ABSTRACT

Chapter 3 found much to criticize in the equilibrium approach to economic analysis, but did note that it offers substantial insight into the way that prices and quantities are determined in a market economy. This chapter begins by looking into the determination of prices and quantities as a foundation not for discovering the properties of equilibrium in an economy, but as a foundation for understanding the market process. Market clearing and equilibrium are not the same things, although they

have been depicted as such at least since Adam Smith described the process in The Wealth of Nations. An equilibrium implies that if that equilibrium is disturbed, there are forces that re-equilibrate and bring the system back to its former equilibrium state. That notion has some merit when examining the market clearing forces in an economy, but has little merit if it is extended to an examination of the forces that produce economic progress and prosperity. The economic forces that work to clear markets are not the same forces that work to generate progress.