Social Classes and Equilibrium

37356

This essay develops a simple worker-capitalist model. We first show that if labor markets clear at low wages then certain produced commodities are over-supplied due to inadequate demand. This implies that any voluntary trade between firms and consumers is Paretoinefficient. Nonetheless, this inefficiency can be rectified by a Pareto-improving income transfer from capitalists to workers. We claim that these results point out an efficiency enhancing role for the welfare state, and demonstrate the markets’ incompetency for coordinating economic activity efficiently, thus evoking the Marxian/Keynesian polemics. Finally, we analyze price cycles in a simple setting of Walrasian price adjustment.

69

disequilibrium , underconsumption , Arrow’s corner , irreducibility , social classes.

Bogazici Journal

83

Bogazici Journal