Interest and Prices

AUTHOR’S PREFACE

THIS book is not very extensive, but it has occupied me for over two years of almost uninterrupted work. My original purpose was merely to provide a clear statement and a clear examination of the case for and against the Quantity Theory, and, in particular, for and against bimetallism (of which at that time I was inclined to be a supporter). My reflections soon forced me to give up this simple plan. I already had my suspicions—which were strengthened by a more thorough study, particularly of the writings of Tooke and his followers—that, as an alternative to the Quantity Theory, there is no complete and coherent theory of money. If the Quantity Theory is false—or to the extent that it is false—there is so far available only one false theory of money, and no true theory. In the criticisms advanced by the school of Tooke, there is on the negative side much that is correct and instructive, but in a positive sense they do not amount to more than a few aphorisms, of some ingenuity, which this school never succeeded, nor indeed so much as attempted, to organise into a connected whole. It is no exaggeration to say that even to-day many of the most distinguished economists lack any real, logically worked out theory of money, a circumstance which has not, of course, been particularly conducive to the success of modern discussions in this field.

The Quantity Theory, on the other hand, even in the form in which it is presented in Ricardo’s truly classical writings about money, is open to too many objections, as pointed out by later writers, to be accepted without modification. The only possible course seemed to me to attempt to push on in the footsteps of the great master—to follow up the logical consequences of the fundamental conception which had given rise to the Quantity Theory, so as to arrive at a theory which should be both self-consistent and in full agreement with the facts.

The following line of thought seemed capable of leading to a useful conclusion. An excess of money will, according to Ricardo, show itself in two ways—partly through a rise in all prices, partly through a fall in the rate of interest. But the latter, Ricardo emphasises, can only be a temporary phenomenon, for as soon as prices have accommodated themselves to the increased quantity of money, the excess of money no longer exists and the rate of interest must return, other things being equal, to its former level. To bring about a fall in the rate of interest that is in any way permanent, the excess of money would have to be constantly renewed and the relative amount of money would have to be continually increasing. Such a result would, therefore, be feasible only with commodity prices constantly rising. This proposition should be capable of general application. Indeed, in the developed credit economy of to-day it can claim an enhanced significance; for not only does an addition to the amount of material money act as a cause of easier credit but an increase (actual or virtual) in the velocity of circulation comes about as an effect; this will be shown below.1

If the monetary institutions offer their money or their credit on abnormally favourable terms, this must logically lead to an intensified use of money or credit on the part of the public. A rise in prices is the result, and we have seen that prices will continue rising so long as credit remains easy. A tightening of credit has, of course, the opposite effect.

A very important qualification is, however, necessary. Though it is called for by the very nature of these phenomena, it is frequently overlooked, and hasty conclusions, which the facts fail to support, are the result. The rate of interest charged for loans can clearly never be either high or low in itself, but only in relation to the return which can, or is expected to, be obtained by the man who has possession of money. It is not a high or low rate of interest in the absolute sense which must be regarded as influencing the demand for raw materials, labour, and land or other productive resources, and so indirectly as determining the movement of prices. The causative factor is the current rate of interest on loans as compared with what I shall be calling the natural rate of interest on capital. This natural rate is roughly the same thing as the real interest of actual business. A more accurate, though rather abstract, criterion is obtained by thinking of it as the rate which would be determined by supply and demand if real capital were lent in kind without the intervention of money.

It is remarkable that this proposition—fundamentally very simple, indeed almost self-evident—though occasionally alluded to by economists, has never, to my knowledge, been used as the foundation for a complete theory of money and prices. The explanation, it seems to me, must lie in the defective condition of the theory of interest as it has so far been developed. Economists do not tire of impressing on their students that money and real capital are not the same thing, that interest on capital and interest on money are consequently different things. But as soon as it comes to applying these ideas, almost without exception “the two subjects are mixed up in the most inextricable confusion”, as Mill puts it (at the opening of an argument2 in the course of which, in spite of every effort, he merely succeeds in adding to the confusion).

