Vilks A Set of Axioms For Neoclassical Economics

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ASetofAxiomsforNeoclassicalEconomicsand theMethodologicalStatusoftheEquilibrium Concept

ArnisVilks
EconomicsandPhilosophy/Volume8/Issue01/April1992,pp5182 DOI:10.1017/S0266267100000481,Publishedonline:05December2008
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Economics and Philosophy, 8 (1992), 51-82. Printed in the United States of America.
A SET OF AXIOMS FOR NEOCLASSICAL ECONOMICS AND THE METHODOLOGICAL STATUS OF THE EQUILIBRIUM CONCEPT
ARMS VILKS
Universitat Hamburg, Institut fur Statistik und Okonometrie, Germany
1. INTRODUCTION
It is widely agreed that the concept of general equilibrium and, in particular, general equilibrium existence proofs play a central role within the neoclassical approach to economic theory. There is much less agreement, however, on the concepts of general equilibrium and of neoclassical economic theory themselves. With respect to "the" concept of general equilibrium, one must recognize that there is a variety of different equilibrium1 concepts that have been explicitly defined and analyzed in the theoretical literature. First of all, one may think of the Arrow-Debreu model and its concept of competitive or Walrasian equilibrium. For modern neoclassical theory, this certainly is the paradigm case of an equilibrium concept, and not
A first version of this article was written while I was visiting the Faculty of Economics and Politics of Cambridge University in Winter 1987/88. I thank Partha Dasgupta, Frank Hahn, Geoffrey Harcourt, and Tony Lawson for kindly giving me the opportunity to present my thoughts to several discussion groups and workshops, and the following people for providing helpful comments and criticisms and, thereby, prompting several fairly substantial revisions of the original draft: Paul Anand, Frank Hahn, Franz Haslinger, Daniel Hausman, Michael Landesmann, Jochen Runde, Hamid Sabourian, Harald Scherf, and the anonymous referees. Finally, financial support by the Deutsche Forschungsgemeinschaft is gratefully acknowledged. 1. Unless otherwise stated, I will use the word "equilibrium" as an abbreviation for "general equilibrium state." 1992 Cambridge University Press 0266-2671/92 $5.00 + .00. 51
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infrequently the Arrow-Debreu model tends to be identified with "general equilibrium theory." This is quite obvious when the expression "disequilibrium theory" is used to denote the theory of those phenomena that cannot be described as competitive equilibria (cf. Benassy, 1982, pp. 1-4). However, disequilibrium theory in this sense comprises models that have their own concepts of equilibrium: equilibrium with marketing costs (Foley, 1970), equilibrium with quantity rationing (Dreze, 1975), and conjectural equilibrium (Hahn, 1978) are well-known examples of such "non-Walrasian" equilibria, and it is equally well known that many competitive disequilibria may be viewed as, for example, equilibria with quantity rationing. While there are thus different equilibrium models with specific concepts of equilibrium, the construction of all these models seems to be guided by the methodological conviction that a model of a whole economy is not satisfactory unless some concept of equilibrium has been defined and existence has been proved. One is thus led to look for common features of the different specific concepts that could explain that peculiar methodological status of the equilibrium concept. Broadly, one may distinguish four features that have been claimed to characterize "the" equilibrium concept of neoclassical economics. First, it is certainly true for all specific models mentioned above that, in equilibrium, individual agents simultaneously optimize. Second, the simultaneity of the individuals' actions seems to require some kind of consistency. Thus, Hahn (1973, p. 2) describes equilibria as "those states in which the intended actions of rational economic agents are mutually consistent and can therefore be implemented." Such mutual consistency of simultaneous actions seems closely related to logical consistency of the statements that are used to describe or explain the individuals' actions. Thus, Gale (1985, p. 431) notes that existence of equilibrium "establishes the consistency of the relationships that are assumed to determine equilibrium." Third, it is sometimes argued that all "actual states are equilibrium states," 2 and, hence, that ultimately all economic theory should be concerned with equilibria. Finally, an equilibrium is frequently characterized as a possible "state of rest" or, in Hahn's (1984, p. 3) more technical language, as "a critical point of some implicit or explicit dynamics." 3 Now, while it seems relatively uncontroversial among neoclassical economists that equilibria are characterized by simultaneous optimization, there seems to be considerable disagreement with respect to consistency, stationarity, and the question whether actual states should be viewed as equilibria. For example, according to Balasko (1988, p. 16),
