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to production and consumption alone or to stocks alone. Disequilibrium means

the frustration of desired transactions. J.R. Hicks comments:
As long as we hold to the principle of price determination by equilibrium of demand
and supply..., we have no call to attend to anything but transactions. We do not need
to distinguish between stocks and flows...It is not the case that there is one stock equilibrium and one flow equilibrium.10

Building on this idea, we shall focus on transactions undertaken for whatever

purpose, whether to dispose of current production, to consume currently, or to
build up or run down stocks. We shall include both transactions accomplished
and transactions frustrated. The Law appeals to arithmetic and not to motives.
It is possible of course to build models distinguishing two equilibrium
magnitudes for each good currently produced and consumed and also stockpiled
the rate of production-and-consumption flow and the level of stocks. This
distinction, while relevant to questions of inventory policy and capital formation,
has no particular bearing on Walrass Law. It in no way means that each such
good has one market and price for stocks and another market and price for
flows of production and consumption. The good has a single market that either
does or does not clear at its single price. (The section on fringe complications,
below, notes one minor qualification concerning the price at which transactions are attempted.)
The Stock-to-Flow Questions
We continue our discussion of what we call the stock-flow problem. The main
purpose of this exercise is to lay the groundwork for understanding the complications concerning money. Because of moneys uniqueness and peculiarities,
the implications developed in this section and the next do not necessarily apply
to it in any straightforward way.
Are the stock and flow senses of disequilibrium and equilibrium consonant
with each other? First, does stock disequilibrium imply flow disequilibrium? For
a pure flow good, like haircuts, the question cannot even arise. For a stockand-flow good, and also for a pure stock good like a collectible item neither
currently produced nor currently consumed, stock disequilibrium does imply
flow disequilibrium in the same direction. Flows are disequilibrated, however,
not necessarily in the narrow production-and-consumption sense but in the
broader transactions sense mentioned above. An excess stock demand means
that people want to hold stocks aggregating more than the stocks actually held
and furthermore that they are meeting frustration as they attempt an adjustment.
(If they met no frustration in building up stocks, stocks would not be in excess
demand.) At the prevailing disequilibrium price, the flow of purchases attempted

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for consumption and stock build-ups combined exceeds the flow of sales offered
from production and stock rundowns combined. The market for transactions
being attempted for whatever purpose, which is the only market that the good
has, fails to clear. Similarly, stock excess supply implies transactions-flow
excess supply. Frustration of attempted stock reduction means frustration of
attempted sales. (From here on we refer to transactions flows to emphasize
our broad interpretation.)
Second, does stock equilibrium imply transactions-flow equilibrium? The
next section provides an example in which the implication fails to hold. But
for many goods the implication holds even when people want to build up or
run down their stocks over time. Divergence of future desired stocks from
present desired and actual stocks no more indicates frustration than does a
travelers desire to be somewhere else next week than at his present desired
and actual location (Shackle, 1961, p. 223).
This correspondence does not stand or fall according to the particular reasons
why people may not be trying to adjust their stocks any faster than they actually
are trying. Even if mere transactions costs are inhibiting certain transactions,
these unattempted transactions are not influencing market equilibrium or disequilibrium, even though they would be influencing it if, under different
circumstances, they were being attempted.
The Flow-to-Stock Questions
Third, does transactions-flow equilibrium imply stock equilibrium? For a pure
flow good the question cannot arise. For pure stock goods and for stock-andflow goods, transactions-flow equilibrium implies stock equilibrium, since
desired transactions undertaken for whatever purpose are able to be carried out.
Fourth, does transactions-flow disequilibrium imply stock disequilibrium?
We have argued that stock disequilibrium implies transactions-flow disequilibrium in the same direction. For pure stock goods like Old Masters, the implication
runs the other way also. Since their only flows are actual and attempted stock
adjustments, transactions-flow disequilibrium implies stock disequilibrium. On
whether any such implication holds even for money read on.
For stock-and-flow goods, transactions-flow disequilibrium does not necessarily imply stock disequilibrium in any straightforward sense. Consider a good
whose producers would like to supply more output than is being demanded but
who frustratedly hold output down to what they can sell. Since desired sales
exceed quantities demanded, the good is in transactions-flow excess supply.
(Page 69 above explains Patinkins important distinction between supply and
output.) Yet the good is not unambiguously in excess stock supply also, for the
output restraint holds stocks down to what producers and others find appropriate to the actual situation. It is hardly worth explaining a strained sense in

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which the good might count as in excess stock supply after all, since transactions-flow equilibrium and disequilibrium are what are fundamental to Walrass
Law, not all of their conceivable stock counterparts.

SUMMARY
We pause to review and examine some important terms and concepts. Equilibrium, disequilibrium, excess demand and excess supply all relate specifically
to the market and not to any subgroups that may comprise it (see the next
paragraph). Transactions-flow equilibrium implies that desired market purchases
equal desired sales undertaken for whatever purpose, including adjustments of
holdings. Transactions-flow disequilibrium implies frustration of market transactions. Quantity demanded exceeds or falls short of quantity supplied, both
of which include desired adjustments of holdings.
We recognize that an alternative exists in the literature that interprets excess
demand or excess supply as net purchases or net sales by a particular
transactor or group of transactors. For example, under exchange rate pegging
the monetary authoritys sale of foreign exchange indicates that it has an excess
supply of foreign exchange that is matched by the buyers excess demand.
We eschew this interpretation in favor of the view that focuses on failure of
the market to clear and the attendant frustration of some transactors plans.
Accordingly, we would not say that in depression workers have an excess supply
of labor. Rather, excess supply refers to the labor market and the related frustrations of workers on that market.
We have focused thus far on money holdings or cash balances, which are
stock concepts. In keeping with Walrass Law we now turn our attention to
transactions flows even when discussing money. Our goal is to examine what
must be true in the depths of depression. In Chapter 4 money holdings or cash
balances regain their prominence as we shift the analysis to what must be true
at the start of a depression resulting from deficient spending.

