ABSTRACT
It is well known that competitive and market-clearing general equilibrium models of the Arrow-Debreu-McKenzie kind yield almost no descriptive comparative static propositions.2 In their everyday general equilibrium work, therefore, economists have retreated to special versions of the ArrowDebreu-McKenzie models. In particular, in many branches of their subject economists now rely on the Heckscher-Ohlin model and on its descriptive comparative statics, packaged as the Stolper-Samuelson, Rybczynski, Factor Price Equalization, Heckscher-Ohlin and Hicks-Ikema propositions. However, the comparative-static manipulations of the Heckscher-Ohlin model have relied on the rarely mentioned assumption that the reallocation of factors in response to any external disturbance is without cost. This assumption is implausible. Moreover, it rules out the construction of a sensible, dynamic, market-clearing version of the model. For if reallocation is costless but occurs at a finite rate, then factor owners have an incentive to adjust even faster. To overcome this difficulty, we must introduce resource-using, and therefore costly, adjustment and allow the speed of adjustment to be optimally chosen by factor owners. In short, equilibrium dynamics is possible if and only if costly reallocation of factors is accommodated.3