2. Weintraub (1985b, p. 118, fn. 2). 3. See also Hahn (1982, p. 747).
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NEOCLASSICAL ECONOMICS AND THE EQUILIBRIUM CONCEPT
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"nonexistence of an equilibrium . . . is by no means proof that the hypotheses of the model lack axiomatic consistency." With respect to stationarity, Lucas (1980, p. 708) holds that "the idea that an economic system in equilibrium is in any sense at rest is simply an anachronism." And the view "that all theory should be equilibrium theory" is vehemently attacked by Hahn (1984, p. 4) who has "not been able to make any kind of sense" of it and even calls it "foolish." The present article suggests that it is possible to make sense of these apparently conflicting views, if one distinguishes between two general concepts of equilibrium. Roughly speaking, one of these concepts will be defined by "simultaneous optimization," the other one by "stationarity." With respect to the former of these alternative definitions, I will show that if a certain set of rather general axioms is assumed, then, indeed, (a) actual states must be equilibrium states and (b) existence of equilibrium may be viewed as necessary and sufficient for logical consistency of an economic model. I will suggest that the required axioms may be regarded as basic tenets of neoclassical economic theory. Thus, for the concept of equilibrium as simultaneous optimization, its methodological status will be straightforward: As most economic theorists are committed to the ideal of logical consistency, it follows from (b) that those who accept the neoclassical axioms must reject an economic model unless it has an equilibrium. If, on the other hand, equilibrium is defined as a "state of rest," then it seems indeed absurd to claim that all actual states are equilibria, and it is equally absurd that the assumptions of a dynamic model should be inconsistent just because no solution of the model is stationary. For one reason or another, one may be interested in the stationary solutions if there are any, but to use a dynamic model that has no stationary solutions is perfectly consistent with the neoclassical method. To clarify the distinction between the two concepts of equilibrium and, in particular, to substantiate the above claims (a) and (b), some care must be taken to spell out the required neoclassical axioms. On the one hand, they must not include assumptions that are peculiar to some specific equilibrium models but are negated in others. For the purpose of elucidating the role of the equilibrium concept in neoclassical economics, a choice of axioms will not be adequate unless there is reason to believe that they would be accepted as axioms by those who are commonly regarded as neoclassical economists. On the other hand, the axioms must not only make it possible to define equilibrium, but also to relate equilibria to actual states. Moreover, an analysis of logical consistency seems almost impossible without a sufficiently precise language. After a verbal discussion of the axioms, I will therefore use a set-theoretic formalization that can be easily related to the technical general equilibrium literature.
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2. WEINTRAUB'S APPRAISAL OF GENERAL EQUILIBRIUM ANALYSIS
Before I turn to a discussion of what I regard as the basic axioms of neoclassical economic theory, it may be helpful to contrast the aims of this article with an appraisal of general equilibrium analysis that may seem similar both in its attempt to articulate the axiom structure of neoclassical economics and in its conclusion that logical "consistency requires the production of a model in which a[n] . . equilibrium exists" (Weintraub, 1985a, p. 30). On the basis of a Lakatosian methodology, Weintraub (1985a, b) characterizes the neoclassical research program4 as containing six "hard core propositions," along with some further "heuristic" propositions. The hard core propositions are stated thus (p. 109): (HC1) (HC2) (HC3) (HC4) (HC5) (HC6) There exist economic agents. Agents have preferences over outcomes. Agents independently optimize subject to constraints. Choices are made in interrelated markets. Agents have full relevant knowledge. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.
Weintraub compares this set of propositions to "a set of axioms about lines and points which together define Euclidean geometry" (p. 113) and explains that "the hard core functions like the axioms for a program; one must accept the Euclidean parallel postulate if one is doing Euclidean geometry" (p. 114). Similarly, the hard-core propositions of the neoclassical research program "are questioned only by 'outsiders'" (p. 109). To "ask whether agents do, in fact optimize" is "to place oneself outside the program" (pp. 109-10). Moreover, the axioms both of Euclidean geometry and of neoclassical economics "contain words or phrases that initially have only commonsense interpretation." In the context of Euclidean geometry, "line" and "point" are simply words that are used in accordance with the Euclidean axioms; in neoclassical economics, the "undefined terms like 'agent,' 'outcome,' 'knowledge,' or 'market'" (p. 113) are used in such a way that no hard-core proposition is violated. So far, so good. I completely agree that a characterization of neoclassical economic theory should be attempted by explicitly listing its axioms. As, within a formal theory, it is impossible to define explicitly all terms of the theory, there will be always some primitive or undefined
4. Weintraub prefers to use his own term "neo-Walrasian," but makes it clear that he does so only "out of impatience with the cavalier use of the word 'neoclassical' which now seems to be used to describe all that is loved, or abhorred, by the particular analyst" (Weintraub, 1985a, p. 25, fn. 8).
