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who has decided that he values twenty-five cents more highly than a
bottle of milk (and offers milk to the market at this price), is successful in
discovering some consumer who happens to prefer a bottle of milk over
twenty-five cents (and is willing to buy milk at this equilibrium price).
A market that is not in equilibrium should be looked upon as reflecting
a discordancy between the various decisions being made. Some of these
discordant decisions cannot be successfully consummated in market action;
they do not mesh. If sellers of milk charge too high a price, they will
not find sufficient buyers. Decisions will have to be revised until a
compatibility is attained between decisions that is the condition of a
market in equilibrium.
The theorist who fastens his attention on a particular market upon
a particular date is well aware that the decisions being made are different
from the decisions that would be made in a market that had attained
equilibrium. Whatever the current buying and selling attitudes of the
market participants might be, they are likely to be somewhat different
than on previous dates. Thus, even if previous market activity had suc-
ceeded in achieving equilibrium, from the point of view of the previous
market attitudes, the situation is no longer one of equilibrium with respect
to the new attitudes of buyers and sellers. But the theorist knows that
the very fact of disequilibrium itself sets into motion forces that tend to
bring about equilibrium (with respect to current market attitudes). If
current attitudes were maintained unchanged (and the theorist is of course
well aware that they will do nothing of the kind), then the initial state

of disequilibrium would itself tend to bring about an eventual equilibrium.
The very fact that some of the decisions and plans currently being made
are incompatible with others, so that some individuals must be disap-
pointed, will force market participants to revise their plans in the direction
of closer harmony with the other plans being made in the market. If
current attitudes, to repeat, were to continue unchanged, then one might
expect the plans of market participants to reach eventual full compatibil-
ity. Until then, decisions would be continually revised and adjusted.
When equilibrium would have been attained, all plans would be carried
out successfully and would be therefore maintained without alteration
for as long as the basic attitudes continue unchanged.
The market theorist distinguishes, therefore, (a) a process of adjust-
ment during which the market is in agitation, and (b) a state of equilibrium
(the imaginary situation that would be achieved if the adjustments set
in motion by the current market attitudes would be permitted to work
themselves out fully; that is, if current market attitudes continue without
change). In his analysis, the theorist may determine the conditions that
would prevail on a market where equilibrium had been attained; he may
do this by describing the actions that will be taken in a given disequilibrium
market, tracing the tendency of such actions toward the attainment of

Some further attention to these various analytical approaches is in
order, and will help us, incidentally, toward a clearer grasp of the market
process. A market process, we have seen, is essentially a process of ad-
justment. In this process, individuals adjust their actions to take ad-
vantage of the opportunities offered by the market; that is, they adjust
their actions to "fit" the actions of other market participants. So long
as unexploited opportunities exist that can be grasped through a change
of action, the process of adjustment is not yet complete; somebody's plans
must go unfulfilled”equilibrium has not yet been attained. Until the
attainment of equilibrium, there will be unspent forces at work in the
market. These forces will impel men, sooner or later, to produce different
quantities or qualities of goods, to try to buy or to sell at different prices,
to move in or out of industries, and so on. All these forces, it will be
borne in mind, are set in motion by the simultaneous existence of two
sets of factors: first, a given set of basic buying and selling attitudes (im-
agined by the theorist to be continuously maintained); and second, a set
of prevailing decisions by market participants that have not yet been
"shaken down" through the market process into a harmoniously fitting,
self-renewing pattern.

