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When the founder of the science which has become Economics came to write the title-page of his immortal work, he wrote boldly An Enquiry into the Nature and Causes of the Wealth of Nations. From this it might be thought that Economics was the science of wealth; that it would tell us what are the conditions which make one society wealthy and one poor, or which make for the growth and decline of wealth, in general or in particular. In fact, however, the science has not developed primarily along these lines, in spite of many interesting and important observations on this subject on the part of the standard writers. Especially in these days we seem to be interested not in Plutology—the science of wealth—but in Economy—the science of management, of budgeting, of the distribution of given resources. In other words, our interest has shifted from the study of the Nature and Causes of the Wealth of Nations to the study of equilibrium and disequilibrium.In many ways this shift of emphasis is regrettable, in spite of the undoubted achievements of equilibrium theory. Part of the loss of prestige from which Economics has suffered is undoubtedly due to this very point. To the general public, equilibrium seems to be a vague and irrelevant ideal. Most governments, and most individuals, would rather be in chronic disequilibrium, and be rich, than be in glorious equilibrium, and be poor. The assumption which frequently underlies economic homiletics—that equilibrium is synonymous with riches and disequilibrium with poverty—is not one which can be long maintained.

It is the intention in this paper to conduct an inquiry into the relations between general equilibrium analysis and public policy by the indirect method of examining the place of such analysis in the solution of a definite economic problem. The problem selected is the possibility of raising wages without raising prices. Traditional partial equilibrium theory made the solution of this problem a fairly simple one, but modern general equilibrium considerations, dynamic qualifications on these, and institutional changes in the organization of business and labour have opened up such areas of indeterminateness in the formation of prices that we may no longer trust the answers given by the simpler generalizations.In the development of ideas during this paper, the term "degree of monopoly" will be employed rather frequently. The term will be used in Professor Lerner's sense of the ratio between the excess of price over marginal cost and price itself. In terms of Figure 1, this is the ratio RP/MP. This definition has limitations but it is retained as the simplest to which analysis may be referred and sufficient for the particular purposes for which it is required here.The idea that the rise of wages in relation to prices may have consequences for the levels of employment and national income is, of course, based upon the Keynesian hypothesis that larger wage incomes in relation to national income as a whole tend to mean a lower level of savings, and the corollary that a lower level of net new investment will be needed to maintain a given level of employment and income where the wage share is higher. There is also some opinion that changes in the degree of monopoly during the business cycle are such as to aggravate the operation of the disequilibrating forces. For example, Dr. M. Kalecki in an article published in Econometrica in April, 1938, suggests that the Keynesian analysis respecting the relation between wages and prices requires emendation and expansion because it appears from his statistical and theoretical analysis that the degree of monopoly increases with recessions of the business cycle and decreases with its upward phase. If this be so, Dr. Kalecki points out that the cyclical redistribution of income carries with it the necessity of attaching a larger quantity of new investment to any given level of national income as the level of national income recedes, though this reasoning is qualified for effects of falling wages on the foreign balance.

At an early point in the Economics of Imperfect Competition Mrs. Robinson assures us that her attention is to be confined to equilibrium analysis only and that she proposes to make no study of the process of inter-equilibrium adjustment. "The technique set out in this book is a technique for studying equilibrium positions. No reference is made to the effects of the passage of time. Short-period and long-period equilibria are introduced into the argument to illustrate various technical devices, but no study is made of the process of moving from one position of equilibrium to another …." There are two alternatives open to the theorist who has adopted a methodological precept involving the complete separation of equilibrium and process analysis. It is possible, on the one hand, to follow the precept with the utmost rigour, in which case the equilibrium theory will be almost purely formal and hardly constitute an explanation of the equilibrium. Or the theorist can in practice relax his rule and introduce process propositions into the equilibrium theory. Few writers have been able fully to resign themselves to the first alternative and most have in greater or less degree followed the second. Thus there has been elaborated, largely unconsciously, a theory of the process of interequilibrium adjustment which forms an integral part of the accepted theory of the equilibrium of the firm in its usual form. It is the purpose of this paper to bring this adjustment theory explicitly to view and to determine the degree to which the validity of the equilibrium propositions is dependent upon it. It is emphasized that the discussion is restricted to the questions of internal logical consistency and formal generality of the theory.