Page 69 - Global Political Economy_Understanding The International Economic Order

CHA PTER T HREE
supply, and hence a decline in the price of a good, will give some
actors an incentive to increase their consumption of the good(subject,
of course, to the principle of diminishing returns). Over time, the
imbalance between the increasedsupply andthe increaseddemand
for the goodwill be overcome, and the market will be restoredto an
equilibrium condition in which no actor has an incentive to change
her or his behavior. Thus, a market equilibrium is defined by econo-
mists as a system of prices andquantities in which there is a balance
between opposing forces.
The concept of equilibrium is a powerful analytic tool. Yet, this
concept can also be quite misleading. Economists generally use the
term as if they really coulddetermine at any particular moment
whether or not an equilibrium actually exists in a particular market.
However, as Fritz Machlup emphasized, the concept of equilibrium is
an abstract concept andcannot tell us whether in reality equilibrium
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actually exists. Moreover, rather than being a neutral term, the con-
cept may be loadedwith policy andpolitical biases. The equilibrium
concept is central to economists’ study of the market, but there are
problems in using equilibrium as an explanatory or predictive tool.
Markets are highly dynamic and are continually revolutionizing so-
cieties. Certain characteristics of a market economy explain its dy-
namic nature: (1) changes in relative prices in the exchange of goods
and services, (2) competition as a determinant of individual and insti-
tutional behavior, and(3) the effect of efficiency in determining the
survivability of economic actors. The market’s profoundconse-
quences for economic, social, andpolitical life flow from these char-
acteristics. The pressures of market competition andthe imperative
to achieve ever greater efficiency leadto the continuous innovation of
new technologies, organizational forms, andproductive techniques,
and to discarding of the old in what Joseph Schumpeter called a “pro-
cess of creative destruction.” At both the domestic and international
levels, a market system creates a hierarchical division of labor and
distribution of wealth among producers, a division based principally
on specialization andthe law of comparative advantage. Market
forces lead to the reordering of society (domestic or international)
into a dynamic core and a dependent periphery. The core is character-
izedprincipally by its more advancedlevels of technology andeco-
nomic development; the periphery is, at least initially, dependent on
the core as a market for its exports andas a source of productive

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Fritz Machlup, Economic Semantics, 2ded. (New Brunswick, N.J.: Transaction
Publishers, 1991), 43–72.
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