Now, it must be emphasized that the twin notions of adjustment and
equilibrium, while seeming to pertain only to a world of unchanging basic
attitudes, are in fact the tools with which the theorist analyzes the effects
of change. A new tax is imposed, a new oil field discovered, a wave of
immigration is expected, a revolution in tastes is considered”the theorist
explains the consequences of these changes by means of the analysis of
adjustment and the description of equilibrium. In all these problems the
theorist imagines a market that, before the occurrence of the change, had
been in equilibrium; he imagines the state of disequilibrium such a market
would be thrown into by the postulated change; he traces through the
process of adjustment that would be touched off by this disequilibrium;
and he finally describes the new state of equilibrium that can be attained
when all the forces of adjustment have worked themselves out, imagining,
of course, that throughout the adjustment period no other change in basic
attitudes has occurred.
In his analysis of the consequences of such a change in the basic data,
the theorist frequently finds that ripples of market forces set off by the
change do not completely spend themselves until adjustments have been
made in market actions far removed from the initial change. The discovery
of a new oil field not only affects the price and sale of oil, but eventually
affects numerous other industries; and so on. If the theorist ignores any
of the adjustments”however remote”that must sooner or later be made,
his system will, of course, not be one of full equilibrium. Nevertheless,
economists frequently are content to trace out the market consequences of
a particular event only insofar as it directly entails adjustments. The
theorist may mark out either a time range, or a market area, within which
he is especially concerned to discover the course of adjustment. When the
forces which change the actions of market participants can be held to
have spent themselves within this selected range”even though further
adjustments will eventually have to be made beyond it”the theorist, loosely,
may describe his selected range of the market as having attained equilib-
rium. Such an "equilibrium" obviously is quite incomplete; there are still
market descisions (outside the "range") that will be disappointed and will
have to be revised.4 Nevertheless, it may clearly be expedient for the
analyst to concentrate his attention on particular waves of adjustment, and
the concept of "incomplete equilibrium"”although self-contradictory”
may be of considerable usefulness.
Two kinds of incomplete equilibrium may be distinguished, depend-
ing on the criterion by which the theorist selects his "range."
1. The theorist may discover that certain market forces work them-
selves out fully within a relatively short period of time, while other such
4 Moreover, revisions in decisions made outside the range may bring about secondary
repercussions, in turn, upon decisions within the range.

forces are felt generally only after a longer interval. He may confine his
attention to the first group of forces. When these have spent themselves,
he may describe his system as being in equilibrium”as it may be, in fact,
for the duration of the selected time period.5 The incompleteness of this
kind of "equilibrium" is indicated by referring to it as short-run equilib-
rium”it being understood, of course, that the nature of the problem under
consideration will dictate the "shortness" of the selected period, and also
that a number of different such periods may be possible with correspond-
ing equilibrium positions of different degrees of incompleteness.
2. The theorist may mark off, secondly, certain kinds of activity on
the part of market participants that he believes to be more likely affected
by the initial change in market data. He may believe, for example, that
the discovery of a new oil field is likely to cause a more marked alteration
in the willingness of oil producers to sell oil at given prices, than in
the willingness of landlords to purchase new oil burners. The theorist
might then confine his attention to the market activities of those buying
and selling oil. When the decisions governing these activities are mutually
compatible, then "the oil market" may be described as in equilibrium.
The incompleteness of this kind of "equilibrium" is indicated by referring
to it as partial equilibrium; that is, an equilibrium existing only in one
selected "pocket" of the entire market system.6 The possibility, discussed
in earlier sections of this chapter, of distinguishing separate "markets"
between which definite interrelationships exist, arises, of course, out of the
kind of analysis described here. The term "general equilibrium" is re-
served for the condition where all adjustments have been carried through
to completion, so that no decisions made in the entire system, however
remote from the initial change, are found to be disappointed.7

We have seen that a market system may be divided by the theorist
into more or less distinct areas of activity where market forces bring about
adjustments with especial speed and directness. In considering the par-
ticular course of economic forces within such a distinct area of activity, the

5 It should be realized, however, that long-run forces may start to operate well before
shorter-run forces have worked themselves out. See Ch. 10, pp. 217-222.
6 Of course, the changes brought about in the "oil-burner market" as a result of
changes in the "oil market" may simply take a longer time to work themselves out. In
this sense "partial" equilibrium may be "short-run" equilibrium.
7 In the later chapters in this book, the various separate markets within a market
system are frequently called "partial markets" to emphasize the partial character of analy-
sis confined exclusively to such a separate market. On the other hand, when, as in
Ch. 11, we analyze the complete market process as it embraces all the separate "mar-
kets," the market as a whole is called the "general market."

