Economics and Philosophy, 15 (1999), 161-185 Copyright © Cambridge University Press
EQUILIBRIUM AND
DISEQUILIBRIUM IN ECONOMIC
THEORY: A CONFRONTATION OF
THE CLASSICAL, MARSHALLIAN
AND WALRAS-HICKSIAN
CONCEPTIONS
MICHEL DE VROEY
UniversiteCatholique de Louvain
1 INTRODUCTION
When the economic theory of the last decades becomes a subject of
reflection for historians of economic theory, a striking feature which they
will have to explain is the demise of the disequilibrium concept.
Previously, economists had no qualms concerning the view that die
market or the economy was exhibiting disequilibria. Amongst many
possible quotations, the following, drawn from Viner's well-known
article on Marshall, illustrates that:
The ordinary economic situation is one of disequilibrium moving in the
direction of equilibrium rather than of realized equilibrium. (1953, p. 206)
Today, mainly under Lucas's impulse, such a statement is considered
unacceptable. To all intents and purpose, the term, disequilibrium, has
been banished from the vocabulary of economists. The basic aim of this
This research has been supported by a grant 'Actions de Recherches concertees' no 93/
98-162 of the Ministry of Scientific Research of the Belgian French Speaking Community. I
would like to thank Claude Wampach and Franco Donzelli for stimulating discussions on
the subject of this paper. Comments on an earlier draft by C. Benetti, J. Cartelier, P. De
Ville, F. Magris and two anonymous referees are gratefully acknowledged.
161
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MICHEL DE VROEY
paper is to shed some light on the reasons underlying this evolution. Its
concern is less the immediate episodes that led to its demise - for
example, the fall of disequilibrium theory a la Barro and Grossman - than
some prior antecedents. In particular, it purports to draw economists'
attention to the fact that the Marshallian and the Walrasian theoretical
traditions rest on different conceptions of equilibrium and disequilibrium. Put differently, my paper pleads for de-homogenizing Marshall
and Walras on equilibrium.1 The main rationale for such a move from the
traditional interpretation has to do with the possibility of disequilibrium
outcomes. In the Marshallian approach, it makes sense to state that, at the
closure of a given market-day, the market can be in a state of
disequilibrium. However, disequilibrium is not made synonymous with
non-market-clearance. On the contrary, market-clearing - that is, the
matching of market-day supply and demand - is supposedly always
realized, in equilibrium as well as in disequilibrium. In contrast, in the
Walrasian approach disequilibrium states have only a virtual existence:
they are eliminated before becoming effective. Moreover, market-clearing
and equilibrium are considered to go hand in hand. As market-clearing is
always present, so is equilibrium. The lack of perception of this difference,
it will be argued, is at the source of many confusions pervading presentday debates on topics such as, for example, unemployment theory.
Initially, my aim was to compare the Marshallian and Walrasian
conceptions of equilibrium.2 However, in the course of writing this
article, I came to realize that I had to enlarge its scope in two respects.
First, rather than just discussing the Walrasian conception of equilibrium,
I felt that my attention should be focused on what I suggest should be
called the Walras-Hicksian conception. The latter is broader than the
former in that it brings to the fore the intertemporal perspective which
may have been lacking in Walras's Elements of Pure Economics. The
Hicksian modifier is then used to refer to Hicks's contribution to this
broadening in Value and Capital.3 Secondly, it progressively turned out
that a comparison of the Marshallian and the Walrasian conceptions
could not validly be made without considering their predecessors'
views. The rationale here is the lineage to be traced from the classics to
Marshall as both approaches deserve the 'market-clearing disequilibrium
theory' label. Hence the view that the Marshallian stands in between the
classical and the Walras-Hicksian approaches. It shares the disequili1
2
3
In a companion paper (De Vroey 1999a), other differences between the Marshallian and
the Walrasian traditions related to the institutional set-up are analysed.
An interesting comparative study of Marshall and Walras on equilibrium is Dos Santos
Ferreira (1989). The emergence and development of the Walrasian research programme is
depicted in Ingrao and Israel (1990).
In view of Hicks's later defence of disequilibrium theory, his association with a viewpoint
excluding the possibility of disequilibrium may seem odd. On this, see De Vroey (1999c).
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
163
brium approach with the former and the subjective theory of value with
the latter. So, I ended up comparing three distinct approaches: the
classical, the Marshallian and the Walras-Hicksian.
The discussion is organized as follows. In Parts 2, 3 and 4, the
distinctive features of the classical, Marshallian and Hicks-Walrasian
conceptions of equilibrium are brought to the fore and contrasted. In
Part 5 the conceptual muddle arising from blurring them is illustrated
with a few examples. Concluding remarks are offered in Part 6.
Some supplementary remarks are in order before concluding this
introduction. First, my exploration is not undertaken exclusively for
historical reasons. Its main motivation lies in my strong belief that a
retrospective exploration is a prerequisite for the understanding of the
present meaning of equilibrium and the controversies and ambiguities it
may carry. Nonetheless, my paper considers only the canonical models,
leaving aside their modern offspring wherein, for example, market
clearing may cease to be present. Second, each of the three approaches
considered raises interpretative issues of their own. Hence some work of
reconstruction is needed, which necessarily involves making disputable
interpretative choices. In fact, as will be seen, I am less interested in what
the classical political economists, Marshall, Walras and Hicks, meant
than in reconstructing what can be considered as the basic classical,
Marshallian and Walras-Hicksian lines of thought, even though they
may possibly be different from these authors' original assertions. Third,
my paper will adopt a rather relativistic viewpoint. Since my primary
aim is to bring to the fore differences in methodological perspectives, the
question of their respective pros and cons will be dealt with briefly.
Finally, before beginning my comparison of the three approaches, it is
worth drawing a preliminary distinction between the issues of the
determination and the formation of equilibrium. Determination pertains to
the assessment of the conditions of its logical existence as calculated by
the outside theorist, formation relates to the issue of the making of
equilibrium, that is, of the conditions, possibly institutional ones, needed
for bringing it about endogenously. At stake here is an outcome whose
logical possibility has been priorly asserted. Clearly, it does not suffice
that an equilibrium is logically possible to have it existing effectively.4
2 THE CLASSICAL CONCEPTION OF EQUILIBRIUM
The first equilibrium approach which will be considered is that of
classical political economists such as Smith, Ricardo and Marx. It has
4
The issue of stability stands in between the two terms of my distinction. On the one hand,
it addresses a problem of logical possibility, as does the issue of determination. On the
other hand, as is the issue of formation, it is concerned with the process of attaining
equilibrium.