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terms. In fact, as any term that is explicitly defined can be eliminated from all statements that contain the term, one may demand that the axioms of a theory, properly stated, should contain only undefined terms. One may say that, in a formal theory, the axioms impose restrictions on the use of those terms that are not defined within the theory, and that the meaning of the undefined terms is not fixed except by the requirement that they must be used in accordance with all axioms. Viewed from this perspective, however, Weintraub's hard core is rather unsatisfactory. First, while "optimization" is commonly defined to mean something like "choice of what is most preferred," Weintraub's six propositions do not provide any conceptual link between the terms "optimization," "preference," and "choice," except that "having preferences" and "optimization" are both ascribed to "agents." Unlike Weintraub, I will try to use axioms that reflect the logical structure of optimization. Second, Weintraub not only seems to suggest that such phrases as "interrelated markets," "full relevant knowledge," or "coordinated" are primitive concepts of neoclassical theory, but even that "equilibrium" must be regarded as an undefined term. Unlike Weintraub, I will try to give an explicit definition of "equilibrium" in terms of primitives that may be regarded as part of all neoclassical equilibrium models. Third, while he mentions Hicks's Value and Capital (1939), Weintraub does not seem to recognize that HC5 hardly applies to the model of temporary equilibrium, where the agents do not know future prices, while they may be quite relevant. Unlike Weintraub, I will try to avoid "axioms" that are not compatible with important neoclassical equilibrium models. Of course, one might try to "save" proposition HC5 by a suitable interpretation of "full relevant knowledge." In fact, Weintraub claims that the specific, mathematically formulated general equilibrium models are "interpretations of the hard-core propositions" (p. 116). However, while he emphasizes that "mathematics and theories are linked" and calls it "unreasonable to separate the mathematics, to put it aside as it were, for the duration of the appraisal" (p. 171), Weintraub does not provide any explicit interpretation "in the sense of a bijective mapping between a set of mathematical concepts and a set of economic concepts" (p. 117, fn. 1). Unlike Weintraub, I will explicitly state a bijective mapping that translates an ordinary-language statement of the axioms into the set-theoretic language of mathematical economics, and I will illustrate, by means of a familiar example, how the terms of the axioms reappear in a specific general equilibrium model. Before I proceed to the topic of consistency, it is important to distinguish clearly between "a model" in the sense of a set of propositions or assumptions and "a model of a set of propositions." 5 While the former
5. For a comparison of different concepts of "model," see Suppes (1961).
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use of the term is certainly the more common one among economists, the latter, relational one is predominant in formal logic and mathematics. A set of (arbitrary) objects is said to be a model of a given set of propositions, if there is an interpretation - that is, a bijective mapping between the objects and the terms within the propositions - such that, under that interpretation, the propositions hold true (cf., e.g., Bell and Machover, 1977, chap. 5). Thus, if a given set of propositions is contradictory, there can be no model of the set of propositions. If, on the other hand, one can show that a model of the set of propositions exists, then that set of propositions is logically consistent. Weintraub explains how this type of argument can be used to prove logical consistency of non-Euclidean geometry and then poses the following question: "Are the hard-core propositions of the neo-Walrasian research program logically consistent? A demonstration of consistency requires a model for the propositions in the sense that the terms of the propositions are interpreted in that model and, for the model, the propositions are actually true" (p. 114). Note that it is the logical consistency of the propositions HCl through HC6 that is at stake here. Weintraub, however, goes on to claim that "this requires a model such that HC1-HC5 are taken to be true and HC6 is true when they are. In other words, consistency requires the production of a model in which a competitive equilibrium exists. The entire line of papers which culminated in those of McKenzie and Arrow-Debreu are exactly of this form" (p. 114). Thus, apparently blurring the distinction between "a model" in the sense of a set of assumptions and the relational expression "a model of s.th.," Weintraub seems to suggest that Kakutani's fixedpoint theorem had to be used to demonstrate consistency of HCl through HC6! But Weintraub's "hard core" contains so many undefined terms and imposes so few conceptual links on their use that, far from requiring deep mathematical theorems, demonstrating consistency of those six propositions amounts to nothing but an elementary exercise in formal logic.6 Unlike Weintraub, I am not going to claim that equilibrium existence proofs aim at demonstrating consistency of the neoclassical axioms, but rather that existence of equilibrium is equivalent to consistency with a certain set of basic axioms.
3. A SET OF AXIOMS FOR NEOCLASSICAL ECONOMICS
Neoclassical economists from Robbins to Hahn have argued that the basic axioms of neoclassical economic theory "have only to be stated to be recognized as obvious" (Robbins, 1935, p. 78), that they "constitute claims about this world so widely agreed as to make further argument
6. Hint: Consider a "set of agents" with just one element and a "set of outcomes" with just one element; let the sets of "observable outcomes," of "coordinated outcomes," and of "equilibrium states" be identical to the set of outcomes, etc.
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unnecessary" (Hahn, 1985, p. 12). However, there seems to be no statement of the axioms that is both sufficiently explicit to make their alleged obviousness credible and sufficiently precise to be easily translated into the set-theoretic framework of modern economic theory. I suggest that the following statements may be regarded as the basic axioms of neoclassical economic theory.