area is referred to as a "market"”in the same way as the economy as a
whole is called a market (when we are interested in the ripples of economic
forces as felt throughout the system). The simplest form of market where
the forces set up by human action can be analyzed is that marked out by
considering only the activities of those buying and selling the same good
or service.
We speak”and will be doing so frequently in this book”of a market
for shoes, wheat, a particular kind of labor, and so on. We bear in mind
at all times that any equilibrium achieved in such a market may be quite
incomplete from the standpoint of the entire market system. It is the
especial directness with which changes in the data in one part of such a
market make their impact on actions through this market, that justifies
our undertaking this kind of separate analysis.
In the actions taking place in the market for any one commodity, such
as wheat, there is always, we find, the same market process at work. In
any such market there is a general tendency on the part of potential buyers
and sellers to continually revise their bids and offers, until all bids and
offers are successfully accepted in the market. This general tendency ex-
presses itself in three specific ways. First, so long as there is a discrepancy
in the prices offered by different would-be buyers, or in the prices asked
by different would-be sellers, there will be disappointments and subsequent
revisions in bids or offers.8 Second, so long as the quantity of the com-
modity offered for sale at any one price (or below it) exceeds the quantity
that prospective buyers are prepared to buy at this price (or above it),
some of the would-be sellers will be disappointed and will be induced to
revise their offers. Third, so long as the quantity of the commodity offered
for sale at any one price (or below it) falls short of the quantity that pros-
pective buyers are prepared to buy at this price (or above it), some of the
would-be buyers will be disappointed and will be induced to revise their
Thus, the agitation of the market proceeds under the impulse of very
definite market forces. Prices offered and bid would be continually
changing”even with constancy assumed in the basic production and con-
sumption attitudes of the market participants”as would-be buyers or sellers
find themselves forced to offer more attractive terms to the market. A
would-be buyer might offer a higher price than before because his previous
offer did not fit in with the plans of any prospective seller. Apparently
all sellers aware of this previous offer found more attractive alternative
ways of disposing of their commodities. A seller would be forced to lower
8 In Ch. 7 and subsequent chapters, where the process outlined here is worked out in
greater detail, it will be shown that these initial discrepancies in prices offered or asked,
are the result of imperfect knowledge.

his price because buyers found more attractive uses for their money”either
elsewhere in this market, or in some other market altogether.
The general direction toward which agitation in the market is tending
should be clear. If unlimited time were allowed for a market to reach its
own equilibrium position”that is, if we assumed no change to occur
indefinitely either in consumer valuation of the commodity or in pro-
ducers' assessment of the difficulty of its production”it is easy to imagine
what would finally emerge. There would be a single price prevailing in
the market; all sales would be effected at this price. Individuals would
offer to sell the commodity at this price, and the quantity that they offer
for sale would be exactly sufficient to satisfy those other individuals who
are offering to buy the commodity at the prevailing price. No would-be
buyer is disappointed in his plans to buy, and no would-be seller in his
plans to sell.9

Much of our discussion thus far has concerned the attitudes of in-
dividuals at a given point in time, or over a period during which these
attitudes are assumed not to change. The analysis of the market under
these artificial conditions makes it possible, in addition, to grasp the course
of the market process as it would operate in the absence of these restrictive
assumptions. Let us consider again the pattern of adjustment discussed
in the previous section.
If we permit change to occur in the urgency with which prospective
buyers are anxious to acquire the commodity sold in the market, or if
we permit change to occur in the conditions governing the production and
supply of the commodity to the market, a number of new elements enter
into the situation. It is clear, first of all, that with respect to the attitudes
of buyers and sellers toward the commodity as of each moment, a different
equilibrium situation occurs toward which the market would tend if the
attitudes of that moment were maintained indefinitely. Since attitudes
are permitted to change, it follows that the market process, the ceaseless
agitation of the market, is being continually pulled toward a different
equilibrium position. Would-be buyers and sellers who were disappointed
in their past market activity”or who, even if not disappointed in the past,
do not wish to be disappointed in the future”must revise their bids or
offers to make them more attractive to the current market. A quite differ-
ent importance is now attached to the skill of anticipating future market
conditions. Disappointment of plans made by would-be sellers will spur
9 It may be observed that in this case (as in all others in economics) a state of equilib-
rium is not the same thing as a state of perfect happiness. All that exists is a state in
which no one is misled into making plans that cannot be executed.