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164
MICHEL DE VROEY
been revived by modern Ricardian-Marxian economists, such as Garegnani (1976, 1987), Dumenil and Levy (1993) and Kurz and Salvadori
(1995), who refer to it as the 'surplus approach' or the 'analysis of longperiod equilibrium positions'. Donzelli (1989) calls it the 'stationary
equilibrium perspective'. Here I will however use the more neutral
appellation of the classical equilibrium conception in order to avoid
some interpretative ambiguities born of the other labels.
In the classical equilibrium conception a distinction is drawn
between two price concepts - the natural and the market price. In
theoretical terms the natural price is deemed to be more important than
the market price. Theirs is a relationship of hierarchy: the market price is
supposed to be subordinate to the natural price, in that any situation of
deviation from the latter is supposed to trigger off some feed-back effect.
Among the different possible definitions of the classical conception of
equilibrium, the following one drawn from Caminati (1990) is worth
quoting:
A classical long-period position of the economy is, broadly speaking, a
state of the system where the driving forces of the classical competition are
at rest. More precisely, a classical long-period position is defined in this
paper as a given productive technique, a given state of distribution (e.g. a
given real wage rate), and an associated set of relative commodity prices
(production prices) such that the rate of profit is uniform across industries.
(Caminati, 1990, pp. 12-13)
Crudely stated, the natural prices are the prices allowing for the
uniformity of the profit rate in all branches of the economy. Their
effective existence marks the realization of equilibrium. Market prices
and natural prices then coincide. On the contrary, disequilibrium
prevails as soon as profitability differs across branches.
As is well known, unanimity among classical economists on value
theory and hence on the determination of equilibrium did not exist.
Whereas Smith defended an 'adding-up' or 'cost-of-production' determination of natural prices, Ricardo and Marx gave it a labor theory of value
foundation. Modern authors usually assume that natural prices coincide
with Sraffian prices of production. These differences are however less
central for my purpose. More important is the common claim that some
fundamental price category determined otherwise than by market forces
- the natural prices - exists and that this category plays the role of center
of gravitation for a less fundamental price category, market prices.
Two distinct formation processes should be separated as soon as a
distinction is drawn between market and natural prices. As far as the
formation of natural prices is concerned, the hallmark of the classical
conception is that whenever market prices deviate from natural prices,
competitive forces intervene to bring the economy back to a state of
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
165
equilibrium. Disequilibria arise because of mistaken production decisions (a lack of perception by firms of the size of the 'effectual demand'
confronting them), though their mistaken character surfaces only ex
post. Over-investment in some branches and under-investment in others
leads the market price to respectively be below or exceed the natural
price. Unequal profit rates across branches ensue, which in turn spurs
on the reallocation of capital from the low to the high profitability
branches. As a result, supply decreases (increases) in the former (latter)
branches. Inequalities in profitability diminish and market prices come
closer to natural prices; all this occurs over a range of market-periods.
Noteworthy, classical authors do not claim that equilibrium will ever be
attained but rather that it acts as an attractor. The existence of
disequilibrium states is in no way considered as an anomaly, on the
contrary: the resilience of the system is rather based on the fact that
they elicit feed-back effects impeding their taking on a cumulative
character.
In the writings of classical economists this convergence process is
described in the crudest way, without any systematic examination of
either its stability or institutional conditions. Nonetheless, it has a strong
appeal for it points to a dynamic conception of competition wherein the
latter is depicted as an unceasing process rather than an end-state.5
Let me now turn to the issue of market price. In Chapter VII of Book
One of the Wealth of Nations, Smith defines it as 'the actual price at which
any commodity is commonly sold . . .' (1976, p. 73). This view, consisting
of seeing market prices as day-to-day real world data, is defended by
most authors of the surplus approach.6 In this line of thinking, market
prices are seen as theoretically founded as well as accidental at one and
the same time. On the one hand, the amplitude of their variations is
limited by the fact that any departure from natural prices elicits feedback effects, on the other hand, it is also admitted that they are under the
spell of casual factors. Hence the view that their actual size is of little
theoretical importance.7
At stake is the issue of whether a specific equilibrium concept exists
5
6
7
Cf. Kurz and Salvadori (1995, p. 20) and Caminati (1990, p. 15). Unfortunately, their
modem followers have discovered the difficulty of recasting the classical insights in
models that conform to the present-day canons of rigor. Hence the viewpoint taken by
several of them that gravitation should be seen as an axiom.
See, for example, Boggio (1987, p. 392), Milgate (1987, p. 179), Panico and Petri (1987,
p. 392).
In Kurz's and Salvadori's terms: 'And on the further premise that a general analysis of
market prices would be impossible anyway, it appears to be perfectly sensible to set aside
altogether the "temporary effect" produced by "accidental causes" and focus on the
"laws which regulate natural prices, natural wages and natural profits, effects totally
independent of these accidental causes'" (1995, p. 8). See also Eatwell (1987, p. 599).
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166
MICHEL DE VROEY
that is distinct from the natural price equilibrium, but associated with
market prices instead. In other words, does a competitive process exist
which elicits that market prices are such as to ensure a matching
between supply and demand or market-clearing? Modern defenders of
the classical approach suggest that there is no such mechanism and
hence no further equilibrium concept. This view is however unconvincing to me. First, stating that the term 'market price', as used in the
theoretical discourse, refers to the real-world price phenomenon is farfetched.8 Second, these authors are sitting on the fence. They accept that
some adjustment process is at work as they endorse Smith's statement
that when the quantity supplied and the 'effectual demand' (the demand
of those who are willing to pay the natural price of the commodity)
diverge at the natural price, the market price changes (1976, pp. 73-4).
However, they seem to think that this process stops short of its normal
result, that is, making effectual demand and supply match, for otherwise
they should accept the market-clearing conclusion and the existence of a
second equilibrium concept. Yet, if an adjustment process is present, is it
not better to assume that it works its way through until some equilibrium
state is reached?
According to Smith, the market price will either rise above or fall
below the natural price whenever the quantity of any good supplied
differs from effectual demand.
The market price of every commodity is regulated by the proportion
between the quantity which is actually brought to the market, and the
demand of those who are willing to pay the natural price of the commodity,
or the whole value of the rent, labor and profit, which must be paid in
order to bring it thither. (1976, p. 73)
For Smith the market price is thus determined by the ratio between two
quantities rather than by equality between market supply and demand.
As is well known, he did not reason in terms of demand functions but
merely stated that agents express their effectual demand. This implies
that they know the natural price, which is an unacceptable assumption
as soon as one admits that the natural price is logically anterior to
market prices (the latter being a deviation from the former). A possible
alternative is to assume that agents pre-assign their expenditures across
markets before the opening of the economy: hence, to borrow Benetti's
terminology (1981), the possibility of a 'natural expenditure curve'
taking the form of a rectangular hyperbola. One may well not want to
8
This ambiguity is partially admitted in the first part of Roncaglia's following
(contradictory) statement: 'Clearly, although the market price is a concept and as such
implies a certain degree of abstraction, we are not confronted here with a theoretical
variable' (1990, p. 104).
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
167
call this a demand function, yet to all intents and purposes, it amounts to
the same; market prices are then those prices which ensure a matching
between this fixed pre-assigned expenditure and supply. With such a
reconstruction it can be stated that market prices are market-clearing
prices.9
The above is about the determination of market prices. On the topic
of their formation, classical theory is mute. Which assumptions about
agents or the organization of trade are necessary to ensure market
clearing? It may be surmised that the only way to get such a result is to
assume the market organization is centralized: a market secretary, the
story would then run, announces prices at the natural price and changes
them until supply and demand match. Trading at a false price or bilateral
trade is forbidden. Competition among the dealers, referred to by Smith
(1976, p. 73), would then be a kind of auction process. Obviously, this
assumption is hardly satisfactory. Yet, it seems that there are no
alternatives for ensuring unicity of price and the matching between
market supply and demand. Once this assumption is made, the result
that market prices are obtained instantaneously or in logical time cannot
be avoided.
If my interpretation is accepted, the classical approach buttresses the
co-existence of two equilibrium concepts, natural price equilibrium and
market price equilibrium. However, they should not be put on the same
footing. Theirs is a relationship of hierarchy, with market price
equilibrium (natural price equilibrium) as the 'lower' ('higher') equilibrium concept. The term, 'full equilibrium', can be used to designate a
situation where the two equilibria are jointly present or, in other words,
where the market price coincides with the natural price. 'Disequilibrium'
is then used as a short-hand for 'natural disequilibrium', that is, any
state where the market deviates from the natural price. It refers to a lack
of 'full equilibrium' rather than 'full disequilibrium', the (non-considered) case where neither of the two equilibrium criteria are matched. As
full equilibrium is considered to be rarely obtained, states of effective
disequilibrium are seen as normal phenomena.
Before leaving the classical viewpoint, let me say a few words on
their treatment of time, an issue closely related to their conception of
equilibrium. In the classical approach, an economy is analysed over a
given time span, the length of which is not made precise, except for two
features. First, an implicit yet crucial distinction is drawn between
permanent and transitory features of reality. Put differently, the economic
reality is supposed to be formed by two layers: a deep or fundamental
and a superficial layer, the main item to be put under 'fundamentals'
9
The view that the classical conception comprises two equilibrium concepts is defended,
amongst others, by Arena, Froeschle and Torre (1990), Benetti (1981), Hollander (1987, pp.
64-9) and Kubin (1990).
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MICHEL DE VROEY
10
being the technological conditions of production. By definition, the
fundamental layer is seen as immutable during the time span of the
theoretical investigation, whereas the superficial one is viewed as subject
to transitory changes. This assumption can be called the 'constancy of
basic data' assumption.11 The second feature concerns the length of the
period under analysis. The convergence process towards natural prices
requires changes in the quantities produced. Hence it is a time-taking
process. However, nothing precise is stated about its duration, except
that it ought to be more lengthy than the adjustment towards market
prices. In as far as it is accepted that the latter adjustment takes place
instantaneously, this is a very weak requirement.12
3 THE MARSHALLIAN CONCEPTION OF EQUILIBRIUM
3.1 Marshall's price and equilibrium concepts
A good point of entry for studying Marshall's conception of equilibrium
is his famous fishing industry example (1920, p. 369). Herein, Marshall
reflects on how firms react to changes in demand conditions.13 If the
change is expected to be of a very short duration, supply will remain
unchanged. If it is expected to be of a moderate length (i.e., to last for a
'short period', to which Marshall attributes the length of a year or two),
only their variable capital will be modified. Finally, if it is expected to
last for a 'long-period', fixed capital will vary as well, which will entail
bigger changes in production. The ensuing picture is, as Hicks put it
(1946, p. 122), a tripartite equilibrium classification: it is composed of
10
11
12
13
The term fundamental is used by classical economists to draw a contrast between 'deep'
and accidental features of reality. In Walrasian theory this term is used differently and
designates the 'givens' of the economy, without any contrast being drawn between
'fundamental' and 'non-fundamental' givens.
In Petri's terms: 'And to this end the equilibrium's data must be sufficiently persistent, so
that the equilibrium does not change over time and the deviations of the economy from it
have time to be corrected, or to compensate one another' (1991, p. 273). See also Eatwell
(1987, p. 599).
In this light, the judiciousness of Garegnani's rechristening of the classical approach
under the label 'long-period equilibrium positions analysis' (1976) is open to question.
This terminology suggests that classical analysis bears on long time spans. Yet, as stated,
this interpretation is hardly compelling. I, for one, would be more inclined to see the
long-period as formed of a succession of non-overlapping natural equilibrium timeperiods, each of which is associated with a specific state of techniques of no definite timelength. The long-period would be the time span with which an issue such as the decline
in the rate of profit could be associated. It could then be stated that classical economists
have a deep interest in the long-period yet not that their value theory is a long-period
theory.
As regards very quick changes, Marshall refers to changes in supply conditions, but for
longer ones demand is considered the triggering off factor.
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
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three equilibrium concepts - the ultra-short, the short- and the longperiod equilibrium - each of which is associated with a specific price
concept, the market-day price, the short-period normal price and the
long-period normal price respectively.
The standard interpretation of the interrelationship of these concepts
runs as follows: first, the three price concepts are not given the same
importance, the market-day price being considered the least important.
Second, the three equilibrium concepts are seen as all designating a
multiple of some basic unit of time, for example, the hour. The marketday can then be defined as comprising a certain number of hours, the
short-period as comprising a certain number of such days, each of them
being furthermore considered as separated by a certain time span, and,
finally, the long-period as comprising a certain number of short-periods.
Third, the relationship of the three price concepts is described as
consisting of a twofold gravitation-like process, from the market-period
towards the short-period equilibrium and from the short- towards the
long-period equilibrium (Frisch, 1950).
To me, this standard view raises several interpretative problems. In
De Vroey (1999b) I have suggested an alternative interpretation whose
thrust can be summarized under three headings.
(a) The basic divide is between market-day and normal equilibrium
To me the main divide of the Marshallian conception of equilibrium is
between market-day equilibrium and normal equilibrium, which ought
to be associated with two price concepts, market-day and normal price.14
They stand in the same relationship of hierarchy as the classical
economists' two equilibrium concepts, with normal equilibrium being
considered as more fundamental than market-day equilibrium. The
criterion for the latter is market-clearing. That is, a state where agents'
trading plans prove to be compatible on a specific market-day considering and taking into account the specific constraints they face, in
particular the fact that changes in supply cannot be implemented
instantaneously. Put differently, market-clearing refers to states where
market-day demand and supply functions match. In the context of
Marshall's analysis, Book V of the Principles, with its focus on firms'
decision problems, normal equilibrium is defined as a situation where
firms have no incentive to change their production decisions, it being
moreover assumed that the effects of such past decisions have had time
to be fully worked out. Put differently, normal equilibrium is characterized by the matching of normal supply and demand functions. The
notions of 'full equilibrium' might be used in the same sense as in the
14
The market-day equilibrium is also called the temporary equilibrium, yet this term will
not be used in order to avoid confusion with Hicksian terminology.
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MICHEL DE VROEY
classical approach, that is, to designate any situation where the two
criteria are fulfilled or, in other words, where the market-day price
coincides with the normal price.15 In turn, the notion of disequilibrium
characterizes any situation where the higher equilibrium criterion is not
fulfilled, that is, where market-values differ from their normal values.
Whereas the possibility of disequilibrium against market equilibrium is
excluded, disequilibria against normal equilibrium can exist effectively.
Thus, we have the same 'market-clearing disequilibrium' pattern as in
the classical approach.
(b) The short-flong-period distinction
In my view, the short-/long-period distinction should be made only in a
second stage of reasoning. Properly speaking, it characterizes the shock
in normal demand and the type of adjustment it triggers off rather than
the new equilibrium arising after the adjustment (whatever the shock,
the new equilibrium qualifies as a 'normal equilibrium'). In other words,
a short-period adjustment will be initiated if the expected duration of
some change in demand is longer than the time-span required to make a
change in variable capital worth its salt, yet not long enough for
justifying a change in total capital. The technical characteristics of the
production process are therefore involved and there is no reason to
believe that the underlying thresholds will be the same across branches.
(c) No adjustment front short- to long-period equilibrium
It has been argued above that the natural equilibrium is obtained
through successive adjustments of market equilibria in the classical
approach. The same applies for the relationship between market and
normal equilibria in my interpretation of the Marshallian approach. In
both cases, the formation of the higher equilibrium arises over time
through successive changes in the lower concept. It therefore makes
sense to state that an adjustment process from the lower to the higher
equilibrium concept is at work. Contrary to what is often argued, for
example, by Frisch, the same is not true, however, for the relationship
between short-period and long-period normal equilibrium. The reason
lies in the fact that short- and long-period changes in demand are
alternative occurrences. The firm has to make a decision as to whether an
observed change in demand will last long enough to justify a modification of its total capital or, if not, as to whether a change limited to
variable capital is justified. As soon, as it is assumed that the firm has
perfect information, as is implicitly the case in Marshall's reasoning, no
risk of confusion arises and the choice is clear-cut. Hence, it makes little
15
Marshall himself used the notion of full equilibrium in another sense to designate a state
where all firms of a branch are in equilibrium, in contrast to his alternative 'statistical
equilibrium' category. Cf. Newman (1960).
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
171
sense to state that the short-period normal equilibrium will adjust
towards the long-period normal equilibrium since only one or the other
type of adjustment will be elicited.
3.2 The formation of equilibrium prices
As in the classical perspective, in as far as two equilibrium concepts are
separated, a distinction ought to be drawn between two specific
adjustment processes geared respectively to the formation of market and
normal equilibrium. The formation of market equilibrium is addressed
by Marshall in his corn-market analysis, in Book V Chapter 2 of the
Principles. Two different cases are considered.16 First, it is assumed that
agents hold perfect information about the market. Market-clearing then
follows automatically. Marshall's references to higgling and bargaining
to the contrary notwithstanding, the formation of equilibrium should
then be considered as occurring in logical time. In a second stage,
Marshall makes the constant marginal utility of money assumption,
amounting to considering a quasi-linear utility function. As a result, the
possibility of income effects is discarded. In this case, false trading is
allowed to occur. Since it is not accompanied by path-dependency, the
market will end up with the same quantity traded as in the perfect
information case with the last exchange occurring at Marshall's 'true
equilibrium' price. Whereas most interpreters tend to give precedence to
the second stage of Marshall's analysis, I, for one, see it rather as an
amendment of the first argument, geared towards making the point that
the perfect information assumption is less heroic than it may appear at
first sight, since the same result can be obtained without it.
Some reconstruction is needed as regards the issue of the formation
of normal equilibrium since nothing on this topic is to found either in
Marshall's Principles or in the writings of authors such as Frisch, Viner or
Hicks. The point to elucidate is whether the market-clearing disequilibrium result noticed apropos classical theory is likely to occur in a
Marshallian context. Let me refer again to the fishing industry example.
It is implicit in Marshall's reasoning that changing the quantities
produced is a time-taking process. This is the reason why, for example,
new boats are not constructed if the change in demand is supposed to
last only two years. This may not allow enough time for them to be built.
Moreover, they could not be amortized over such a time-span. Here, it is
the first of these factors - the 'time-to-build' element, to use present-day
terminology - which needs to be considered. Once it is brought into the
picture, disequilibrium states become a likely occurrence. Suppose that a
shock arises and the owners of the representative fishing firm correctly
diagnose its short-period nature. Suppose also that the changes decided
16
For a more in-depth analysis and assessment, see De Vroey (1999b).
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MICHEL DE VROEY
on in variable capital cannot be implemented in the time-span separating
one market-day from the next. As a result, market outcomes can be
characterized as disequilibrium states for the whole period separating
the market-day where the shock arose and some subsequent market-day
where the decision to change variable capital will turn out to have
exerted its full effects. During the different market-days occurring in
between, market prices and quantities will diverge from their normal
equilibrium, all this, however, going along with market clearing. Clearly
enough, the same reasoning is even more valid when shocks are of a
long-period nature.
The conclusion can then be drawn that, as far as the adjustment
towards normal equilibrium is concerned, the Marshallian resembles the
classical account on the basic point that its realization occurs through
successive displacements of the (market-clearing) market results, as they
emerge at every period of trading. This is a point which was obvious to
early interpreters, whereas its obviousness may have been lost today
because of the prevalence of the Walrasian meaning of equilibrium/
disequilibrium.
Finally, the question may be raised of whether disequilibrium states
could still arise without the time-to-build assumption. The answer is yes.
An enlightening example is Friedman's discussion of the expectationsaugmented Phillips Curve (1968). Here, the linchpin of the disequilibrium result is the asymmetry in expectations across firms and workers.
Whereas firms hold rational expectations and hence correctly expect the
rate of inflation, workers suffer from being endowed with adaptive
expectations. Expansionary monetary policies then result in overemployment states. Clearly, against my definitions, this is a state of
market-clearing disequilibrium. On the one hand, both the quantity
traded and the real wage arising at the end of the market-day following
the shock differ from their normal magnitudes. On the other, market-day
supply of and demand for labor still match.
3.3 The treatment of time
As with the classical approach, the Marshallian approach is underpinned
by the constancy of data assumption. Yet the distinction between
permanent and transitory features is now dropped. Economic data are
assumed to stay constant during the time-span of the adjustment process
in order to ensure the success of the adjustment towards equilibrium
(either of the short- or the long-period type). Yet irreversible moves or
changes in equilibrium positions are accepted. This process-limited
constancy requirement is the price to be paid for the introduction of
duration without forgoing the view that equilibrium states are effectively
achieved. In view of the fact that, according to Marshall, adjustment may
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
173
be the matter of a decade or more (when the long-period is concerned),
this requirement still proves to be formidable and runs counter to
Marshall's characterization of economic systems as being subject to
gradual and continuous transformations.
4 THE WALRAS-HICKSIAN CONCEPT OF EQUILIBRIUM
The Walras-Hicksian label refers to Walras's equilibrium model developed in his Elements of Pure Economics (1954), and extended by Lindahl,
Hayek and Hicks in order to encompass the intertemporal perspective.17
Its subject matter is a sequence of instantaneous equilibria, each referring
to a given point in time. Owing to a lack of space, I will not enter into the
issue of whether this perspective is already present in Walras's work, as
argued by Donzelli (1989), or whether the Lausanne economist should
rather be interpreted as having stuck to the classical equilibrium
conception, as claimed by his first interpreters and by the surplus school
economists nowadays. According to the stance taken in this respect, it
can be asserted either that Lindahl, Hayek and Hicks rediscovered an
insight already present in Walras's and Pareto's work, yet neglected by
their immediate followers, or that they were responsible for an important
shift in the Walrasian research program, away from what Walras himself
had spelled out. Be this as it may, the Lindahl-Hayek-Hicks interpretation has become the backbone of the neo-Walrasian research program
today.
4.1 The two equilibrium concepts
The starting point of Hicks's reasoning is Walras's static equilibrium
concept. The latter is denned in the following way:
A market is in equilibrium, statically considered, if every person is acting
in such a way as to reach his most preferred position, subject to the
opportunities open to him. This implies that the actions of the different
persons trading must be consistent. (1946, p. 58)
Hicks's contribution is to have extended this concept to an intertemporal
dimension. To this purpose, recourse is made to two distinct equilibrium
17
The impulse for the intertemporal extension of Walras's static model extension is mainly
due to Lindahl and Hayek. Lindahl's seminal paper, published in Swedish in 1929, was
translated into English under the title "The Place of Capital in the Theory of Price' and
published as Part Three of Lindahl's book, Studies in the Theory of Money and Capital
(1939). Hayek's paper is 'Intertemporal Price Equilibrium and Movements in the Value of
Money', published in German in 1928 and reprinted in Hayek (1984). Hicks, however,
popularised it in his Value and Capital and is responsible for what was to become the
standard terminology. On the issue of the origin of the intertemporal approach see Currie
and Steedman (1990), Hansson (1982) and Ingrao (1989).
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174
MICHEL DE VROEY
concepts which may be called 'equilibrium at one point in time' (or
'temporary equilibrium) and 'equilibrium over time' (or 'intertemporal
equilibrium'). 'Equilibrium over time' designates an equilibrium path. In
Value and Capital it is defined by the 'condition that the prices realized on
the second Monday are the same as those which were previously expected
to rule at that date' (1946, p. 132, author's emphasis). It exists whenever
the succession of point-in-time equilibria happen to belong to the
equilibrium path. The temporary equilibrium notion is borrowed from
Marshall where it designates the market-day result. To Hicks, it
constitutes a new, expectations-augmented, characterization of Walras's
static equilibrium. It has the same conditions of existence, namely that
the excess demand for every good or service traded is equal to zero. As
soon as the tatonnement hypothesis is made, equilibrium at one point of
time should be considered as arising instantaneously.18 Its introduction
serves the purpose of emphasizing that what appears as an equilibrium
against the backdrop of the conditions for static equilibrium may cease
to do so when set against an intertemporal perspective. Hence the view
that it is a provisional reality, exactly like Marshall's market-day result.
In the temporary equilibrium context, markets exist only for the
exchange of commodities at the date under consideration as well as for
trading of the numeraire commodity from the present to the next future
date. As far as these commodities are concerned, agents' equilibrium
plans are made mutually consistent through tatonnement. However,
agents' expectations about future prices are not made compatible. As a
result, agents may regret their choices ex post. Thus, any point-in-time
equilibrium is a temporary equilibrium when set against the intertemporal perspective, irrespectively of whether it proves to belong to the
intertemporal equilibrium trajectory or not. This is how disequilibrium
might enter the picture.
In this (analytically important) sense the economic system can be taken to
be always in equilibrium; but there is another wider sense in which it is
usually out of equilibrium, to a greater or less extent. . . The wider sense of
Equilibrium - Equilibrium over Time, as we may call it, to distinguish it
from the Temporary Equilibrium which must rule within any current week
- suggests itself when we start to compare the price-situation at any two
dates. (Hicks, 1946, pp. 131-2)19
18
19
Hicks, himself, did not want to adopt the tatonnement hypothesis. However, without it,
income effects are bound to arise. In Hicks's story, time is divided into 'Weeks' and
trading is supposed to occur on 'Mondays'. Contrary to what he states explicitly, his
Monday concept is better interpreted as comprising no duration. Whatever happens on
Mondays occurs in logical time. Cf. De Vroey (1999c).
Or, as stated in Capital and Growth (Hicks, 1965, p. 26): 'And it is similarly true that an
equilibrium at a point of time which is not an equilibrium over the period in which that
point of time occurs, is a disequilibrium position, from the point of view of the period. (It
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
175
4.2 The treatment of time
Contrary to the other two approaches, the Walras-Hicksian viewpoint
requires that all events, be they concerned with trading or delivery, are
time-indexed or dated and that each date is considered as an indivisible
point in time. A rather subtle treatment of time, based on a distinction
between 'logical' and 'real' time, ensues. In Donzelli's terms:
The set of 'real' time instants is the time set over which the economy under
theoretical investigation is supposed to evolve; the set of 'logical' time
instants is instead the time set over which the equilibration process is
assumed to take place . . . by virtue of that distinction the process of
adjustment towards equilibrium, though being interpreted as an enduring
process with respect to 'logical time', can nevertheless be viewed as a
durationless phenomenon with respect to the 'real' time set through which
the evolution of the economy is supposed to take place. But, being
durationless with respect to 'real' time, the adjustment process cannot give
rise to any observable disequilibrium phenomenon; as a consequence, it
has the character of a purely virtual process that is structurally unable to
affect the data constellation characterizing the economy at the instant (of
'real' time) to which the analysis is meant to refer. By the same token, the
equilibrium state associated with that data constellation, though it can be
conceived as a rest point of an adjustment process unfolding itself in
'logical' time, can at the same time be supposed to be instantaneously
reached by the economy at the relevant instant of 'real' time. (1989,
pp. 27-8)
Another issue is whether the constancy of economic data assumption, found in one way or another in the classical and the Marshallian
approaches, is also present in the Walras-Hicksian program. In one
obvious sense the answer is in the negative: when time unfolds, the set
of future states of the world become partitioned in the set of effectively
realized states on the one hand, and the set of beforehand possible yet
unrealized states on the other. This move should be interpreted as the
emergence of 'novelty over time' and hence as running on a collision
course with the immutability assumption. The point is then to see
whether the latter assumption should be overruled completely or
partially maintained. Usually, neo-Walrasian authors seem to think that
the fundamentals (tastes, endowments, technology) remain the same.
However, there is no intrinsic necessity to stick to this viewpoint. The
Walras-Hicksian approach can perfectly accommodate cases where the
fundamentals are changing over time. Adopting such a radical discontinuity of economic data perspective actually amounts to a Heraklitean
is better to say that the path, on which the disequilibrium occurs, is not an equilibrium
path, over the period.)'
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176
MICHEL DE VROEY
depiction of the Walras-Hicksian program. In this line of thought, every
tatonnement round should be seen as concerned with a radically
different economy having possibly nothing to do with the economies
which existed at earlier dates. This assumption is obviously too strong,
yet it clearly points out that the Walrasian approach does not require the
constancy of data assumption as the classical and Marshallian
approaches do.
4.3 The contrast between the Walras-Hicksian and the classical and
Marshallian conceptions of equilibrium
At first sight, the Walras-Hicksian and the classical and Marshallian
conceptions of equilibrium seem to be rather similar. First, temporary
equilibrium seems to be on the same footing as the market clearing result
which is obtained in the last two approaches. Second, a hierarchy similar
to that which is established in the other two approaches is implicitly
established between Hicks's two concepts. Market-clearing, as the
equilibrium principle obtained by tatonnement, seems to be superseded
by a higher equilibrium principle bearing on the fulfillment of price
expectations.20 Third, the impression prevails that the two equilibrium
concepts are linked by some convergence process in the same way as the
attainment of equilibrium in the classical and Marshallian approaches
proceeds through successive displacements of market values. There
must be, it is suggested, some forces at work that result in bringing the
economy back on its equilibrium path whenever it happens to deviate
from it.
Were this impression confirmed by a deeper probing, the basic claim
of this paper - that no unique equilibrium conception pervades economic
theory - would not hold. Some significant differences break the surface
upon closer scrutiny however, suggesting an important difference
between the Walras-Hicksian approach on the one hand and the classical
and Marshallian one on the other. They arise when the following two
questions are raised about the Walras-Hicksian approach: first, is there
really a convergence process towards equilibrium over time at work?
Second, is there a hierarchy between the temporary equilibrium and the
intertemporal equilibrium concepts?
4.3.1 Convergence towards equilibrium over time?
Market prices are deemed to oscillate around natural prices in the
classical approach. In the Marshallian approach, whenever market
20
As stated by Leijonhufvud when commenting on Value and Capital: 'Market-clearing,
however, was equilibrium in a "limited sense"; in the more fundamental sense of
"Equilibrium over time", Hicks emphasised, the economic system was "usually out of
equilibrium'" (1984, p. 31).
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
177
values diverge from their normal magnitude, they will change until they
coincide. Equilibrium plays the role of an 'attractor' in both cases. The
issue to be examined here is whether the same can be stated about
equilibrium over time vis-a-vis temporary equilibrium.
As far as Hicks is concerned, the quotations given above suggest his
adhesion to the idea of the existence of a convergence process. However,
in subsequent writings, in particular in Chapter 2 of Capital and Growth
(1965), he seems to have changed his mind. In this respect the following
passage is worth reflecting on:
. . . the kind of equilibrium concept (or concepts) that we require in
dynamics. We need (1) equilibrium at a point of time; the system is in
equilibrium in this sense, if 'individuals' are reaching a preferred position,
with respect to their expectations, as they are at that point. It is only to such
an equilibrium that there can be tendency. We also need (2) equilibrium over
a period of time. . . . But for period equilibrium there is the additional
condition that these expectations must be consistent with one another and
with what actually happens within the period. Period equilibrium is
essential, in dynamic theory, as a standard of reference; but is hard to see
how there can, in general, be any 'tendency' to it. (1965, p. 24)
Hicks draws a crucial difference between his two equilibrium concepts
in this passage. On the one hand, he asserts the existence of an
adjustment towards point-in-time equilibrium.21 On the other hand,
however, he denies it in so far as equilibrium over time is concerned. The
latter concept, he states, is a standard of reference, a yardstick and
nothing more. In other words, intertemporal disequilibrium elicits no
mechanism tending towards its disappearance. Although Hicks, unfortunately, did not elaborate further on his observation, I would surmise that
it is underpinned by the issue of whether changes in the data are
accepted. In a nutshell, if it is assumed that agents have to devise their
optimizing behavior plan against a completely new set of data at each
new point in time, the idea that they are able to correct their past
mistakes over time becomes irrelevant. The more radical the discontinuity of data over time, the less the idea of convergence makes sense.
Semantics prove to be troublesome at this juncture. Once Hicks's
observation is admitted and one furthermore accepts that the equilibrium concept implies some underlying adjustment process, what he
21
His assertion that there is a tendency towards equilibrium at a point in time is somewhat
misleading. When taken literally, it means that if equilibrium prices are not realized,
forces will be triggered off tending to realize them. This suggests the possibility of false
price trading, a possibility which Hicks himself did not objet to, yet which cannot be
accepted in a tatonnement context. Thus, it should be emphasized that the adjustment
towards equilibrium at a point in time occurs instantaneously and does not allow for
false trading.
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178
MICHEL DE VROEY
calls 'equilibrium over time' should in no way be subsumed under the
equilibrium label, for as he states earlier in the same chapter: 'It is
necessary, if the equilibrium assumption is to be justified, that we should
be able to assert the existence of a tendency to equilibrium' (1965, p. 17).
However, Hicks did not abide by his own conclusions on this point. To
wit, the quotation given above in note 19, according to which an
equilibrium at a point in time can be a disequilibrium position from the
point of view of the period, is to be found just two pages after the
passage where he makes the point about the lack of attraction.
As far as more recent works in the Walras-Hicks tradition are
concerned, no clear-cut position stands out. In Grandmont's interpretation of temporary equilibrium, much emphasis is placed on agents'
expectation functions (1977, p. 542; 1987). In his view, the formation of
expectations in temporary equilibrium models can be formulated as the
result of the application of classical statistical techniques by the agents
rather than of following some simple rules-of-thumb. To Grandmont, the
expectation functions ought to be formulated in a general way, selffulfilling expectations being considered as a special case. The convergence idea is part of the picture when a general formulation is adopted.22
However, as soon as Grandmont's general expectations function is
replaced by the rational expectations assumption, the prevailing approach nowadays, the picture changes again and the idea of a random
walk substitutes itself for that of convergence. The 'equilibrium over
time' term is then used to designate a sequence of temporary equilibria,
without claiming that they are governed by some superior equilibrium
principle and that a convergence process is at work.
To conclude, the Walras-Hicksian hypothetical convergence cannot
be put on the same footing as the classical convergence process. Whereas
the latter is considered as the embodiment of the competitive process, in
the Walras-Hicksian perspective this process is, on the contrary,
embodied in the formation of temporary equilibrium. Nor can the
relationship between point-in-time and intertemporal equilibrium be
assimilated to the relationship between Marshall's market-day equilibrium and normal equilibrium categories. Notice also that if what is
22
As stated by Grandmont in his New Palgrave Dictionary entry on temporary equilibrium:
'[The temporary equilibrium method] permits to incorporate in the analysis the fact that
traders usually learn the dynamic laws of their environment only gradually and thus to
study in principle how convergence towards self-fulfilling expectations may or may not
obtain in the long run' (1987, p. 622). The same viewpoint is found under Radner's pen:
'In the evolution of a sequence of momentary equilibria, each agent's expectations will be
successively revised in the light of new information about the environment and about
current prices. Therefore, the evolution of the economy will depend upon the rules or
processes of expectations formation and revision used by the agents. In particular, there
might be interesting conditions under which such a sequence of momentary equilibria
would converge, in some sense, to a (stochastic) steady state' (1991, p. 437).
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
179
called an intertemporal equilibrium path is used as a reference against
which the path of successive temporary equilibria can be gauged rather
than as an attractor, it makes little sense to consider states where the
latter paths deviate from the former as disequilibria. Thus, the concept of
disequilibrium which is so central in the two other approaches should be
considered as irrelevant when it comes to the Walras-Hicksian approach.
4.3.2 A hierarchy between the temporary equilibrium and the
intertemporal equilibrium concepts?
As seen above, in both the classical and the Marshallian approaches the
two equilibrium concepts are viewed as organically connected and as
being in a relationship of hierarchy. In the Walras-Hicksian approach,
two equilibrium concepts may well also be present but they feature
neither interconnectedness nor hierarchy. First of all, assessing the
conditions for market-clearing is deemed to be a central theoretical
objective in this approach, which is hardly the case in the other two. In
spite of Hicks's insistence on the intertemporal dimension, the static
version of equilibrium was considered as able to capture sufficient
insights on its own to deserve most of the attention. After the advent of
equilibrium business cycle theory this is of course no longer true today.
However, even if dynamic rather than static analysis is now being
accorded more importance, it remains true that the two matters remain
unconnected. Equilibrium at a point in time and equilibrium over time
are not part and parcel of the Marshallian approach as are the marketday result and normal equilibrium. Likewise, Leijonhjufvud's assertion
to the contrary notwithstanding (see note 20), no foundation exists for
claiming that equilibrium over time is more fundamental than equilibrium at a point in time. The relationship of hierarchy characterizing the
classical and Marshallian approaches has no raison d'etre in the WalrasHicksian approach.
5 SEMANTIC PITFALLS
It follows from my above analysis that the conceptions of equilibrium
found in the classical, the Marshallian and the Walrasian approaches
should not be confounded. Unfortunately, economists are hardly aware
of such a need. Some examples of the confusion liable to arise when they
are blurred are given in this last section.
First, let me briefly reflect on the fate encountered by the short-/
long-period divide. The latter, as may be seen, is a typical Marshallian
distinction. In Marshall's writings it refers to two particular cases of the
adjustment towards normal equilibrium. Today, the divide is still used
in the Marshallian literature yet in a quite different sense. What is now
called short-period equilibrium is in fact Marshall's market-day
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MICHEL DE VROEY
equilibrium - to all intents and purposes, it ought to be understood as
referring to an instantaneous adjustment - whereas the long-period
equilibrium term ought to be interpreted as designating what was
called normal equilibrium above.23 This is how, for example, Friedman
understands the short-/long-period divide. Here, the problem is
semantic rather than substantial. More unfortunate, however, is the
exportation of this divide to the Walras-Hicksian approaches, wherein,
strictly speaking, it does not belong. There is no reason to redefine
'point-in-time equilibrium' as 'short-period equilibrium' and 'equilibrium over time' as 'long-period equilibrium'. When this is done, it is
hard to resist instilling into the Walras-Hicksian approaches connotations which are alien to them, such as the idea of a relationship of
subordination of short- to long-period equilibrium. The muddle caused
by such an import is further revealed by the fact that the Walrasian
static model is seen as a case of short-period analysis by some authors,
whereas it is viewed as a long-period analysis by others. The latter
stance is taken up by the authors of the surplus approach, who thereby
assign the same role of center of gravitation to the Walrasian static
equilibrium as to their own natural equilibrium concept. More oddly
however, this viewpoint is also taken up by some neoclassical
authors.24
Another example of the semantic muddle resulting from confounding the Marshallian and the Walrasian conceptions of equilibrium
concerns the introduction of the involuntary unemployment concept in
neoclassical theory.25 Without entering into a substantive discussion, let
me just note that the characterization of the involuntary unemployment
program differs according to whether it is embedded within the
Marshallian or the Walrasian approach. In the Marshallian perspective,
involuntary unemployment should be characterized as an equilibrium
result, whereas in the Walrasian perspective it can only be characterized
as a disequilibrium state. Thus, in reference to the Marshallian approach, a
theory of involuntary unemployment aims at turning the Marshallian
standard market-clearing disequilibrium result upside down and replacing it with models of non-market clearing equilibrium. The 'KeynesianWalrasian' involuntary unemployment program is quite distinct as it
consists of substituting a point-in-time market rationing result for a
23
24
25
Thereby, the distinction between short-period and long-period as based on the difference
between changes in variable and total capital, vanishes from the scene.
For example, in his Theory of Unemployment Reconsidered (1977), Malinvaud presents the
phenomenon of price rigidity as having a short run existence, whereas he assigns
Walrasian equilibrium to the long run: 'The Walrasian equilibrium is appropriate for
long-run economic analysis, because in the long run prices are actually flexible and play
the role that was traditionally given to them' (1977, p. 34). A similar viewpoint is to be
found in Bliss's entry on Hicks in the Neiv Palgrave Dictionary of Economics (1987, p. 643).
Cf. De Vroey (1998).
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EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
181
point-in-time market-clearing result, thus replacing the temporary
equilibrium outcome by its converse - a 'temporary disequilibrium'.
In the same vein, the meaning of the notions of full employment and
natural rate of unemployment (or, to consider the opposite of the
standard appellation, the natural rate of employment) differs according
to whether they are set against a Walrasian or a Marshallian equilibrium
conception (here an exclusive concern for static Walrasian equilibrium
suffices). The concept of full employment makes sense in the former, but
not in its ordinary meaning. Full employment coincides with being on
the supply of labor curve.26 No increase in employment can arise
without increases in the real wage, due to the voluntary nature of
exchange. In this context, the notion of natural rate of employment is
irrelevant. The opposite is true however in a Marshallian perspective.
Here it is the notion of full employment that makes little sense, whereas
that of a natural rate of employment, which should then be considered to
refer to the quantity dimension of normal equilibrium, does. Unlike
what happens in the static Walrasian context, this quantity is no
insuperable threshold: the market-day equilibrium level of employment
can very well be greater or smaller than the natural level, in which case
there is either over- or under-employment. Labor-market disequilibrium,
so defined, is thus a plausible effective result, going along, I repeat, with
market-clearing. Neither the notion of over- or of under-employment
makes sense in a static Walrasian framework.
All this, I hope, suffices to illustrate the need of having a firm grasp
of the differences between Marshall and Walras; not just for the sake of
getting one's history of economics straight, but also in order to be able to
avoid semantic pitfalls when discussing modern economic theory.
6 CONCLUDING REMARKS
This article has pursued a critical aim that consists in comparing the
equilibrium conceptions found in three main economic paradigms: the
classical, the Marshallian and the Hicksian-Walrasian approaches.27
Stating that they have nothing in common would be a crude exaggeration. They are similar in at least two central points: the first one concerns
the role given to the equilibrium concept, the backbone of the whole
theoretical reasoning in all three approaches. The second feature
common to all three paradigms is market-clearing. It thus turns out that,
contrary to a wide-spread opinion, market-clearing is not a modern
invention. It has pervaded economic thinking since its inception, the
Keynesian episode being the exception which proves the rule.
26
27
Cf. Patinkin (1965, p . 315). Such a micro-founded definition of full employment is poles
apart from the common-sense meaning of this term. Cf. De Vroey (1998).
Table 1 overleaf summarizes its main results.
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yes
4. Effectiveness of marketclearing
5.2. possibility of existence
non-coincidence of market
and natural prices
yes
two distinct adjustment
processes:
- logical time adjustment
towards market
equilibrium
- diachronic adjustment
towards natural price
equilibrium
two distinct adjustment
processes:
- logical time adjustment
towards market
equilibrium
- diachronic adjustment
towards natural price
equilibrium
3. The adjustment process
yes
non-coincidence of market
and normal prices
yes
relationship of hierarchy
5. Disequilibrium
5.1. meaning
The Walras-Hicksian approach
no
non-market clearance
yes
one adjustment process:
- logical time adjustment
towards equilibrium at one
point in time
- no adjustment towards
equilibrium over time
no organic link between the two
concepts
natural and market equilibrium normal and market equilibrium equilibrium at one point in time
and equilibrium over time
The Marshallian approach
2. The relationship between the relationship of hierarchy
two concepts
1. The equilibrium concepts
The classical approach
Table 1. The distinctive features of the three equilibrium approaches
s
m
a
m
r*
n
00
EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY
183
Having acknowledged these two common features, the question
may then be raised of whether the spontaneous ranking of the three
approaches - that is, putting the classical approach on one side and the
Marshallian and Walras-Hicksian ones together on the other, is confirmed by my analysis. No clear-cut answer can be given to this question,
the reason being that the Marshallian approach sits on the fence between
the other two. It ought not to be confused with either of them. True, the
Marshallian and the classical traditions differ in several important
respects: their value theory, the place given to micro-foundations, their
adoption of either a partial or general equilibrium perspective. On the
other hand, however, they all give the disequilibrium concept a central
place in their analysis. It is also true that the Marshallian and the WalrasHicksian approaches share important similarities. In particular, they are
alike as far as the micro-foundation aspect is concerned. In view of the
fact that this topic forms the bulk of microeconomic theory, small
wonder that most economists feel no need to draw a distinction between
these two approaches. Yet, they stand in sharp contrast as regards the
possibility of disequilibrium results. As seen, in the Walras-Hicksian,
contrary to the Marshallian conception, no discrepancy between market
clearing and equilibrium exists and states of disequilibrium have no
effective existence (as, rightly enough, deviations from steady-state
growth are scarcely labeled as disequilibria).
So, it turns out that the three approaches are not poles apart. It is
rather that their differences are subtle, similarities being interwoven with
dissimilarities. This is precisely where the difficulty lies. The fact that, for
example, they are similarly underpinned by two distinct equilibrium
concepts may prompt the conclusion that they could be subsumed under
the same general divide such as the short-/long-term distinction. The
contribution of my paper is to show that such an unifying interpretation
elicits more heat than light.
Finally, to turn back to the observation with which I began this
paper, namely the Lucasian view that no room exists for disequilibrium
in modern economic theory, the preliminary lesson which can be drawn
from my reflection is as follows: this view can be true only to the extent
that the Walras-Hicksian approach has effectively become the exclusive
way of practising economic theory.
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