It is only with the development of a real theory of capital, such as we owe to the genius of Jevons in his Theory of Political Economy3 and of Böhm-Bawerk, who brought it to full completion in his famous Positive Theorie des Kapitales, that it has become possible to make a survey of the phenomena of capital and interest, as they would be exhibited on the purely imaginary assumption that they could take place without the intervention of money or credit. At the same time the modifications which are called for by the appearance of money are brought to light. These modifications are fundamental in nature. It is not true that “money is only one form of capital”, that the lending of money constitutes “a lending of real capital goods in the form of money,” etc. Liquid real capital (i.e. goods) are never lent (not even in a system of simple merchandise credit); it is money which is lent, and the commodity capital is then sold in exchange for this money.

There is nothing so far to bring the rate of interest on money into coincidence with the rate which would be determined by supply and demand if real capital goods were lent in kind. The supply of real capital is limited by purely physical conditions, while the supply of money is in theory unlimited and even in practice is held within fairly elastic boundaries: over a given period the same pieces of money can be lent almost any number of times to different individuals, or to one and the same individual.4

It is, however, sufficiently certain that sooner or later the money rate will move into coincidence with the natural rate of interest on capital. In other words, the magnitude of the money rate is ultimately determined only by the relative excess or scarcity of real capital goods. Precisely this, it seems to me, cannot be explained until it is possible to assume that the persistence of any deviation between the two rates of interest will lead to a change in commodity prices, and that this change will continue progressively, so that, with the monetary system of actual fact, the rate on loans is sooner or later drawn into line with the current level of the natural rate on capital.

No better illustration of this proposition can, I think, be provided than in the famous letters exchanged between Bastiat and Proudhon concerning the Gratuité du crédit (recently published in German by Mühlberger 5).

Not only Proudhon, but also his opponent Bastiat (as is made very clear in Bastiat’s sixth letter6), were of the opinion that if the banks are permitted to issue paper without full metallic covering, they will be able to a corresponding degree to lower their rates of discount, and that under conditions of free competition this is what they will do. On this line of approach not more than a hair’s breadth separates us from the gratuité du crédit. It is in any case easy to imagine a situation in which the credit system is so developed that the banks’ necessary holdings of cash and their other expenses are reduced to a minimum. Then according to this view the money rate of interest could fall almost to zero without any increase in the amount of real capital! What becomes then of all the reasons put forward by economists, not least by Bastiat himself, for the economic justification and necessity for the lending rate of interest, and for its determination by the supply and demand for capital?!

The conflict is easily resolved. It is only necessary to assume that a constant deviation of the rate of interest on loans below the natural rate on capital will bring about, not merely a rise in prices, as Bastiat himself maintains, but a progressive rise, proceeding without limit, so that sooner or later the banks will be led to raise their rates; mutatis mutandis in the opposite case where the money rate is above the natural rate. It is at the same time clear, looking at the world as a whole, that if all banks behave in the same way, there is no reason for any rapid movement of the money rate into line with the natural rate, and a deviation between the two rates, with its due effect on prices, can persist for a considerable time. The question then arises whether this does not constitute an adequate explanation of all observed changes in prices; while I shall try below to show that all other explanations turn out to be logically untenable.

The Quantity Theory is correct in so far as it is true that an increase or relative diminution in the stock of money must always tend to raise or lower prices—by its opposite effect in the first place on rates of interest. But monetary conditions are only one factor in the situation, at any rate if the period under consideration is not too long. The other factor, which is often of more weight, takes the form of the independent movements of the natural capital rate itself, which must necessarily, but in general only gradually, be accompanied by corresponding movements of the money rate.

This completely disposes of the most important objection that has been advanced against this theory, which is clearly in complete accord with the observed fact that rising prices have seldom been associated with low or falling rates of interest, that far more often they are associated with high or rising rates of interest, and that falling prices accompany falling interest rates.

Though this line of approach turns out to be simple and clear, its detailed elaboration meets with great difficulties. Almost at every step opposite convictions are met with, in some of which not only laymen but experts too are deeply rooted; or results are obtained which at first glance appear altogether paradoxical. I have made an honest attempt to meet these difficulties rather than to circumvent them by verbiage. But I have the feeling that if I had at my disposal more time or more skill in exposition, it could all be a great deal simpler, more straightforward, and more convincing.

The worst of it is that the more exact test of the theory by means of the facts of experience still remains to be made. I am very far from regarding as adequate the little that I have been able to do in this direction in Chapter 11, where I give the reasons why a detailed investigation appears to me an extraordinarily difficult task, indeed as yet almost impossible. Until it has been fully endorsed by experience, every theory, no matter how plausible, remains no more than a hypothesis. I would not pretend that mine is more than that. But I do not think that I have overestimated the importance that would attach to it not only in theory but also in monetary practice if it should turn out eventually to be correct.