them to undertake production only by their assessment of future demand
But the basic pattern of market adjustment is applicable in this chang-
ing market as well. The disappointments engendered at any one time by
the existing absence of equilibrium will help to guide subsequent plans to
anticipate the correct future conditions. Since the changes in market data
can be expected to proceed only gradually, the success or failure of past
plans can provide a fairly reliable indicator of how these plans must be
revised in the future. Thus, market forces are still able to direct the
agitation of the market in the direction of a uniform market price, and of
a correspondence between the quantities offered and demanded in the
market at given prices.
Where a considerable change in the basic market attitudes has occurred
with abruptness, the consequences are not difficult to understand. The
change will make itself felt initially by severely disappointing the plans
of buyers and sellers who had been unable to foresee the change. If, for
example, the supply of the commodity has been abruptly halted by the
sudden unavailability of a vital raw material, then many buyers will find
that the price they had confidently expected to obtain the commodity at
is no longer in effect. If, to take a different possibility, the emergence
of some new product abruptly reduces the dependency of consumers upon
the commodity we are considering, then sellers will find that their offers
to sell will no longer be accepted at the old prices. In short, any kind
of abrupt change will immediately increase the degree of disequilibrium
existing in the market, and will therefore initiate fairly rapid and extensive
adjustments in the plans of buyers and sellers in the direction of the
state of equilibrium corresponding to the new state of affairs.

Our discussion of the pattern of adjustment in the market for a single
commodity serves to clarify the nature of the market process as it governs
activity throughout the entire market economy. We have seen that it is
permissible to consider the market system as a whole, as being made up
of many separate markets that have definite and powerful strands of
relationship. For the market system as a whole to be in equilibrium, it
is necessary for equilibrium to exist within each separate market. Within
the market for each commodity, buying and selling plans must dovetail
so that no disappointment occurs in the execution of any plan made
throughout the system.
So long as the market system as a whole is not yet in equilibrium”
that is, so long as "general equilibrium" has not yet been attained”some
plans are being disappointed. The disappointed buyers or sellers may

revise their plans in several ways. They may offer better terms in the
same markets, or they may decide to cease (or reduce) activity in these
markets and increase activity in fresh markets altogether. Disequilibrium
in any one of the separate markets will thus cause adjustments in the
plans made first of all by participants in that market, and then secondarily
in the plans made by participants in related markets”whether horizontally
or vertically related.
In any event the course of the market process is fairly clear, assuming
for the moment that consumer tastes and basic production possibilities are
maintained unchanged. As each separate market adjusts to bring cor-
respondence in the buying and selling plans directly affecting it, the ripples
of disappointed plans spread gradually into the related markets. Each
separate market thus adjusts to disappointments in plans due to both its
own initial disequilibrium, as well as to the impact of changes in plans
brought about by the adjustments being made in related markets.
In the process of adjustment within each separate market, and between
the separate markets making up the entire system, a principal role is played
by the entrepreneur. Conditions may exist in separate markets so that
adjustments can take place to improve the positions of all concerned. The
entrepreneur becomes aware of this situation and undertakes the risk of
attempting to make the necessary adjustment. It is through his activity
that the relationships between separate markets transmit ripples of change.
If, for example, on the market for a finished product, its price is in excess
of the sum of the prices of all the resources necessary for its production,
as prevailing in the separate resource markets, it is entrepreneurial activity
that is at once set into motion by the inconsistency, constitutes itself the
condition of disequilibrium, and is responsible for the tendency to bring
about ultimate equilibrium in the market.
An important change that occurs at any point in the market system as
a whole brings about direct alterations in its immediate market vicinity.
Entrepreneurial activity transmits the consequences of these changes to
related markets. Through the impersonal medium of altered prices, par-
ticipants in other, possibly remote, parts of the market system are forced
to adjust their plans to the changed conditions. The ceaseless agitation
that is characteristic of a market economy becomes now for the market
theorist a determinate process that is set into motion in a very definite
way in response to fundamental changes in the basic data with which the
market grapples. Movements of prices; growth of new industries; expan-
sion or contraction of existing firms; the adoption of new methods of pro-
duction; the search for new resources, techniques, and products; all become
explainable for the theorist in terms of the totality of the market process of
which they are a part.
In the next chapter we review briefly what the market process achieves.

