Tuesday, April 6, 2010

The problem to be solved by the invisible hand (amv)

The complexity of an economy stands in sharp contrast to the simplicity of a question that must be raised about its operation. Many agents compose the economy, and they have to deal with a large number of commodities. Each one of those agents makes decisions about the quantity of each one of those commodities that he will produce or consume: the number of variables involved is the product of the number of agents and the number of commodities. Moreover, is this decision‐making process the agents act independently of each other, and they are guided by self‐interest. Why is high disorder not the result?
The agents of an economy are counted in millions, if not billions. The number of commodities is similarly large. The self‐interests of the independent decision‐makers are sometimes in agreement, sometimes in conflict. Why does one not observe for every commodity a large excess of demand, evidenced for instance, by lengthy waiting times for orders to be filled, or a large excess of supply over demand, evidenced, for instance, by massive inventories?

Agents no longer make independent decisions, and they interact with each other, if there are markets for commodities. Their interaction then reduces the difference between demand and supply.

—Gerard Debreu, ”Existence” 1998