A NOTE ON ARROW'S SUGGESTED ENVIRONMENT FOR THEORIES OF PRICE ADJUSTMENT*
| Date | 01 November 1981 |
| Author | Larry R. Clark |
| DOI | http://doi.org/10.1111/j.1467-9485.1981.tb00094.x |
| Published date | 01 November 1981 |
Scottish
Jaunrrl
of
PdUicdEconomy,
Vol.
28,
No.
3,
Nomk
1981
8
1981
Longman
Group
Limited
003tL9292jSl/00230~ W2.00
A
NOTE ON ARROW’S SUGGESTED
ENVIRONMENT FOR THEORIES OF
PRICE ADJUSTMENT*
LARRY R. CLARK
University
of
Prince Edward Island
I
INTRODUCTION
This note is meant to be an addendum to Arrow’s “Toward
A
Theory of Price
Adjustment”
(1959).
In that paper it was argued that the “Law
of
Supply and
Demand”
dP
-
=
h(D-S)
dt
h’
>
0,
h(0)
=
0
(2)
(where
D
is the demand for a commodity,
S
its supply and
p
its price) is not to
be regarded simply as a technical relation. Rather, it represents the result
of
the
interaction of economic agents and therefore requires firm behavioural
footing.
In
particular, any theory which claims to explain the adjustment
of
prices must present a behavioural explanation consistent with this “law”.
Moreover, such explanations must be based on decision-making by in-
dividuals (Arrow,
1959,
p.
42).
Such explanations are excluded from theories
of
a perfectly competitive economy because all agents are price takers. Thus,
perfect competition exists only at equilibrium and we must rely on theories
of
imperfect competition to explain the behaviour of an economy in dis-
equilibrium situations.
This, then is what Arrow proposes: Explanations
of
an economy out
of
equilibrium must be
(1)
based on imperfect competition,
(2)
in terms of methodological individualism, and,
(3)
consistent with the stated “Law of Supply and Demand”.
In what follows, propositions
(1)
and
(2)
are accepted. Issue is taken only with
proposition
(3).
In particular, it is maintained that the position underlying this
proposition in untenable. First,
a
brief argument that the position taken in
proposition
(3)
is unjustified will be presented. Then an analysis
of
individual
behaviour out
of
equilibrium will be taken up.
*The analysis in this paper is based on a suggestion by Lawrence
A.
Boland.
Date
of
receipt
of
final manuscript:
16
March 1981.
284
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