COMPLICATIONS CONCERNING MONEY

Walrass Law holds most transparently in a barter economy. Challenging
questions attach to money. Does an aggregate negative (or positive) excessdemand value for all goods but money strictly entail a positive (or negative)
excess demand for money itself? And even if it does do so in the transactionsflow sense appropriate to Walrass Law, does this transactions-flow imbalance
imply disequilibrium between desired and actual total holdings of money?

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Conversely, does imbalance between these holdings imply an opposite frustration of transactions in goods and services (and securities)?
To forestall misunderstanding of our answers, we must alert the reader to
some complications tracing to moneys distinctness from all other goods. We
shall have to distinguish between different senses in which demand and supply
of money are and are not equal (see the end of this section). The relation
between supply/demand disequilibrium and perceived frustration of attempted
transactions holds less straightforwardly and more loosely for money than for
other goods.
This looseness derives from moneys buffer stock role and in turn from its
role as the general medium of exchange. Money trades against all other things
but not on any one market and not at any one price specifically its own.
Monetary disequilibrium does not show itself in confrontation of supply and
demand on a specific market at a specific price. Instead, holders try to adjust their
cash balances by altering their attempted purchases and sales of innumerable
goods and services and securities. Far from being well focused, pressures of
monetary disequilibrium are widely diffused with widespread consequences.
Complications arise for Walrass Law in a depression attributable to an excess
demand for money. Although we take it as settled that monetary disorder can
cause and has caused depression, we do not say it is the only conceivable cause.
We shall distinguish between transactions-flow demands (and excess
demands) to acquire money and stock demands (and excess demands) to
hold it. People try to acquire money as they offer their goods and labor for sale.
But instead of necessarily acting to build up their cash balances (except very
temporarily, in accordance with moneys medium of exchange and buffer stock
roles), they may well be intending promptly to respend the money received.

THE PUZZLE OF AN EXCESS SUPPLY OF LABOR (AND

COMMODITIES)
When labor is in transactions-flow excess supply in a depression, what is in
corresponding excess demand? Not only is labor in excess supply so are commodities that frustrated business firms desire to produce and sell but cannot
because they lack customers (recall the difference between supply and output).
Again we ask: what thing or things are in transactions-flow excess demand,
matching the transactions-flow excess supply of labor and commodities?
One suggested answer is nothing: the Law fails in a depression, which
might well be described as a situation of general deficiency of demand. (Clower,
1965 [1984], p. 53, mentions but does not rest content with this interpretation.)
Such a dismissal of Walrass Law would overlook the requirement that only

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demands and supplies and imbalances having the same degree of effectiveness
be evaluated and compared.
Here we are invoking Clowers distinction between notional supplies and
demands and effective or constrained supplies and demands. Notional supply
or demand in a particular market refers to transactions that suppliers or
demanders would desire and be prepared to carry out if they met no frustration
in carrying out their desired transactions in any other market. Effective supply
or demand refers to transactions that the parties are ready and willing to carry
out under actual circumstances. Note that effective does not necessarily mean
successful. Absent frustrations elsewhere, notional supply or demand is
effective also. If the parties do encounter frustrations elsewhere, then the
effective supply or demand quantities in the particular market diverge from the
notional quantities. They are constrained by lack of full success in accomplishing other desired transactions.
In Clowers example, his inability to find buyers for his consulting services
constrains his demand for champagne. His constrained demand for champagne
is effective at a lower level than his notional demand, the latter being the demand
that would be effective if, contrary to fact, he were meeting no frustration in the
labor (or other) markets.11 Chapter 6 elaborates on these concepts.
With necessary distinctions made, we may return to our puzzle about what
effective transactions-flow excess demand matches an effective transactionsflow excess supply of labor and commodities.12 In a depression, labor is in
effective excess supply since unemployed workers are ready and willing to sell
their labor, but they cannot find employers. If workers could succeed in selling
all their effectively supplied labor, they would spend their larger incomes on
more commodities than they can now afford. Ultimately, they are demanding
commodities (and perhaps savings assets) with their labor, but these potential
demands are contingent on their sales of labor. Actually, their frustration in
acquiring money in exchange for labor shields the commodities market from
these more ultimate demands (Baumol, 1962, p. 53n).
Unemployed workers demands for additional commodities are thus notional
and not effective, as in the Clower champagne example. In applying Walrass
Law, a merely notional demand for additional commodities cannot count as
what matches an effective transactions-flow excess supply of labor.
Workers effectively but frustratedly supplying labor are by that very token
effectively but frustratedly demanding money in exchange. Money then, and not
commodities, is the thing in effective transactions-flow excess demand. (Leijonhufvud, 1968, p. 88, recognizes this possible interpretation.) True enough,
if workers could acquire it, they would not want to add all this money to their
cash balances. They would want to spend most of it on commodities. But instead
of being effective, this contingent supply of money for commodities is merely
notional, like Clowers supply of money for champagne.