(Al) Whether an agent believes an action to be possible {for him), may depend on the situation he is in (but on nothing else). (A2) Whether an agent prefers an action to another one, may depend on the situation he is in (but on nothing else). (A3) Whether agents' actions are physically possible, may depend on the situation they are in (but on nothing else). (A4) //, in a given situation, an agent carries out an action, then there is no other action that he, in that situation, believes to be possible and that he prefers to the one he carries out. (A5) //, in a given situation, an agent carries out an action, then he, in that situation, believes this action to be possible (for him). (A6) //, in a given situation, agents carry out actions, then these actions are, in that situation, physically possible. (A7) Some situation obtains, and every agent carries out some action. (A8) A situation that obtains is a situation, and an action that is carried out is an action.
In Section 4,1 will treat these statements as axioms of a formal theory in the way that was already indicated; that is, I will treat them as rules of language that impose restrictions on the use of the terms "agent," "action," "prefers," and so on, without logically presupposing any additional "meaning" of these terms. In general, however, a formal system will not be regarded as interesting unless one believes that there might be interpretations for which the axioms hold true. Thus, in Debreu's (1959, p. x) famous dictum that "the theory, in the strict sense, is logically entirely disconnected from its interpretations," the qualifier "logically" is essential, and the fact that the theory's primitive terms are borrowed from the vocabulary of ordinary language already suggests that the construction of the theory aims at applicability to contexts where it might be regarded as natural to use the same terms in their ordinary meaning. For the time being, therefore, I will treat the above statements as statements of ordinary language, and I will try to explain that in many ordinary, everyday contexts those statements would indeed be regarded as "obvious," "evident," or "trivial." Perhaps I should make it clear from the outset, however, that the following discussion can only have the role of showing why neoclassical economists accept the theory that has the above statements as axioms. If I am right to claim that (Al) through (A8) may be regarded as the basic neoclassical axioms, this claim will be corroborated not only by neoclassical economists agreeing that
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those statements are "obvious," but also by opponents of neoclassical economics refusing to agree. For example, economists who reject the idea that economics is concerned with individual agents' actions will probably refuse to accept the above statements as axioms of economic theory, but I think it is in accordance with common usage to characterize neoclassical economists as "reductionists" in the sense that they "attempt to locate explanations in the actions of individual agents" (Hahn, 1984, p. 1). Thus, without pretending to provide a justification for neoclassical economics that "everyone" will find acceptable, I suggest that the validity of the statements (Al) to (A8) is frequently presupposed in ordinary language. This is quite obvious in the case of (Al) to (A3): Whenever an individual's beliefs or preferences or the physical possibility of actions depend on something, this something is in some sense of the word an aspect of "the situation." [The word "may" in (Al) to (A3) allows for the fact that in some cases beliefs, preferences, or physical possibilities will be constant across situations.] One might say that (Al) to (A3) reflect a "situational determinism" of sorts, but it is important to note that it is beliefs, preferences, and physical possibilities that are situationally determined. Contrary to what has been claimed by Latsis (1976), neoclassical economics does not entail that the actions themselves are uniquely determined by the situation. That neoclassical theory allows for cases where actions are not uniquely determined, should indeed be evident to anybody who has seen an indifference curve with a flat segment. Statement (A4), which is a little more complex than the others, may be regarded as a "principle of rationality." It expresses that what an agent actually does is subjectively "optimal" in the sense that any alternative course of action is (a) not preferred to what is actually done or (b) not believed to be possible. It should be noted that (A4) makes sense, even if preferences are not assumed to be transitive or complete. In fact, I do not think that one should follow Hausman (1981, p. 19) and count transitivity and completeness of preferences as "fundamentals of neo-classical economics," for this would have the very strange consequence of excluding from neoclassical economics all the work on competitive equilibrium with nontransitive or noncomplete preferences (e.g., Schmeidler, 1969; Sonnenschein, 1971; Mas-Colell, 1974; Shafer and Sonnenschein, 1975). To show that the truth of (A4) is commonly presupposed in ordinary speech, one can adopt a type of argument that has been used in a similar context by Churchland (1970). Imagine some everyday context where an agent i has carried out an action x, and an observer makes the following remark: "Why did you do x? You could have done y instead!" What could agent i answer? It seems that he could either say: "Yes, I know. But under the given circumstances I preferred x." Or he could
