General Financial Economic Equilibria

Abstract

When demands and supplies are uncertain, given the prices, equilibrium cannot be defined by equating them. New equilibria are then formed on modeling markets as an abstract risk absorbing agent. The theory of acceptable risks is applied to define the new two price general financial economic equilibrium (GFEE). The market sets two prices for each commodity, one at which it buys and the other at which it sells. The two prices are determined by requiring the random net inventory and net revenue exposures of the market to be acceptable risks. For an n- commodity economy there are 2n equilibrium equations for the 2n prices. The introduction of a two price labor market naturally leads to the concept of both an equilibrium unemployment rate and an equilibrium unemployment insurance rate. It is shown that the unemployment rate rises with the productivity of the economy and can be mitigated by expanding the number of products. Technological innovation accompanied by product expansion can be employment neutral and socially acceptable. Similarly redistributive strategies from the upper end of the income scale towards the middle or lower end can lower equilibrium unemployment levels via their effects on aggregate demand. Productivity shocks like COVID lead to higher equilibrium unemployment support levels measured by the income ratios of the unemployed to the employed. The magnitude of the increase depends on the levels of labor market risk acceptability. The analysis of a skill differentiated labor market makes the case for income and aggregate demand support via unemployment compensations in a GFEE.