I start off with some introductory remarks about the concept of the average level of money prices and the possibility of measuring it. They do not pretend to present any exhaustive treatment of this much debated matter, but it is to be hoped that they may contribute something towards clearing up the question.7

To facilitate the use of this book, certain passages are printed in smaller type. They may be omitted, particularly at a first reading, without breaking the thread. This applies also to the whole of Chapter 9, where I attempt, on the basis of certain hypothetical assumptions, a more systematic exposition of the theory. Towards the beginning of this chapter there is an exposition of Böhm-Bawerk’s theory of production (his wages-fund theory), which may appear superfluous since I make no direct use of it. This, however, is the case only because for the sake of simplicity I imagine a constant length (equal to one year) for the period of production. At the same time I wanted at least to indicate how this restriction could be dispensed with. This is precisely where Böhm-Bawerk’s teaching is useful—indeed it is the only economic theory which provides a rational explanation of the magnitude of the rate of interest on capital, wages, and rents, of the distribution of the final product between capitalists, workers, and landlords, etc.

I have on this occasion made next to no use of the mathematical method. This does not mean that I have changed my mind in regard to its validity and applicability, but simply that my subject does not appear to me to be ripe for methods of precision. In most other fields of political economy there is unanimity concerning at least the direction in which one cause or another reacts on economic processes; the next step must then lie in an attempt to introduce more precise quantitative relations. But in the subject to which this book is devoted the dispute still rages about plus as opposed to minus. As regards the influence on prices of easier credit, all three possible opinions are to be found among the most eminent writers: that prices will tend to rise, that there is no effect, and finally (in the case of Tooke) that prices will tend to fall. I feel that for the moment I shall have accomplished sufficient if I convert the reader to one of these views.

I have, on the other hand, in an Appendix 8 ventured on a mathematical demonstration of Bernouilli’s Law, the so-called Law of Large Numbers, which I make use of in dealing with the size of cash reserves and so with the velocity of circulation of money. I am aware of no treatment of the theory of probability in which this beautiful and important law is deduced in a form accessible to non-mathematicians. I have attempted such a deduction, while confining myself to the simplest possible case, which is, however, adequate for most purposes.

—————

I hold no teaching post, so that my scientific work is made possible only by special grants. I have in the first place to express my profound gratitude to the administrators of the Lorén Foundation, who for the third time have made me a generous grant.

It further gives me particular pleasure to express my respectful appreciation to the Government of Sweden for making me a grant towards this work.

Herr Otto Gutsche, of Breslau, with his usual care, has once again examined the manuscript on the linguistic side, and has also been so kind as to draw my attention to points of substance at which I had been careless or obscure.

KNUT WICKSELL

UPSALA, January 1898.

9 The fact that, on the other hand, a rise in the rate of interest has a certain tendency to accelerate the circulation of money offers an apparent contradiction which is easily resolved, in the manner explained on p. 119, below. See also what follows in the text.

10 “Of the rate of interest”, Principles, book iii., chap, xxiii.

11 His earlier works, as we shall see below, are based entirely on the older point of view.

12 This is true even of merchandise credit, indeed to a marked degree. A lender cannot provide more goods than he actually possesses, but he can provide any amount of money—in fact he provides exactly the sum that the borrower promises to pay for the goods.

13 Kapital und Zins, die Polemik zwis chen Bastiat und Proudhon, Jena Gustav Fischer, 1896 [translation of Intérêt et Principal, Paris, 1850].

14 Ibid., pp. 209-11 ff.

15 Having failed to do so elsewhere I would here refer to Edge worth’s admirable treatment in his “ Some new Methods of measuring Variation in General Prices “ (Journal of the Royal Statistical Society, 1888). The idea of a rational definition of the purchasing power of money which, in the footnote to page 16, I ascribe to Pareto, is, it would appear, actually due to Edgeworth.

16 [Not included in the translation.]