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say: "Oh, really? I thought that y was impossible!" Perhaps he could explain that doing x or y was a matter of indifference to him or that he could not rank the two alternatives and had to pick something. All these reactions and many others are certainly compatible with the truth of (A4). But if the agent replies in terms of preference, beliefs, and possibility at all, there is one type of answer that directly contradicts (A4), namely, the following: "When I did x, I believed that y was a possible alternative. Moreover, I preferred y to x. But, as you can see, I have done x." It seems to me that in most cases this kind of answer would indeed be regarded as "incomprehensible," as apparently violating some tacit rule of language. Nevertheless, there are cases where that answer may seem to be justified. Thus, one might think of hypnosis or of the case that agent i meant to do y, but slipped and did x by accident. However, (Al) through (A8) are about actions, and I think it is at least not uncommon to reserve the word "action" for behavior that is to some extent voluntary. At any rate, neoclassical economic theory certainly does not purport to explain those aspects of human behavior that must be described as reflexes or as due to hypnosis. There is another objection against (A4), however, that is more important, as it touches the question whether agents should be regarded as being conscious of their beliefs and preferences. What if the agent replies as follows: "Why didn't you remind me to think of y before I did x? Of course I preferred y, and I have never stopped believing that y is possible, but I simply forgot it when I had to act." This reply is certainly not incomprehensible, but the words are used in a peculiar way. The dialogue could continue as follows: "If I had told you about y before you did x, the situation would have been different. To be sure, you used to believe that y was possible, but I should say that as soon as you forgot to act accordingly, you had virtually stopped believing it." - "You can't expect me to be fully aware of all my beliefs and preferences!" - "I do not insist that you are fully aware of your beliefs and preferences, but if, in a particular situation, you are so unaware of them that they do not guide your behavior, I refuse to regard them as your real beliefs and preferences in that particular situation." I think this little dialogue shows that in ordinary language there are different - and apparantly incompatible - ways of using the words "belief" and "preference." To use them in accordance with (A4) neither entails that agents must be completely conscious of their attitudes nor that they act only "as if" they had them, but it does entail that beliefs and preferences must not be ascribed to an agent as long as, otherwise, they would have to be regarded as "existent but inactive." While (A4) is still compatible with an agent who does not know what he is doing, (A5) expresses that an individual's movement of his body may be called "an action" only insofar as that individual believes that movement to be possible. This might seem to contradict the case
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where, for instance, someone who is completely convinced that there is nothing of any value buried in his garden, nevertheless digs up a treasure there. However, a contradiction to (A5) arises only if one classifies "digging up a treasure" as an action. Certainly, some may insist on such a classification, but a neoclassical economist would distinguish between "digging" as an action and "finding a treasure" as its probably welcome but unintended consequence. To understand what happened, he would have to look for preferences that could explain the digging itself. And again, something like this seems to be the natural reaction in most everyday contexts that are similar to my example - even if one does not adhere to any strict terminology. Statement (A6) is nothing but a specialization of a well-known principle of modal logic: ab esse ad posse valet consequentia. If an action is
known to be physically impossible, any claim that it has been or will be carried out must be regarded as mistaken. As a rule, neoclassical theory assumes that certain actions or combinations of individuals' actions are impossible because of physiological or technological restrictions or because of limited availability of resources. [Neoclassical theorists have used the words "possible" (Hurwicz, 1960, p. 30), "feasible" (Arrow and Hahn, 1971, pp. 88-89), or "attainable" (Debreu, 1959, p. 76; 1982, p. 705) to characterize those states that cannot be "excluded" on "a priori" grounds. I have chosen to use the phrase "physically possible," because "feasible" is frequently used in the sense of "subjectively feasible," and "possible" or even "objectively possible" may seem too strong, as, in a sense, the rationality axioms impose additional restrictions on what may be regarded as possible. And while "attainability" makes sense for states or allocations, it seems unnatural to speak of "attainable actions."] While the first part of (A7) looks as safe as (A6), the second part might be doubted, if one takes into account (A4) and (A5). Of course, one might say, there is unconscious and involuntary behavior - and such behavior is not "an action" that satisfies (A4) and (A5). However, the neoclassical economist could admit this, while maintaining that some aspect of any human behavior can always be regarded as an action. After all, "one and the same" behavior can be described in many different ways, and even someone who is coughing while asleep may perhaps also be described as someone who is having a nap. Neoclassical theory is not designed to explain the coughing, but it may, perhaps, explain the nap. Finally, there is hardly any need to comment on (A8), except by remarking that it is due to the fact that, strictly speaking, neoclassical economics is not confined to actual states, but may well impose some conceptual restrictions even on those actions that are not carried out, for example, on actions that are physically impossible, but believed to be possible by some agents. To sum up, I think that (Al) through (A8) are indeed "widely
