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In economics, disequilibrium is defined relative to Walrasian equilibrium, which is achieved under the assumption of a fully developed market and a flexible price mechanism. Disequilibrium refers to a balance condition under which there is neither a fully developed market nor a flexible price mechanism. In this sense, disequilibrium is also called non-Walrasian equilibrium.
According to the Walrasian theory, given that the market is fully developed and the price mechanism flexible, given also that every market participant possesses perfect information about current and future prices as well as a full understanding of current and future demand and supply, and that prices adjust instantaneously with changes in demand and supply, then, at any price level, aggregate demand is always equal to aggregate supply, and there is no excess demand or excess supply. All transactions are settled at equilibrium prices. If the equilibrium price is not reached, a transaction will not be concluded. Only when price is in equilibrium can a transaction be concluded. According to this theory, excess production, sluggish merchandise sales, chronic unemployment, and inflation due to excess demand will not occur.
The impractical Walrasian equilibrium has long drawn harsh criticism from some dissenting Western economists. Keynes discussed the issue of chronic unemployment in capitalist society in his book titled The General Theory of Employment, Interest and Money published in 1936. Until the early 1960s, however, research on disequilibrium by economists remained limited and sporadic. Even their interpretations of the Keynesian economic theory were drastically divided. Orthodox Keynesian economists believed that Keynesian economic theory belonged to the economics of equilibrium and that Keynes himself did not deny Walrasian equilibrium but simply made some modifications. Other Keynesian economists, however, believed that the Keynesian theory had gone beyond the limit of equilibrium theory by providing an initial and systemic review on disequilibrium theory, as was demonstrated by Keynes' belief that the market mechanism was not always fully effective in coordinating various transactions and that production, employment, and investment would fluctuate, often leading to overproduction, unemployment, and insufficient demand for investment in capitalist society.
Since the late 1960s, the disequilibrium theory has made noticeable progress. Studies on disequilibrium have demonstrated that when a market is not fully developed and prices fail to function and adjust supply and demand, every economic factor will work its way to a point where they are mutually adaptable according to their respective situations to reach equilibrium. Obviously, the equilibrium under disequilibrium conditions is not one in a fully developed market, but one in a market that is not fully developed. It is not an equilibrium accompanied by zero unemployment or inflation rate, but one with certain unemployment rate and inflation rate. In other words, disequilibrium is actually a type of equilibrium, but unlike the equilibrium described in the Walrasian theory, it is real in daily life. This is the definition of disequilibrium in economics.
Resource allocation refers to the allocation of various economic resources, i.e., labor, materials, and capital according to different uses. When resource supplies are limited, it is necessary to work out an efficient way to allocate various economic resources to meet various needs in order to maximize the output of products and services in demand. Any society, including socialist society, can only be considered to have achieved effective resource allocation when every person's talent has been fully employed, every product's utility has been maximized, and every inch of land has been fully utilized. If there are labor, materials, and capital left idle or wasted, the allocation of resources is considered problematic. One of the most important issues that economists study is how to achieve effective allocation of resources in order to fully utilize existing resources and discover potential resources.
Resource allocation can be viewed in two different tiers. The higher tier refers to the allocation of resources among various sectors, regions, and production units. Whether the allocation is effective or not depends on whether each resource is effectively allocated to its best place. The lower tier refers to the organization and utilization of pre-allocated resources by a production unit, a region, or a sector. The effectiveness of the allocation depends on whether or not these resources are utilized to their fullest potential.
These two tiers of resource allocation have certain connections as well as differences. From the perspective of overall society, allocations of existing resources in different areas undoubtedly impact resource utilization efficiency at each economic unit as the total quantity of existing resources is limited, and ineffective resource allocation in the macroeconomy will certainly lead to low utilization efficiency at some production units. On the other hand, if most production units are able to raise resource utilization efficiency to a higher level, the supply of resources in the economy will increase. Compared with unchanged quantity of resources, higher supply of resources is more favorable to adjusting resource allocation in various areas and more conducive to allocating resources effectively. This is the connection between the two tiers of resource allocation. Their differences, however, are represented by different goals and ways of execution. The goal of the lower tier resource allocation is to raise resource utilization efficiency at a production unit so as to increase total output with fixed amount of input, while that of the higher tier resource allocation is to effectively put every resource to its best use and allow factors of production to regroup to maximize their utility. The two tiers of resource allocation also vary in terms of way of execution, with the lower tier increasing resource utilization efficiency by using production or managerial techniques inside the production unit without transferring production factors. The higher tier resource allocation achieves its goal via rearranging the combination of production factors, regulating property rights, transferring fixed assets, making macroeconomic adjustments, as well as reforming macroeconomic management system.