• 1See, for instance, his preface to the German edition of his Vorlesungen, II.: Geld und Kredit, 1922.
• 2Lectures, II.: On Money and Credit, 3rd Swedish ed., p. 197.
• 3Ibid., p. 198.
• 4See the following papers in the Ekonomisk Tidskrift: (i) Davidson, “On the Concept of the Value of Money”, 1906; (ii) Wicksell, “The Stabilisation of the Value of Money, a Means of Preventing Crises”, 1908; (iii) Davidson, “On the Stabilisation of the Value of Money”, 1909; (iv) Wicksell, “Money Rate of Interest and Commodity Prices”, 1909. Cf. also Brinley Thomas, “The Monetary Doctrines of Professor Davidson”, Economic Journal, March 1935.
• 5Loc. cit., 1908, p. 211.
• 6In Wicksell’s opinion the money rate should be raised to ensure equilibrium on the capital market and prevent a rise of the price level; see Wicksell’s answer.
• 7Loc. cit., pp. 65, 66.
• 8An analysis of these questions is to be found in my Swedish book, Monetary Policy, Public Works, Subsidies and Tariffs as Remedies for Unemployment, 1934. A revised English version will appear in 1936 under the title The Theory of Expansion.
• 9Wicksell always insisted that this reasoning did not mean more than an amplification of the old quantity theory. Moreover, he always regarded his own contribution as a doubtful hypothesis and never became as convinced of its tenability as did some of his pupils. He explicitly rejected the idea that his theory provided an explanation of the business cycle. He was critical of Mises’ idea that mistaken credit policy is the origin of the tendencies towards booms and depressions. A brief quotation will indicate his position: “Our conclusion is, therefore, that although the changes in the purchasing power of money, caused by credit policy, are under present conditions intimately bound up with the business cycle and without any doubt also influence the latter, above all by giving rise to crises, yet it does not seem essential to assume that there is, by the nature of things, any necessary connection between these two phenomena. The main cause of the business cycle, and a sufficient cause, seems to be the fact that technical and commercial progress cannot by its very nature give rise to a series which proceeds as evenly as the growth in our time of human needs—due above all to the organic increase in population—but is now accelerated now retarded. In the former case ... a mass of circulating capital is transformed into fixed capital, a process which, as I have said, accompanies every rising business cycle: it seems as a matter of fact to be the one really characteristic sign, or one in any case which it is impossible to conceive as being absent.”. . . “If the banks already at the beginning of a rising period sufficiently raised their interest rates, but on the other hand reduced them energetically when the depression was about to set in”, then the price level would probably remain stable, although raw materials for fixed capital would rise in price during periods of good trade and fall during times of bad trade. “Under such circumstances the chief crises-causing factor would probably have disappeared, and what remained would be only a quiet wave movement between periods of accelerated formation of fixed capital and periods when the new capital assumed . . . other forms.” . . . “Increase in commodity stocks is probably the most important form of real investment during so-called bad trade.”
• 10Wicksell always insisted that this reasoning did not mean more than an amplification of the old quantity theory. Moreover, he always regarded his own contribution as a doubtful hypothesis and never became as convinced of its tenability as did some of his pupils. He explicitly rejected the idea that his theory provided an explanation of the business cycle. He was critical of Mises’ idea that mistaken credit policy is the origin of the tendencies towards booms and depressions. A brief quotation will indicate his position: “Our conclusion is, therefore, that although the changes in the purchasing power of money, caused by credit policy, are under present conditions intimately bound up with the business cycle and without any doubt also influence the latter, above all by giving rise to crises, yet it does not seem essential to assume that there is, by the nature of things, any necessary connection between these two phenomena. The main cause of the business cycle, and a sufficient cause, seems to be the fact that technical and commercial progress cannot by its very nature give rise to a series which proceeds as evenly as the growth in our time of human needs—due above all to the organic increase in population—but is now accelerated now retarded. In the former case ... a mass of circulating capital is transformed into fixed capital, a process which, as I have said, accompanies every rising business cycle: it seems as a matter of fact to be the one really characteristic sign, or one in any case which it is impossible to conceive as being absent.”. . . “If the banks already at the beginning of a rising period sufficiently raised their interest rates, but on the other hand reduced them energetically when the depression was about to set in”, then the price level would probably remain stable, although raw materials for fixed capital would rise in price during periods of good trade and fall during times of bad trade. “Under such circumstances the chief crises-causing factor would probably have disappeared, and what remained would be only a quiet wave movement between periods of accelerated formation of fixed capital and periods when the new capital assumed . . . other forms.” . . . “Increase in commodity stocks is probably the most important form of real investment during so-called bad trade.”
