INTRODUCTION

To a new classical macroeconomist the principal guiding light is equilibrium. Equilibrium is in everyone's best interest and therefore each of us will try to achieve it. To Robert Barro the identification of equilibrium with optimality is derived from his belief that the equality of supply and demand “implies that … the private market manages to exhaust trades that are to the perceived mutual advantage of the exchanging parties.”

Underlying this belief is the perception that all markets are organized as auction markets, clearing at almost every instant in time, and that prices determined in these markets provide the participants with the signals that allow them to respond to changing conditions in ways that maximize their individual benefits as well as those of society as a whole. In such a world, other institutional arrangements do not make sense since they cannot improve on the results available from a complete set of auction markets. There is no room in the analysis for the influence of such institutions as labor unions and union contracts. If unions do not disrupt equilibrium, they are tolerated but irrelevant; if they do cause disequilibrium in the labor market, they will be eliminated by a new institutional arrangement for setting wages that does not produce this undesirable result. Nevertheless, we observe markets that are emphatically not auction markets.