Tuesday, June 30, 2009

Hmmmm… Economic Harmony

This summer I have been fortunate enough to be asked to lecture at the Foundation for Economic Education (FEE) for several of their summer secessions. During my prep work, a lingering idea hit me with more force this year.

The word “equilibrium” is a terrible, horrible word to use in economics. It does not convey what economists mean. The word equilibrium is borrowed from the natural sciences—physics. It means a state of rest. Imagine a ball rolling down a hill into a valley. It swings up one side and then back down; up the other and then down, etc. until it comes to a state of rest. It stops. It will stay at rest until another outside force acts upon it. The ball is in equilibrium.

Now here is what an economist is looking at…There are millions of individuals making choices. Each one has an independent subjective point of view on life. Each buyer decides if a good or service is or is not worth the price asked. Each seller is attempting to get customers to buy their products and make as much money as they can, while constrained by competitors and fickle consumers. Economists describe these actions and behaviors through the use of supply and demand models. When the price is too high there is a surplus of goods that go unsold. When the price is too low, there is a shortage and group of frustrated buyers. However when the price is just right, the amount of goods wanted and offered match perfectly. The market clears and no one goes home frustrated, at least with respect to the market. One can always find something to be frustrated about.

It is this balance between supply and demand that economists use the word “equilibrium.” However, economists do not mean a state of rest where nothing is going on. There is definitely something happening. People are happily trading and no one is angry about not getting enough or having too much.

I think that the 19th century French economist Frederic Bastiat may have gotten it right when he called his book on the overall economy Economic Harmonies.

“Harmony” is a much better word to use than “equilibrium.” Harmony means the complementary actions of many weaving together a greater whole. Think of a symphony. The strings, the brass, the woodwinds, all coming together that create a larger work of art. In the same way, the economy is a process of harmonization. The economy is many people working together, comprehending, complementing, completing projects, tasks, ideas so that others will be served. If customers are not served, the business closes.

The economy is truly a marvelous, beautiful work of art.