• 11Wicksell always insisted that this reasoning did not mean more than an amplification of the old quantity theory. Moreover, he always regarded his own contribution as a doubtful hypothesis and never became as convinced of its tenability as did some of his pupils. He explicitly rejected the idea that his theory provided an explanation of the business cycle. He was critical of Mises’ idea that mistaken credit policy is the origin of the tendencies towards booms and depressions. A brief quotation will indicate his position: “Our conclusion is, therefore, that although the changes in the purchasing power of money, caused by credit policy, are under present conditions intimately bound up with the business cycle and without any doubt also influence the latter, above all by giving rise to crises, yet it does not seem essential to assume that there is, by the nature of things, any necessary connection between these two phenomena. The main cause of the business cycle, and a sufficient cause, seems to be the fact that technical and commercial progress cannot by its very nature give rise to a series which proceeds as evenly as the growth in our time of human needs—due above all to the organic increase in population—but is now accelerated now retarded. In the former case ... a mass of circulating capital is transformed into fixed capital, a process which, as I have said, accompanies every rising business cycle: it seems as a matter of fact to be the one really characteristic sign, or one in any case which it is impossible to conceive as being absent.”. . . “If the banks already at the beginning of a rising period sufficiently raised their interest rates, but on the other hand reduced them energetically when the depression was about to set in”, then the price level would probably remain stable, although raw materials for fixed capital would rise in price during periods of good trade and fall during times of bad trade. “Under such circumstances the chief crises-causing factor would probably have disappeared, and what remained would be only a quiet wave movement between periods of accelerated formation of fixed capital and periods when the new capital assumed . . . other forms.” . . . “Increase in commodity stocks is probably the most important form of real investment during so-called bad trade.”
• 12As Wicksell worked on monetary problems for almost three decades after the publication of the Geldzins, it may be worth while to say something here about the changes which his views underwent. These were not, as a matter of fact, considerable. Although he was always ready to question his own reasoning, his lively discussions with other Swedish economists do not seem to have left many traces on his theory. Take, for instance, his discussion with Professor Davidson. In 1906 Davidson, whom Wicksell held in the highest esteem, suggested that during periods of rapid technical progress and increasing productive efficiency a greater stability of business would be ensured if commodity prices fell in proportion to the increase in output than if they remained stable. Davidson asserted that if the money rate of interest and business profits (Wicksell’s natural rate) stood in a normal relation to one another before the increase in efficiency, then they would continue to do so if prices fell in proportion to the latter. There would be no need for a change in the money rate of interest. If it were reduced to prevent a fall in the price-level, it would be too low in relation to profits, and a process of an inflationary character would start. To this Wicksell replied: “In the case which Davidson has chosen it may appear that the increase in profits due to increased productivity and the reduction in profits due to the fall in prices, caused on his assumption by the former, would offset one another. But surely this would only happen if the price movement could be anticipated beforehand and estimated, or if it were so even and had lasted for so long that it had come to be generally regarded as something constant? In general, however, the individual business man will make his calculations for the future, and so fix his demand for labour, raw materials, and credit on the basis of current prices.” Hence, prices would rise if the money rate were not immediately raised, and when some time later the increase in productivity had led to a greater supply of finished goods, so that prices would fall, business men would make losses and the situation would be disturbed.
• 13As Wicksell worked on monetary problems for almost three decades after the publication of the Geldzins, it may be worth while to say something here about the changes which his views underwent. These were not, as a matter of fact, considerable. Although he was always ready to question his own reasoning, his lively discussions with other Swedish economists do not seem to have left many traces on his theory. Take, for instance, his discussion with Professor Davidson. In 1906 Davidson, whom Wicksell held in the highest esteem, suggested that during periods of rapid technical progress and increasing productive efficiency a greater stability of business would be ensured if commodity prices fell in proportion to the increase in output than if they remained stable. Davidson asserted that if the money rate of interest and business profits (Wicksell’s natural rate) stood in a normal relation to one another before the increase in efficiency, then they would continue to do so if prices fell in proportion to the latter. There would be no need for a change in the money rate of interest. If it were reduced to prevent a fall in the price-level, it would be too low in relation to profits, and a process of an inflationary character would start. To this Wicksell replied: “In the case