. Exchanges do not have to take place at an equilibrium price, since not every exchange will be made at an equilibrium price. When buyers buy a good that is priced too low for equilibrium, a plain state of rest still occurs after their exchanges. The state of rest Rothbard describes on 143 always coincides with what occurs on p116, but they are not the same thing.
Similarily, the equilibrium described above is also different from the final state of rest, which from my understanding describes a final equilibrium price, which is the equilibrium after all the changes have been worked out. Rothbard describes the phenomenon as the equilibrium prices (described above), "moving toward certain long-run equilibria, in accordance with the demand schedule and the effect on the size of stock produced. The supply curve involved in this final state of rest involves the ultimate decisions in producing a commodity and differes from the market supply curve. This equilibrium is not only a equilibrium where the QS=QD, but one where after all the changes in a marketplace have taken place where the final QS=QD, or as you also write, where a market for a good has permanently ended. The final state of rest is different than the equilibrim price Rothbard describes on page 116. Plain states of rest will occur after every exchange takes place at the final equilibrium price (in the ERE), but they are obviously distinctly different terms.
I'm checking to make sure this is the correct line of thinking by the Austrians. I appreciate what your saying with the ex antes and post, but I dont' find them exactly what I'm describing.
Thanks for your time.
In discussing the plain state of rest, I may have confused a number of concepts.
Earlier, I mentioned that I understood the "plain state of rest happens after each and every exchange", which, depending on the particular context, may not be entirely correct, after I re-read selected texts from Mises, Rothbard, et al.
I may have misunderstood the main crux of your questions, which follows:
BlackNumero:However Salerno, in this lecture http://mises.org/media/2538 starting around 40:45 describes the plain state of rest as the state that exists after every exchange (emphasis mine).
BlackNumero:Listening to Jefferey Herbener's lecture (it starts around 16:00 http://mises.org/media/2569, he says that a plain state of rest is when QS=QD, but then later describes a plain state of rest as when someone goes to a store, buys two loaves of bread, and then leaves. It seems like either they are contradicting themselves, or I am just confused. Perhaps a plain state of rest is what occurs after every exchange, and a state of rest occurs when equilibrium is reached? (emphasis mine).
There seems to be two types of "plain states of rest" mentioned:
This inconsistency can be explained by two possibilities:
BlackNumero:Rothbard seems to describe every market exchange as occuring at an equilibrium price when it reality (at least in my view), they will not.
From my reading, Rothbard does not mention that every market exchange must occur at the market clearing equilibrium point.
For example, Rothbard describes market exchanges happening below or above the equilibrium price, through a trial and error method (via speculation), until a market equilibrium is reached.
But maybe I'm missing a citation, so perhaps you can quote the relevant text.
BlackNumero:Essentially, although a plain state of rest occurs after a market is cleared (exchanges take place at the equilibrium price), they are distinctly different things. Exchanges do not have to take place at an equilibrium price, since not every exchange will be made at an equilibrium price. When buyers buy a good that is priced too low for equilibrium, a plain state of rest still occurs after their exchanges.
In the places cited, Rothbard does not explicitly refer to a "plain state of rest" in the main text, except through a footnote (as he cites Mises directly for that), so it is not his purpose to define the concept per se, but simply explain how an equilibrium is reached.
But from what I read, Rothbard would probably agree that it is not necessary for all market exchanges to happen at the market equilibrium.
Like I said earlier, he does mention exchanges above and below the equilibrium, though ultimately the exchanges will converge at the market equilibrium.
Here is a definition provided by a glossary Mises Made Easier by Percy L. Greaves Jr.:
http://mises.org/easier/P.asp Plain state of rest. The condition where there is a cessation of all market transactions because, for the time being, no potential buyers or sellers believe they could improve their conditions by further transactions at quoted prices. This is a temporary period that disappears as soon as such conditions disappear.
Rothbard in Man, Economy, and State seems to describes this state:
http://mises.org/rothbard/mes/chap2c.asp The final price of their sale was the equilibrium price determined ultimately by their various value scales, which also determined the quantity of exchanges that took place at that price. The net result was a shift of the stock of each good into the hands of its most capable possessors in accordance with the relative rank of the good on their value scales. The exchanges having been completed, the relatively most capable possessors own the stock, and the market for this good has come to a close. With arrival at equilibrium, the exchanges have shifted the goods to the most capable possessors, and there is no further motive for exchange. The market has ended, and there is no longer an active “ruling market price” for either good because there is no longer any motive for exchange (emphasis mine).
