Page 71 - Global Political Economy_Understanding The International Economic Order

CHA PTER T HREE
particular goodmight be adoptedby an entrepreneur to cut costs,
expandmarket share, and/or increase income. Then, competitors
would either have to adjust to this development or else be forced
out of business; in either case, the exogenous change has powerful
ramifications throughout the economy as actors adjust to its conse-
quences. When equilibrium is restored, there is no longer any incen-
tive for actors to change their behavior until another exogenous
change enters the market.
Exogenous developments that cause disequilibrium and give indi-
viduals an incentive to change their behavior are frequently quite mi-
nor andmay require little more than a small adjustment by the eco-
nomic actors. This means that the evolution of an economy is a
generally continuous andrelatively smooth process consisting of an
equilibrium, a destabilizing disequilibrium, and eventual creation of
a new equilibrium. Economists agree with GottfriedLeibnitz (1646–
1716) that nature does not take jumps and that change tends to be
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incremental. However, upon occasion, exogenous developments can
be revolutionary andcan cause a profound shock to the economy;
then the resultant adjustment or transition to a new equilibrium can
have significant implications for both economic andpolitical affairs.
The sudden large increase in petroleum prices in 1973 exemplified
dramatically how a change in relative prices could have a dispropor-
tionately huge impact on international economic andpolitical affairs
when the increase in world energy prices plungedthe worldeconomy
into a decade of economic “stagflation.” Throughout the 1970s and
beyond, the economies of the world struggled to adjust to this dra-
matic increase in energy prices.
According to neoclassical economics, the outcome of a disequilib-
rium is totally dependent upon the interplay of economic forces and
the interaction of many individual decisions responding to changes or
anticipatedchanges in relative prices. The focus of analysis is on the
disequilibrium itself and on the economic forces it generates. The his-
tory of the events leading up to the disequilibrium or initial condi-
tions is not relevant for the outcome or to restoration of an equilib-
rium. As Paul Samuelson has argued, whatever initial conditions may
be, eventually prices andquantities converge to a new equilibrium
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For example, an economist wrote that the stock market crash of October 1987
couldnot have been causedby such a small event as the American-German clash over
interest rates. Causes andeffects, he argued, must equal one another. Chaos theory,
on the other hand, teaches us that small events can have disproportionately large conse-
quences.
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