which Davidson has chosen it may appear that the increase in profits due to increased productivity and the reduction in profits due to the fall in prices, caused on his assumption by the former, would offset one another. But surely this would only happen if the price movement could be anticipated beforehand and estimated, or if it were so even and had lasted for so long that it had come to be generally regarded as something constant? In general, however, the individual business man will make his calculations for the future, and so fix his demand for labour, raw materials, and credit on the basis of current prices.” Hence, prices would rise if the money rate were not immediately raised, and when some time later the increase in productivity had led to a greater supply of finished goods, so that prices would fall, business men would make losses and the situation would be disturbed.
• 14As Wicksell worked on monetary problems for almost three decades after the publication of the Geldzins, it may be worth while to say something here about the changes which his views underwent. These were not, as a matter of fact, considerable. Although he was always ready to question his own reasoning, his lively discussions with other Swedish economists do not seem to have left many traces on his theory. Take, for instance, his discussion with Professor Davidson. In 1906 Davidson, whom Wicksell held in the highest esteem, suggested that during periods of rapid technical progress and increasing productive efficiency a greater stability of business would be ensured if commodity prices fell in proportion to the increase in output than if they remained stable. Davidson asserted that if the money rate of interest and business profits (Wicksell’s natural rate) stood in a normal relation to one another before the increase in efficiency, then they would continue to do so if prices fell in proportion to the latter. There would be no need for a change in the money rate of interest. If it were reduced to prevent a fall in the price-level, it would be too low in relation to profits, and a process of an inflationary character would start. To this Wicksell replied: “In the case which Davidson has chosen it may appear that the increase in profits due to increased productivity and the reduction in profits due to the fall in prices, caused on his assumption by the former, would offset one another. But surely this would only happen if the price movement could be anticipated beforehand and estimated, or if it were so even and had lasted for so long that it had come to be generally regarded as something constant? In general, however, the individual business man will make his calculations for the future, and so fix his demand for labour, raw materials, and credit on the basis of current prices.” Hence, prices would rise if the money rate were not immediately raised, and when some time later the increase in productivity had led to a greater supply of finished goods, so that prices would fall, business men would make losses and the situation would be disturbed.
• 15In his rejoinder Wicksell admitted that this case required more attention than he had so far given to it. Davidson’s reasoning depended, however, on “the tacit assumption that the supply of real capital has been increased in the same proportion as productivity. Davidson is obviously of the opinion that money wages remain unaltered; thus if commodity prices have fallen, real wages would have been subject to an increase, but how can they be raised without an increased supply of real capital?” Making reference to Böhm-Bawerk’s theory of capital, Wicksell asserted that this is impossible, and continued: “If the quantity of real capital is increased the real rate of interest will fall even if prices remain unaltered and thus money wages rise. . . . Naturally, however, my assumption is that ‘other things remain equal’; i.e. that real capital and real wages are not subject to any change. . . . An increase in productivity when the supply of real capital is unaltered must necessarily mean a rise in the real rate of interest, and equilibrium on the market can never exist unless the money rate is made to coincide with the latter, i.e. unless it is in this case raised.” Although it was possible that prices might temporarily fall, a tendency for a cumulative rise in prices would set in unless the money rate was raised.
• 16I have come to regard this side of the Wicksellian theory as more important than his other attempt to combine price theory and monetary theory—by his identification of the rate of interest which would maintain the price level constant with the rate as determined in the theory of pricing and distribution, the latter being termed alternatively natural rate, i.e. the marginal productivity of capital, and normal rate, i.e. the rate which equalises supply and demand of savings. The general theory of pricing and distribution is, after all, static in character and its concepts are not likely to lend themselves to the more dynamic analysis of, say, problems of inflation. Rather than build monetary theory on this static analysis, it would seem more natural to pursue the monetary analysis of the actual determinants of the various rates of interest in a dynamic world and then, in the light of such analysis, to revise the theory of distribution. Work along this line seems to me to be the natural consequence of the first-mentioned innovation of Wicksell’s. It would bring monetary theory into harmony with price theory by making the latter more dynamic and would probably give up not only concepts like the natural rate of interest but the whole idea of a monetary equilibrium and thus also the concept of a normal rate of interest defined in equilibrium terms.