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agreed" to be true. To be sure, there are some people who would reject some of them in some cases, but these seem to be cases where ordinary language is ambiguous anyway. Because of the vagueness and the inconsistencies of ordinary language, axioms of a formal theory cannot correspond exactly to everyday usage, but (Al) through (A8) do so to a considerable extent. At this point, it may be helpful to recall the distinction between axioms and (mere) assumptions that has been emphasized repeatedly by Hahn (e.g., 1985, p. 12). There are, of course, many assumptions beyond (Al) through (A8) that are frequently used in economics and might be regarded by some as "essential" for neoclassical economics. In particular, assumptions of individual rationality are frequently used that are much stronger than axiom (A4). For example, preferences over actions are assumed to be derivable from preferences over consequences of actions or even from preferences over "lotteries"; these preferences are assumed to be transitive, convex, or even to be representable by a von-Neumann-Morgenstern utility function. Moreover, it is common to assume that the subjective action possibilities coincide with objective possibilities, that subjective probabilities of future events coincide with objective probabilities, and so forth. However, I think it applies to all these additional assumptions that it can be discussed within neoclassical economics whether they may be regarded as valid. They are certainly not presupposed in ordinary speech in the same way as (Al) to (A8). To conclude this section, I want to point out that the statements (Al) to (A8) may be seen as an axiomatization of what Hands (1985, p. 331) has called "generic" economic theory. In the next section, I will use a formal version of (Al) to (A8) to define in set-theoretic terms what I regard as the fundamental structure of neoclassical economics. In this respect I will follow the "semantic" or "model-theoretic" approach to scientific theories.7 A special version of the semantic approach - the socalled "structuralist view"8 - has been applied by several authors to neoclassical economics,9 but the critical review of this literature by Hands (1985) concludes with a rather negative appraisal. In particular, Hands argues that the structuralists have failed to specify convincingly the intended applications for those parts of economic theory for which they have offered set-theoretic axiomatizations. One could add to this criticism that the structuralists have not even attempted to explain why a particular set of intended applications should be associated with a particular axiomatic theory. However, the structuralist axiomatizations have been limited to very specific economic theories, in particular Walrasian
7. This approach is associated with, e.g., Suppes (1961), Suppe (1974, pp. 221-30), and van Fraassen (1980). 8. The structuralist view is based on Sneed's (1971) analysis of mathematical physics. 9. Examples are Handler (1980), Balzer (1982), Haslinger (1983), and most of the articles in Stegmuller et al. (1982).
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pure exchange economics, and Hands (1985, p. 331) suggests that "the set of intended applications would be fairly straightforward," if "all of economics were subsumed into one big theory." He sketches the general properties of such a generic economic theory as follows: For one thing the theory must be methodologically individualist; all "laws" must be based on the actions of individuals and only individuals. For another thing it must be "intentional," since explanations in economics are always in terms of the beliefs and desires (i.e. intentions) of individuals. Finally, these beliefs and intentions must be connected to specific actions on the basis of a "rationality principle" or "maximization hypothesis." In this section, I have suggested that - contrary to what Hands conjectured - it is possible to axiomatize such a generic theory (though I think one should call it "neoclassical theory" rather than "all of economics"). While the structuralists do not explain why a particular set of intended applications should be chosen for a particular axiomatic theory, I have argued that the basic neoclassical axioms are frequently presupposed in that part of ordinary language that is used to talk about human actions and their reasons, and I think this explains why the intention to apply the generic neoclassical theory to "any problem situation in which individual choices must be made under conditions of scarcity or constraint" (Hands, 1985, p. 331) is regarded as reasonable by the overwhelming majority of economists.
4. THE FUNDAMENTAL STRUCTURE OF NEOCLASSICAL ECONOMIC THEORY AND A GENERAL DEFINITION OF "EQUILIBRIUM"
To gain precision and relate the axioms to formal neoclassical economics, it is helpful to use set-theoretic notation. Write "i G /" "s S" "a G A" "s G O" "a G C," "a G Bj(s)" "a G Pj(s, b)" "(,),<=; G F(s) for "i is an agent," for "s is a situation," for "a is an action," for "situation s obtains," for "agent i carries out action a," for "whenever agent i is in situation s, he believes that action a is possible," for "whenever agent i is in situation s, he prefers action a to action b,"10 for "the (simultaneous) actions (fl,),e; are physically possible in situation s."
10. Some readers may prefer the notation "a > u b." If, however, preferences are not assumed to be transitive, the notation "a 6 P,(s, 6)" seems more appropriate and is indeed well established in the literature; cf., e.g., Debreu (1982, p. 714).
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Using the above abbreviations as rules of translation, along with the usual set-theoretic symbolism,11 the axioms (Al) to (A8) can be formalized as follows: B,: S -+-> A for all i E 1, for all i E 7, (1) (2) (3) (4) (5) (6) (7) (8)
P,: S x A -- A
F: S ->- n, e , A, if s E O and a E C,, then B,(s) n P(s, a) = 0 , if s E O and a E C,, then a E B^s), if s E O and (a,) E II, e , C,, then (a,) E F(s), O x n, e , C, * 0 , O C S, and C, C A for all i E /.
