Financial Markets and the Instability of General Equilibrium

The Hicksian general equilibrium with money and securities is the starting point for an expansion with numerous other financial variables. Disturbances to the system, partly observed from recent experience, are examined, and possible remedies are proposed. Walras´ Law, that the sum of excess demands for goods and basic factors is zero, no longer applies in an economy where financial variables are present. This essay employs some of the tools of general equilibrium theory and adds to this theory the explicit treatment of financial markets. This essay may be applied to explain the departure of the United States and European economies from full employment since the late 1960´s, but especially to diagnose the recent disturbances to equilibrium on both continents. The main analysis is of a closed economy, the open economy, in the manner introduced by Mosak, is treated in an appendix.