Mises in Human Action describes a similar situation, and labels it a "plain state of rest":
http://mises.org/humanaction/chap14sec5.asp The only method of dealing with the problem of action is to conceive that action ultimately aims at bringing about a state of affairs in which there is no longer any action, whether because all uneasiness has been removed or because any further removal of felt uneasiness is out of the question. Action thus tends toward a state of rest, absence of action. The theory of prices accordingly analyzes interpersonal exchange from this aspect. People keep on exchanging on the market until no further exchange is possible because no party expects any further improvement of its own conditions from a new act of exchange. The potential buyers consider the prices asked by the potential sellers unsatisfactory, and vice versa. No more transactions take place. A state of rest emerges. This state of rest, which we may call the plain state of rest, is not an imaginary construction (emphasis mine).
Basically, a "plain state of rest" is when all market activity stops, such that there are no more exchanges between buyers and sellers, until market preferences change or renew.
How exactly does the market arrive at a "plain state of rest"? There are two situations I can a provide:
BlackNumero:He [Salerno] even goes on to describe his own plain state of rest, which occurs after he bought every marginal unit of every good he wanted at Wal mart. This definition differs from mine in the sense that it isn't the equilibrium price (Rothbard's description of supply equaling demand), but rather is a term to describe the aftermath of every exchange. So, for example, if I go to a pizza store and buy a slice of pizza for $2, after I buy that marginal unit of pizza a plain state of rest occurs regardless of whether or not the market was cleared (meaning true equilibrium had not been attained).
In the example, I provided earlier, of person A and person B exchanging an apple and orange, respectively, both persons A and B are in a equilibrium situation, which once the exchange is completed, this market reaches a "plain state of rest." The same is true for exchanging something for a pizza slice, provided there is one buyer and one seller.
However, the problem with this concept is if there are other buyers competing with this particular buyer, then one person buying a pizza slice will not bring the market to a "plain state of rest", unless all other buyers complete their transactions.
Then once all transactions have finished, and there are no further exchanges, then the market for the pizza has reached a "plain state of rest."
However, in contradiction, one person buying a slice of pizza, even though the market for pizza slices has not reached a market clearing equilibrium, would indeed be in a "plain state of rest", according to Salerno and Herbener.
Maybe the paper I referenced earlier would provide a clue in resolving this apparent contradiction:
http://mises.org/journals/scholar/mackenzie12.pdf Hayek also saw that individuals are always in personal equilibrium, given their own knowledge and perceptions, but societal equilibrium requires identical perceptions of reality. Hayek’s insight about personal equilibrium is critical to our understanding the market process. We attain personal equilibrium after we choose between imagined alternatives. We make choices that maximize the expected utility in order to dispel felt uneasiness regarding future events. In the interval between the moment of a choice and the moment when we discover the consequences of that choice action ceases and a state of personal state of rest exists: an imaginary balance between our actions and the actions of others emerges.
In the situation of one person transacting within a market, a person reaches a personal equilibrium will purchase a particular quantity at a given price, then stop buying. Then he or she will reach a personal state of rest, until his or her preferences changes.
In the example above, a person buying a pizza slice reaches a "personal state of rest" once he or she stops buying any more pizza, providing his or her preferences does not change.
Instead of a "plain state of rest", as described by Salerno and Herbener, this situation should properly be called a "personal state of rest" instead, even though it can still be a "plain state of rest", but with respect to a personal equilibrium.
If there was a sequence of causation, it would be as follows:
Personal Equilibrium --> Personal State of Rest --> Market Equilibrium --> Plain State of Rest --> Economic Equilibrium (at ERE) --> Final State of Rest
Marked up my previous post with the rich editor.
Hi BlackNumero. I wanted to private message you, but your profile wouldn't allow me. I posted another response to your question (see above), so I thought you might be interested. Not sure if you saw it, though.
Hey, I've been meaning to get back to this. Originally I thought the thread was dead and I left, but I looked at it this weekend and saw that you replied (much obliged). Sorry if my private message thing isn't working (how do I fix it), I haven't really had time to tweak with my account and I'm not a very dedicated forum poster :(. I appreciate you taking your time and replying back.
Anyways, after I thought the thread was dead, I did some more snooping around and found some websites where Peter Klein talked about the various states of equilibruim. When replying to someone's question on his website about economists and their equilibrium constructs, Klein describes Mises' PSR as my PSR (or your personal PSR), saying that "the plain state of rest (PSR) is a realistic concept, a label for the state of affairs that obtains continuously in the real world at the conclusion of every voluntary transaction." (http://organizationsandmarkets.com/2006/09/16/are-economists-realists-about-equilibrium/). In a couple of sentences after this, Klein says "Wicksteed introduced yet another equilibrium construct, an intermediate condition between the PSR and the final state of rest, in his fruit-market example.", which seems to describe the classic "curves" intersecting supply and demand equilibria that we all know and love from our economics classes (If I'm understanding Klein correctly, what you're describing the PSR as).
