An Historical Investigation
Chapter 2: What is Equilibrium?
INTRODUCTION The first question to be addressed in this book is what equilibrium means. This is by no means an easy task, given that economic theory abounds in different conceptions of economic equilibrium. Fritz Machlup (1958) once tried organizing them, but ended up complaining about their many meanings. And this was fifty years ago, long before mathematical economists working in game theory started developing refinements of the Nash equilibrium, which resulted in many new equilibrium concepts. Is there no way to structure this complex heap of different definitions and develop a more workable perspective on equilibrium theory? I believe there is. 1 The purpose of this chapter is to introduce several distinctions concerning the definition of economic equilibrium that I shall use throughout this book and that allow me to present the history of equilibrium theory in economics in a structured manner. One of the key distinctions that plays a role in this history is that between equilibrium as an end-state and equilibrium as a process. I shall explain this distinction and its implications in the next subsection. Looking at equilibrium theory in this way suggests that the element of time plays a crucial role in our in perception of what equilibrium means. As Rizzo (1979, 2) says, economists do not really have a choice as to whether they will use equilibrium concepts. The notion of equilibrium is an indispensable tool of analysis, because there is no means of studying complex phenomena other than by first abstracting from change altogether....