Realizing effective resource allocation, either at the higher tier or at the lower tier, requires a long process. There is no absolute standard for effective resource allocation, nor is there a limit for how effective resource allocation can be. We can only say that whether resource allocation of this tier or that tier is more effective after certain adjustments or reforms, whether there is some improvement, or how much of an improvement. One of the important topics in the socialist political economics is to study how to manage the economy so as to improve resource allocation and increase effectiveness in the socialist economy, which will lead to higher effectiveness of both the higher tier and the lower tier resource allocation.
Before studying resource allocation in the socialist economy, we must understand the socialist economic system as well as its impact on resource allocation. As various socialist economic systems can be categorized into several forms, resource allocation in the socialist economy can also be grouped accordingly. Each form of resource allocation has its own features associated with its economic system.
There are three types of economic systems categorized based on Chinese economic realities. The first type is the traditional economic system. The second type is the dual-track economic system whereby the traditional economic system is gradually giving in to the new economic system. The third type is the new economic system. The economic system from the late 1950s to the late 1970s was the traditional economic system, while that since the 1980s is the dual-track economic system, which we are currently under. The new economic system is the system we are aiming to establish through economic reform after breaking away from the dual-track economic system. It is still an economic system under planning and has not yet become reality.
The features of resource allocation under these three economic systems are as follows:
In the traditional economic system, mandatory planning is considered either the only form of economic planning in the socialist economy, i.e., the socialist economy is equivalent to a mandatorily planned economy, or the primary form of the socialist economy in which mandatory allocation is the primary method to allocate resources in the economy. In this economic system, the market does not play any role at all or has a very limited impact on resource allocation. Moreover, as the system does not recognize enterprises as goods producers, business operators, or decision-makers, disregards their private economic interests, and restricts the transfer of production factors, resource allocation at the higher tier is extremely ineffective, causing not only severe imbalances in industrial structure, technological structure, regional economic structure, and employment structure but also tremendous waste and destruction of resources. In terms of the lower tier resource allocation, enterprises have no incentive or possibility to utilize resources effectively, as their production and management decisions are constantly interfered by government agencies, resulting in low productivity as well as low resource utilization efficiency. These are the main features of resource allocation in the traditional socialist economic system. Therefore, reforming the traditional economic system is a necessary step toward more effective resource allocation.
The dual-track economic system is a system that exists during the transitional period between the traditional and the new economic system. As defects of the traditional economic system become more and more prominent, the economy will have to undergo a systemic reform and a series of new economic issues are likely to emerge afterward. The reason is that the new economic system can only be established on a gradual basis as the old economic system fades away and the transition process from the old system to the new one is relatively long. During this process, some economic activities may still be carried out according to the traditional economic system, while other activities are conducted according to the new economic system. In addition, there are potential scenarios where economic activities are restricted by both the traditional and new economic systems, as the traditional economic system has not been completely terminated while the new economic system has started to play certain roles in the economy, and there may also be gaps where both the traditional and new economic systems fail to function, resulting in economic turmoil. It is necessary to point out here that the dual-track economic system is transitional in itself and resource allocation in the system is relatively complicated. More specifically, the industrial structure is getting more effective, idle or wasted resources are decreasing, and resource utilization efficiency is increasing; on the other hand, infrastructure construction projects are expanding irrationally, and the number of redundant construction projects is still on the rise, straining the supply of raw materials and leading to rampant inflation driven by both higher demand and cost. Under such complex circumstances, even though resource allocation may be better overall than that in the traditional economic system, it is quite possible that the allocation of resources in certain areas is even worse than that in the traditional economic system. Economic reforms have thus encountered unexpected obstacles. Some people who were optimistic about economic reforms in the first place lose confidence in economic reforms after witnessing chaos during the transitional period between the old and new economic systems. Some even think the traditional economic system has certain merits, for at least it steered clear of the chaos during the transitional period. These are the features of resource allocation in the dual-track economic system. They are also commonly referred to as "transitional symptoms," which are inevitable during the transitional period between the old and new systems, namely, pains brought by the birth of a new economic system.
