Thursday, December 02, 2010
Profit Means Disequilibrium
Israel Kirzner argues that the entrepreneur makes a profit when he finds a state of disequilibrium and moves the system toward equilibrium. This is the essence of arbitrage. If we understand this insight, then we can see that the economy is necessarily in a state of disequilibrum. At least, it is in every single industry where profit is being made. In other words, if Kirzner is right about how profit is made, the existence of profit demonstrates that the economy is in a state of disequilibrium. Where does this leave equilibrium as a valid method of analysis?