|Peter Boettke|
Watch this video and consider the beautiful patterns that are painted by nature.
Now, consider the following passages from Alfred Marshall's Principles of Economics, 8th edition (1920), 287-288.
Such an equilibrium is stable; that is, the price, if displaced a little from it, will tend to return, as a pendulum oscillates about its lowest point; and it will be found to be a characteristic of stable equilibria that in them the demand price is greater than the supply price for amounts just less than the equilibrium amount, and vice vera. For when the demand price is greater than the supply price, the amount produced tends to increase. Therefore, if the demand price is greater than the supply price for amounts just less than an equilibrium amount; then, if the scale of production is temporarily diminished somewhat below that equilibrium amount, it will tend to return; thus the equilibrium is stable for displacements in that direction. If the demand price is greater than the supply price for amounts just less than the equilibrium amount, it is sure to be less than the supply price for amounts just greater: and therefore, if the scale of production is somewhat increased beyond the equilibrium position, it will tend to return; and the equilibrium will be stable for displacements in that direction also.
When demand and supply are in stable equilibrium, if any accident should move the scale of production from its equilibrium position, there will be instantly brought into play forces tending to push it back to that position; just as, if a stone hanging by a string is displaced from its equilibrium position, the force of gravity will at once tend to bring it back to its equilibrium position. The movements of the scale of production about its position of equilibrium will be of a somewhat similar kind.
But in real life such oscillations are seldom as rhythmical as those of a stone hanging freely from a strong; the comparison would be more exact if the string were supposed to hang in the troubled waters of a mill-race, whose stream was at one time allowed to flow freely, and at another cut off. Nor are these complexities sufficient to illustrate all the disturbances with which the economists and the merchant alike are forced to concern themselves.
But who in the real-world must adjust and adapt to these constant changes in the market place and what tools do they employ in aiding them in this difficult task? This is what the theory of the entrepreneurial market process as developed by Mises, Hayek and Kirzner was all about. As Kirzner put it in Market Theory and the Price System (1963, 240): "If a market is not in equilibrium, we have seen, this must be the result of ignorance by market participants of relevant market information. The market process, as always, performs its function by impressing upon those making decisions those essential items of knowledge that are sufficient to guide them to make decisions as if they possessed the complete knowledge of the underlying facts."
As economists we must always put primacy of place in our explanations of market coordination on this ability of the price system to guide adaptation and adjustment, and the role of the alert entrepreneur in not only moving markets, but creating markets. Relative prices guide us in decision making, profits lure us in our decisions, and losses discipline us in our decisions. This is how the price system impresses upon us the essential items of knowledge required for plan coordination through time and in the face of ceaseless change. This science of economics is born out of the puzzle that the coordination of economic activity through time presents to our imagination. The solution to that puzzle is the entrepreneurial market process. And the resulting social order produced should inspire our intellectual awe and amazement. It is a beautiful pattern produced as productive specialization is pursued, mutual gains from trade and innovation are realized, and peaceful social cooperation among distant and disparate individuals is achieved.
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