Econometricmodel of industry, profits, and tatonnement adjustment

Abstract

This study presents a quantitative analysis of one of the main forces in an economy, disaggregated short term profits, and of the process whereby the system adjusts itself to the temporary equilibrium indicated by such forces, a generalised tatonnement. Quarterly ten-equation econometric models explaining industry behaviour and profits are developed from a basic industry model for ten mutually exclusive and exhaustive industries. These models are connected with each other and with the whole by a number of linkages and by being embedded in a skeletal economy model. The system is solved at two levels. Firstly the industry models are solved individually for given values of the linking variables; the results are used to choose between alternative specifications of the models and to assess the adequacy of the formulation adopted. Secondly the whole system is solved iteratively by solving the industry models for some given trial values of the linking variables, using these solutions to derive new trial values, and repeating the process until these values converge; the results are used to assess the efficacy of the tatonnement process. The results indicate that the models proposed are good predictors of disaggregated short term profits and that the tatonnement process used produces rapid convergence to a consistent equilibrium. It is also suggested from the discrepancy between the tatonnement (quasi-competitive) and actual (imperfectly competitive) solutions that the capitalist system is inefficient in that it produces too much.