The Economics of Adjustment

"As consumer tastes and production techniques evolve over time, the economy must adjust to the changing circumstances. It must reallocate its resources away from less desirable goods and less productive technologies towards newly desirable and productive ones. The economics of adjustment takes as its subject matter the analysis of the manner in which these changes occur. It studies how individual economic agents decide to reallocate resources in response to economic disturbances and how markets aggregate these individual adjustment decisions. The importance of the subject arises from the fact that matching resources to their appropriate uses is a very difficult, costly and time-consuming process. As a result it is possible that resources may remain misallocated for some time as the process of adjustment works itself out. In this paper we focus on the role of information in the adjustment process.