Introduction

The matters discussed in the previous chapter are all quite complex, and it is best to deal with them one at a time where possible. In the present chapter, I explore the behavior of individual agents where disequilibrium consciousness is allowed and production and consumption take place out of equilibrium. To do so, I first ignore the (welcome) complications which arise from the realization by agents that they may not be able to complete their transactions. Further, I postpone consideration of how prices (and price expectations) are set. These and other matters are introduced later on.

I thus begin with the general setup of the model and the analysis of the optimizing behavior of agents who believe that prices will change. The analysis is complicated, but the results are appealing, being both interesting in themselves and required for what follows. The complexity seems inescapable if we are to deal with models in which time is essential and arbitrage over time takes place. No suitable, complete treatment of these matters seems available in the literature.

Because it seems desirable to continue to make the discussion accessible to relatively nontechnical readers without at the same time sacrificing continuity for those interested in a more rigorous treatment, this and succeeding chapters are organized a bit differently from the earlier ones. Each subject is discussed in one or more nontechnical sections. Those sections are followed by one or more technical ones, which are indicated by asterisks.