Given the rules of translation, (1) to (8) do not "say" anything other than (Al) to (A8), but without the formalization it would seem impossible to fruitfully combine the basic neoclassical axioms with axioms of formal logic and set-theory, as it is done within neoclassical economic theory. To accept the statements (Al) to (A8) along with the axioms of logic and set-theory, entails the conviction that somehow it is possible to specify the sets and correspondences S, A, B,, P,, etc., in such a way that no unacceptable proposition can be derived within the specification (i.e., the rules of translation must not turn any fact about the specified sets into an unacceptable proposition of ordinary language). In particular, the specification must be such that axioms (Al) to (A8) are satisfied. This motivates the following definition. DEFINITION 1. A structure M = (S, A, (B,, P,),6,, F, O, (C,),6() is a model of the basic neoclassical axioms, iff it satisfies the conditions (1)
to (8). The elements ofZ:= S x n, 6 / A will be called states of M.
Of course, a model of the basic axioms12 can be specified in many different ways. To specify S, A, I, and thereby Z, is to decide on the
11. If X and Y are sets, X x Y denotes the cartesian product of X and Y; if (X,)/e, is a family of sets, Fl^, X, denotes the cartesian product of the X,'s; elements of such cartesian products are denoted by (x,),ei or simply (*,), when there is no risk of ambiguity. Finally, "K:X ^> Y" is an abbreviation for "K is a correspondence from X to Y." In accordance with, e.g., Border (1985, p. 54), I do not require a correspondence to be nonempty-valued. This is different from the definition as used by Debreu (1959, p. 6). 12. Henceforth, I will allow myself to omit the qualifier "neoclassical," when there is no risk of ambiguity.
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type of social phenomena that the theory is designed to talk about. To choose a particular specification amounts to a specific use of the terms "agent," "situation," and "action" and involves a decision on how to represent agents, situations, and actions. The theorist may wish to describe situations or actions in a more or less detailed way; for example, an action may be of the type "to buy cheese," or of the type "to buy a specified quantity of a specified brand of cheese in a specified store." Similarly, a situation may be identified simply by a list of the prevailing prices or by a detailed description of the social history. To specify the subjective possibility correspondences B, and preference correspondences P, is to make explicit assumptions on how the agents' preferences and beliefs depend on the situation.13 To specify F is to specify those restrictions on the possibility of actions that are known - or assumed to be known by the theorist - prior to the considerations of rational agency expressed in (4) and (5). While the choice of A specifies what could count as "an action" at all, many actions have to be regarded as impossible because of, for example, technological or physiological constraints, and many systems of individual actions may be impossible to be carried out simultaneously. Obviously, the specification of F will depend on which (aspects of) actions one wants to deal with. At this point, a remark on the asymmetric treatment of the subjectively perceived possibilities B, in (1) and the physical possibilities F in (3) may be in order. The difference arises because some actions may be physically impossible unless other agents act in an appropriate way. For example, it is physically impossible that two agents eat the same piece of cake, while, for any single agent, it may be physically possible to eat the cake, if it is not known (to the theorist) which agent will eat it. Or, if the actions include buying and selling, it is physically impossible that an agent buys a cake unless there is someone who sells it. In this sense, physical possibility of simultaneous actions requires that they are "mutually consistent." Therefore, in many important cases, physical possibility must be modeled by specifying a correspondence from S to Il, e , A (instead of correspondences from S to A). The states of a specific model correspond to the "elementary events" that can be described or conceived of within the framework of that structure. But, of course, not everything that can be conceived of in the language of a theory is regarded as real by that theory. Not every conceivable state is an actual state. However, the following definition seems to be in accordance with common usage:
DEFINITION 2. Given a model of the basic neoclassical axioms, M, a state (s, (a,-)) is an actual state for M, iff situation s obtains (s O) and the actions a, are carried out (a, E C, for all i E. I).
13. I think that most neoclassical economists would admit that sound knowledge about how beliefs and preferences are formed is lacking.
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This definition emphasizes that to specify O and the C,s, in addition to the other sets and relations, would mean to regard the model as descriptive in principle.14 Now, to relate the basic axioms to general equilibrium theory, one certainly has to recognize the fact that general equilibrium theories are not directly concerned with actual states.15 Taking account of this fact, let us "cut off" those axioms that contain the sets O or C,. Not much remains; what does remain, however, defines a type of structure that is very similar to those structures that are actually defined and treated as the basic units of investigation by general equilibrium theorists. DEFINITION 3. A structure 6 = (S, A, (B,, P,), F) is a social space
iff it satisfies the conditions (1) to (3).
To name just a few examples, it is not difficult to see that the concepts of "private ownership economy," "exchange economy with price rigidities," "social system," or "abstract economy" as defined and used by Debreu (1959, p. 79), Dreze (1975, p. 303), and Shafer and Sonnenschein (1975),16 respectively, can be regarded as special cases of the concept of social space.17 Moreover, once these specializations are properly specified, the following definition is equivalent to the seemingly different definitions of (general) equilibrium that are given by those theorists.