On the same website (but a different webpage), a student asks him about how he defines PSR pricing as it seems to contradict what he percieves to be the PSR (your PSR). He replies that "[he] was a little too glib regarding Marshall. It would be more accurate to say that Marshall's short-run equilibrium is somewhere between Mises's PSR and FSR. The PSR allows traders to have inconsistent beliefs about other trading opportunities; i.e., even without any exogenous changes in the data, including market entry and exit, the price will eventually converge, at the end of Marshall's "market day," to a uniform price as traders adjust their beliefs. Kirzner... argues similarly that Mises's PSR is a momentary, ephemeral condition that does not correspond to the intersection of the Marshallian supply and demand curves, which impose stricter informational requirements."(http://organizationsandmarkets.com/2006/05/05/further-thoughts-on-economic-calculation/)
Starting on p11, Klein elucidates on these points in his paper, "The Mundane Aspects of Austrian Economics" (http://mises.org/journals/scholar/klein4.pdf), as does Salerno (who Klein seems to borrow from) in his paper (http://mises.org/journals/rae/pdf/rae8_1_4.pdf) where he explains that the WSR is the commonly understood equilibrium position (the one position Mises he says Mises never formally analyzed).
So, in conclusion, from what I've dug up, it seems that the Austrian equilibrium states are:
PSR-"equilibrium" position after every transaction. The common prices we see on the market everyday.
WSR-the typical QS=QD prices we see on neoclassical graphs. The price that would result if, utility scales held constant, the market would tend to as people abitrage and take advantage of the un-wicksteedian equilibrium prices (they bring the market into QS=QD equilibrium.
FSR-the price that is never realized in the market. After the WSR is acheived, the FSR would be the price (it could be the same, but most likely not), that would occur if the entire production structure could adjust to the one market change and a given demand curve.
ERE-the economy where all prices are FSR prices.
Thanks for posting the links, especially the Klein and Salerno papers. From my reading of the Klein paper, he understood a plain state of rest (PSR) in two contexts:
He says "each time a buyer and seller agree on a price and make an exchange, momentarily exhausting the gains from trade." He also says a "set of potential buyers and sellers interacting in a defined market space can also be described as being in a PSR once the trading period is completed." He then quotes Mises examples of many buyers and sellers trading until "no more transactions take place."
For the first condition, he does not state whether other buyers or sellers were present. For all we know, the buyer and the seller could had made the deal in isolation in some backroom somewhere. If there were others present, there would still be a PSR between that buyer and that seller, irrespective of what other buyers and sellers do, In sense, there is a PSR after each and every exchange, even though everyone else is still trading.
For the second condition, buyers and sellers keep on exchanging, until "no more transactions take place." This presents a problem, because if a buyer and a seller stops trading, before everyone else does, then that buyer and that seller are in a PSR (by the first condition). But as long as there are more transactions to be made by others, the market will not be at a PSR, until everybody stops trading (by the second condition).
Either a PSR happens after each and every exchange, or until nobody else wants to exchange anymore. From my point of view, it cannot be both, unless a distinction is made between a personal plain state of rest and a market plain state of rest.
That said, a PSR would be after an exchange at an equilibrium (though Salerno would say disequilibrium) other than a market clearing equilibrium (where supply is equal to demand). Because markets are imperfect, market participants do not know the prevailing equilibrium price, so though trial and error method, they will approximate what they believe to be the equilibrium price. However, once trading stops at a PSR, they discover there are still shortages or surpluses, and must revise expectations, and then resume trading, until they reach another PSR, and so on.
Every time there is an error in calculating the market equilibrium price, after each PSR, an arbitrage opportunity presents itself. Then once all arbitrage opportunities are exploited, then the market will then be at a Wicksteedian state of rest (WSR), its true market equilibrium. This WSR would be the closest equivalent to the Mashallian equilibrium taught in many introductory microeconomics classes, where the demand curve intersects the supply curve.
Even then, the market will resume trading after a WSR, and move from one WSR to the next, because the whole economy has not reached a general equilibrium, where all arbitrage opportunities everywhere have been exploited.
Then once the economy reaches the evenly rotating economy (ERE), all profits would have been arbitraged away to the social time preference, such that all markets will reach their final equilibriums, and then enter a final state of rest (FSR).
That's my personal understanding of the whole thing. In conclusion: