The Meaning Of Equilibrium

Like any economic term, equilibrium can be defined in various ways. According to one definition, an equilibrium is "a constellation of selected interrelated variables so adjusted to one another that no inherent tendency to change prevails in the model which they constitute."* Several words in this definition deserve special attention. First, the word "selected" underscores the fact that there do exist variables which, by the analyst's choice, have not been included in the model. Hence the equilibrium under discussion can have relevance only in the context of the particular set of variables chosen, and if the model is enlarged to include additional variables, the equilibrium state pertaining to the smaller model will no longer apply.

Second, the word "interrelated" suggests that, in order for equilibrium to obtain, all variables in the model must simultaneously be in a state of rest. Moreover, the state of rest of each variable must be compatible with that of every

* Fritz Machlup, "Equilibrium and Disequilibrium: Misplaced Concreteness and Disguised Politics." Economic Journal. March 1958. p. 9. (Reprinted in F. Machlup, Essays on Economic Semantics, Prentice-Hall, Inc., Englewood Cliffs. N.J.. 1963.)

other variable; otherwise some variable(s) will be changing, thereby also causing the others to change in a chain reaction, and no equilibrium can be said to exist.

Third, the word "inherent" implies that, in defining an equilibrium, the state of rest involved is based only on the balancing of the internal forces of the model, while the external factors are assumed fixed. Operationally, this means that parameters and exogenous variables are treated as constants. When the external factors do actually change, there may result a new equilibrium defined on the basis of the new parameter values, but in defining the new equilibrium, the new parameter values are again assumed to persist and stay unchanged.

In essence, an equilibrium for a specified model is a situation that is characterized by a lack of tendency to change. It is for this reason that the analysis of equilibrium (more specifically, the study of what the equilibrium state is like) is referred to as statics. The fact that an equilibrium implies no tendency to change may tempt one to conclude that an equilibrium necessarily constitutes a desirable or ideal state of affairs, on the ground that only in the ideal state would there be a lack of motivation for change. Such a conclusion is unwarranted. Even though a certain equilibrium position may represent a desirable state and something to be striven for—such as a profit-maximizing situation, from the firm's point of view—another equilibrium position may be quite undesirable and therefore something to be avoided, such as an underemployment equilibrium level of national income. The only warranted interpretation is that an equilibrium is a situation which, if attained, would tend to perpetuate itself, barring any changes in the external forces.

The desirable variety of equilibrium, which we shall refer to as goal equilibrium, will be treated later in Parts 4 and 6 as optimization problems. In the present chapter, the discussion will be confined to the nongoal type of equilibrium, resulting not from any conscious aiming at a particular objective but from an impersonal or suprapersonal process of interaction and adjustment of economic forces. Examples of this are the equilibrium attained by a market under given demand and supply conditions and the equilibrium of national income under given conditions of consumption and investment patterns.

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