Some economists regard the whole "general disequilibrium" idea as confused thinking. To get an idea of their reasoning, let's take another look at Figure 5.
The idea, we recall, is that the price does not drop below p2, perhaps because businessmen don't know how far they need to cut prices, don't want to overshoot, and so they are "cautious" about price cuts. It could also be that they don't expand production out to the marginal cost curve because they feel better off in a long run sense, even though they are not maximizing profits. These are just possibilities -- the key point is that prices don't drop below p2.
"New Classical" critics of Keynesian thinking would see it this way:
Remember, we define the supply relationship as a price-quantity relationship that tells us how much businessmen want to sell at every price. In this example, businessmen don't want to sell anything at a price less than p2 -- because they are cautious about price cutting and feel they are better off in a long run sense, or for any other reason. Whatever the reason, if businessmen are unwilling to sell at a price below p2, that means that the supply curve is the horizontal line at p2. that in turn means that selling Qd at p2 really is a supply-and-demand equilibrium, not a disequilibrium at all, and the critics conclude that disequilibrium thinking, and Keynesian economics with it, are confused thinking.
What's going on here?
Look back at Figure 5 one more time. The upward-sloping red curve is the marginal cost curve. We learn in microeconomics that the marginal cost curve is the supply curve for a competitive industry. One of the assumptions that defines a competitive industry is "sufficient knowledge." According to the critics' viewpoint, marginal cost is not the supply curve below p2 -- instead, the supply curve becomes horizontal at p2 -- perhaps because businessmen don't know how far they need to cut prices. In other words, the businessmen don't have "sufficient knowledge." Thus, while production of Qd at p2 may be a supply-and-demand equilibrium, it is not the kind of equilibrium we study in microeconomics. It is a different kind of equilibrium.
There may be less to this than meets the eye. Is this criticism any more than a matter of semantics? Perhaps it is also a matter of pragmatics. In a situation like that shown in Figure 5, the kind of supply-and-demand equilibrium we study in microeconomics can't exist. There are two ways we might proceed. We could look for a different approach, not a supply-and-demand approach but an income-and-demand approach, or we could try to adapt the supply-and-demand approach. The real question is, which one will work better to make sense of the world and real-world macroeconomic problems.
Either way, we understand that the microeconomics of supply and demand can't be the whole story. There's no way out: we will just have to go ahead with the study of macroeconomics. We'll do that by following the historical trail -- first, Keynesian economics, and then the New Classical alternatives, and then we will try to find a synthesis or, at least, a balancing of the evidence and arguments. That's the "reasonable dialog" approach.
Two Models or One?
