Saturday, October 1, 2016

The Vital Structure of General Equilibrium

Tradable sectors provide a sizable contribution to general equilibrium stability, in part because they often include a representative single commodity price - one which extends across regions and nations. Nonetheless, while a normally reliable price construct exists - in contrast to somewhat indecipherable non tradable sector pricing - tradable sectors remain subject to swings in supply side conditions, which affect costs and resource availability.

In spite of this changeable supply side factor, the primary market position of tradable sectors is more closely anchored to overall economic conditions, than secondary markets and/or their related non tradable sectors. The latter does not affect general equilibrium value in the same way via price swings, because secondary markets aren't coordinated across a full (international) range of resource potential - especially in terms of economic time representation.

Consequently, when tradable sectors experience supply side shocks, the maintenance of a level nominal target may provide sufficient means to smooth the shock across a full spectrum of primary market value. Yet aggregate spending capacity has not been well maintained by central bankers in recent years, and too many economic activities have been diminished, by what should have been the limited consequences of individual supply shocks. By coddling the secondary market of credit formation, central bankers are missing both the (international) wealth templates of tradable sectors, and the nominal income which bridges all sectors.

Another general equilibrium consideration is price stickiness - especially in the knowledge based wages (and asset structures) of local, unique equilibrium settings for secondary markets. While these settings might appear decentralized due to their price variance, they are a direct monetary response to internationally and nationally (centrally) managed wealth generation. In a recent post, "Price stickiness is a symptom not a cause", David Glasner wrote:
All the theory of general equilibrium tells us is that if all trading takes place at the equilibrium set of prices, the economy will be in equilibrium as long as the underlying fundamentals of the economy do not change. But in a decentralized economy, no one knows what the equilibrium prices are, and the equilibrium price in each market depends in principle on what the equilibrium prices are in every other market. So unless the price in every market is an equilibrium price, none of the markets is necessarily in equilibrium.
Glasner is right, in the sense it can be difficult indeed to decipher equilibrium conditions in secondary markets. My concern of late is that we presently expect too much of our secondary markets in terms of marketplace capacity. Until more secondary markets exist in a primary market position, they will present problems for primary international markets, which are consequently experiencing deflation from inflation targeting.

Is it necessary to "know" equilibrium prices for every market? Secondary markets and non tradable sector activity provide price coordination in a different capacity than tradable sectors, which partly accounts for the unique qualities of these markets. While their value is also a reflection of primary market wealth, secondary markets have the additional responsibility of coordinating time based product which is not (yet, at least) sufficiently represented in primary markets.

Even though sticky wages are a general equilibrium problem, individuals will eventually need a more direct approach, in which existing resource capacity better adjusts to the changing wage realities of the present. In fact, this process should have already begun, decades earlier. Of median wage growth, Ryan Avent writes ("The Wealth of Humans", page 60):
Median wage growth, or growth in wages for the American worker in the middle of the distribution, did far worse. Indeed, since 2000 the real wage for the typical American has not risen at all. Looking further back does not much improve the picture either; since 1980 the median real wage is up by only 4 per cent. Not per year, but over the whole of the period. And if you then focus in just on the real wage of the median male worker, the duration of the stagnation extends back into the 1960s.
Too many aspects of secondary market structure contribute to this dilemma, and the response thus far has been inadvertent attempts to adjust wages to consumer expectations, instead of the other way around. Hopefully, Ryan Avent's latest book will make more of this discussion a commonplace. I am particularly grateful he recognizes the fact that - in the years ahead - marketplace realities will need to do a better job of adjusting to wage realities.

While I hardly expect general equilibrium circumstance to bear this responsibility at the outset (given extensive investments and commitments to marketplace definition), other portions of the population need not have to take this one size fits all approach, for equilibrium structure. Rather, experiments at the margins would make it possible to determine new forms of marketplace structure which more closely approximate existing wage capacity. All too often, sticky wages have been quite important in the general equilibrium conditions which have attempted to impose the same consumption definitions for all citizens.

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