The new economic system is the target system to be established after socialist economic reforms. It will be an economic system in which enterprises are highly motivated and factors of production can be freely transferred and recombined. The internal operation mechanism of enterprises would be fundamentally different from that under the traditional economic system. The lower tier resource allocation would become more effective as enterprises are more motivated by their economic interests. Because of the normalization of property rights and the possible rearrangement of production factors in the economy, effective allocation of resources among various areas in the economy would likely come true, thus realizing the goal of achieving the effectiveness of the higher tier resource allocation. It is obvious that the new economic system to be established is one that facilitates effective allocation of resources.
Analyzing the features of resource allocation in the socialist economy from the economic system perspective helps understand the significance and tasks of economic reforms and economic regulations during the current period as well as in the future. However, simply analyzing the features based on various socialist economic systems is not enough. It is necessary to take the analysis of resource allocation one step further by incorporating the disequilibrium conditions China's economy is currently under. This way, we can better understand the features of resource allocation in the socialist economy.
According to the above discussions on disequilibrium, we can clearly understand that the disequilibrium theory studies the operation process of the economy under the circumstances that the market is underdeveloped and price signals are ineffective in automatically adjusting supply and demand. In terms of China, the economy under the traditional economic system was no doubt in a state of disequilibrium, while the economy under the current dual-track economic system is still in a state of disequilibrium. For a relatively long period of time in the future, the economy will continue to remain in a state of disequilibrium for reasons including sustained constraints on resources, even after the new economic system has been established and functioning. It may be a little different compared to the past, as the severity of disequilibrium is lower. These are the realities in current Chinese economy and we must not avoid them.
Now, let us focus on resource allocation under the dual-track economic system. The fundamental characteristics of a disequilibrium economy, such as underdeveloped market, unreasonable prices of comparable commodities, distorted price signals, severe constraints on resource supply, and an excess of aggregate demand over aggregate supply, all exist in the current dual-track economic system. More importantly, behind the operation of the economy lies such a fact: Enterprises, especially state-owned enterprises in the dualtrack economic system, have not completely steered clear of their affiliation with government administrative agencies or become goods producers with decision-making authorities and responsibilities for their own profits or losses. Their investment and transaction activities are distorted to a large extent. Even when price signals are accurate, they cannot serve as an instrument for those enterprises to adjust demand and supply accordingly. Therefore, only after we have a relatively thorough understanding of current Chinese economic realities can we naturally reach the following conclusions based on the view of disequilibrium economy: It is necessary to reform the economic system in order to enhance the effectiveness of resource allocation; among various economic system reforms, the price reform is neither the only important reform nor can it become a breakthrough point of all economic reforms. The key is ownership reform or the reform of enterprise institution. The breakthrough point of economic reforms is first and foremost the vitalization of enterprises by recognizing them as goods producers who make their own decisions, take responsibility for their own profits and losses, and react to price signals to make necessary adjustments to supply and demand.
It is worth noting that since the purpose of economic reforms is to enhance the effectiveness of resource allocation, the mechanism of resource allocation and the mechanism of the operation of the economy need to be reformed. In terms of the reform of enterprise institution, it is the mechanism governing how enterprises themselves operate as well as how factors of production flow and combine that needs to be changed, not administrative affiliation or management scope (e.g., changing from vertical affiliation to horizontal affiliation or vice versa). In terms of price reform, it is the mechanism of price movement and price determination that needs to be changed, not the ratios of prices. As long as enterprises are still affiliated with administrative agencies, they will not be able to operate independently or take responsibility for their own profits and losses. In this case, the only thing reformed with regard to price is the ratio of prices, not the price setting mechanism. Such a price reform can only lead to reverted price ratios, i.e., the ratios of prices will soon return to the unreasonable level the same as before the reform, but with an even higher price level. This will do no good to the improvement of resource allocation.
If the reform of enterprise institution, or the reform of ownership, is set as the top priority, which reaffirms enterprises as goods producers, identifies investors and investees, separates enterprises from government agencies, and develops as well as improves the market system, investment principals will be identified, markets will be established and improved, price will be determined by market, and the issues related to resource allocation will naturally disappear. Hence, in a disequilibrium economy, it would be a mistake to attempt market establishment and price decontrol in the first place without tackling the fundamental obstacles to resource allocation that hinder market perfection and price signaling or without developing an effective resource allocation mechanism by allowing goods producers to become independent decision-makers responsible for their own profits and losses. If that direction is followed, unending inflation will follow, the ratios of merchandise prices will remain irregular, the market will unlikely be fully developed due to absence of decisionmaking and profit-driven enterprises, price signals will still be distorted, and effective resource allocation mechanism will be nothing but a dream. These analyses on disequilibrium are sure to reach this conclusion.