In the later chapters we turn back to examine in greater detail how market
forces are transmitted, make themselves felt, and initiate adjustments. In
addition we will see more specifically how each participant in the market
economy plays a definite role in the whole process.

Chapter 2 surveys the over-all operation of a market system.
A market system is characterized by a framework of law that broadly
recognizes individual freedom, responsibility, and private property rights.
Market theory assumes the use of a medium of exchange.
In a market system individuals may fill the roles of consumer, resource
owner, and/or entrepreneur. The chains of cause and effect that are
expressed through market forces operate through the typical structural
interdependence existing between the decisions made by consumers, re-
source owners, and entrepreneurs. Vertical relationships between market
decisions exist when goods and services are bought for later sale; for ex-
ample, when resources are bought by entrepreneurs from resource owners
to be used in production and sold in the form of the product to consumers.
Horizontal relationships exist, for example, when two different products
require the use of the same resource in their production; or where a product
may be produced with either of two resources that are substitutes for one
A market is in equilibrium when all decisions dovetail with each other.
Disequilibrium exists when some decisions cannot be executed because they
have been planned on the basis of mistaken assumptions concerning the
decisions of others. The market process consists in the adjustments that
are enforced upon individual decisions by the disappointments experienced
in a disequilibrium market. The economic theorist may confine his at-
tention to limited series of adjustments that may be wrought out within
the market system. He will recognize that the situation where all these lim-
ited series of adjustments have fully worked themselves out is one of only
partial equilibrium. For the entire market system to be in equilibrium”
that is, for a general equilibrium to prevail”each of the separate sectors
of the market must be in harmony with each of the others. Market theory
recognizes the existence of chains of cause and effect between all the market
sectors as well as within each of them. The general market process com-
prises all the adjustments enforced upon the market activities of resource
owners, consumers, and entrepreneurs throughout the system by an initial
failure of all their decisions to dovetail perfectly with each other.

Suggested Readings
Menger, C, Principles of Economics, Free Press, Glencoe, Illinois, 1950, Chs., 1, 2.
Stackelberg, H. v., The Theory of the Market Economy, Oxford University Press,
New York, 1952, Chs. 1, 2.
Hayek, F. A., "Economics and Knowledge," in Individualism and Economic Order,
Routledge and Kegan Paul Ltd., London, 1949.
Efficiency, doordination, and the
JMarket Economy

chapter we complete our broad
preliminary survey of the theory of the market system, its operation and
achievements. Chapter 2 attempted to provide a bird's-eye view of the
way the market transmits economic forces through the system, tending to
make the actions of all market participants dovetail more closely in the
system. The present chapter demonstrates how these interactions in the
market economy enable it to fulfill the basic functions of any system of
organization. We are not concerned here with what the market process is
or with the patterns of relationships the process consists of, but with how it
accomplishes what it is supposed to accomplish. Some remarks are neces-
sary to make clear, at the very outset, the point of view from which such

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