DEFINITION 4. A state e = (s, (a,)) of the social space & is an equilibrium for 6, iff the following conditions hold:
(a) for each i G /: a, B,(s),

14. "Descriptiveness in principle" is here taken to mean that the model generates statements about actual states. Of course, descriptiveness in this sense must not be confused with either truth of the descriptive statements or with the truth of statements like "a G Pj(s, b)" that do not, in general, refer to any actual state. 15. From this we have to exclude "applied general equilibrium analysis" as represented by, e.g., the contributions in Scarf and Shoven (1984). Applied general equilibrium analysis does, indeed, try to specify numerically complete models of the basic axioms. This line of research is of relatively recent origin and cannot be adequately dealt with here. In accordance with most methodological reflections on "general equilibrium theory," 1 will restrict this expression to "abstract" or "fundamental" theory. See Green (1981) on the distinction "fundamental-specific"; Hausman (1981) uses the very similar distinction "abstract-practical." 16. Shafer and Sonnenschein (1975) define an "abstract economy" as a structure ((A,, B,, P,)iei), such that B,: n, s , A, - A,, and P,: n, e , A, >- A,. An "equilibrium for an abstract economy" is defined as a point a = (a,) such that at e Bt(a), and B,{a) D Pt(a) = 0 (for all i 6 /). If one defines S = n,6, A,, A = U,e, A,, and F(s) = {s}, the concept of "abstract economy" is readily seen to be a specialization of the concept of "social space," and, for such a specialization, my Definition 4 and the equilibrium definition of Shafer and Sonnenschein are equivalent. A satisfactory interpretation of this important special case would require an analysis of game-theory and is beyond the scope of this paper. Suffice it to note here that there are important applications of the concept of abstract economy, e.g., by Dreze (1985) to general equilibrium theory of the firm. 17. Compare with Vilks (1991) for details (including a treatment of production).
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(b) for each i G /; Bfe) D Pfc, a) = 0 , (c) fa) G F(s). Using the rules that were stated at the start of this section, this definition can be easily translated into ordinary language. Instead of the rather clumsy result, one may prefer to have the definition rephrased as follows: An equilibrium describes a situation along with such actions that are, in that situation, subjectively optimal and objectively feasible.18 It has to be emphasized that "equilibrium" is defined relative to a social space. One does not define the predicate ". . . is an equilibrium," but the relational expression ". . . is an equilibrium for. . . ,"19 This is obviously of particular relevance when different but closely related social spaces are considered. In fact, neoclassical economic theory is frequently interested in the relationships between different (sets of) social spaces. For example, it is stressed by Hahn (1978) that the Walrasian competitive model can be embedded in the model of conjectural equilibrium. A more elementary example of an important relation between different social spaces is provided by the fact that the structure 6, = (S, A, B,-, P,, S x A) is itself a social space; it treats the i'th agent as isolated and disregards those objective feasibility constraints that are not known to the agent. Obviously, an equilibrium of &j corresponds exactly to what is commonly called "the i'th individual's equilibrium." Of course, in many cases the relevant social space is "clear from the context," but difficulties may arise if it is not. To illustrate this, I shall discuss an argument put forward by Hausman.20 Without formally specifying a social space, he describes a "very specific economic model" as follows (I have added the numbering): [1] Both George and Hermann prefer to wear shoes that fit. [2] George wears size 8 shoes and Hermann wears size 9. George currently owns one pair of shoes that is size 9 (too large) and Hermann currently owns one pair of shoes that is size 8 (too small). [3] Both believe incorrectly that the other has shoes that fit the other fine. [4] . . . they consider trading shoes as possible.
18. The reader may compare this with such explanations of the equilibrium concept as can be found in standard textbooks on general equilibrium, e.g., Arrow and Hahn (1971, p. 107), or Cornwall (1984, p. 19). 19. Compare with the definitions by Debreu (1959, p. 79) and by Dreze (1975, p. 303). 20. In his criticism of an earlier version of this article.
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I argue that (at least) two different social spaces can be associated with these assumptions. Obviously, there are just two agents. Thus / = {G, H}. I take it that there is just one situation s described by assumption [2]. It seems that there are just two actions, "to trade one's shoes" and "not to trade one's shoes." Let me denote them by T and N, respectively. For both agents, it will be physically impossible to trade one's shoes unless the other agent does so as well. Thus F(s) = {(N, N), (T, T)}. However, because of [4], both agents believe that both actions are possible. Thus A = BG(s) = BH(s) = {T, N}. To complete the description of a social space, it might seem that [1] entails Pc(s, N) = PH(s, N) = {T} and Pc(s, T) = PH(s, T) = 0 . Evidently, the social space 6 = (S, A, (B,, P,), F) thus defined has just one equilibrium, namely (s, T, T). However, Hausman argues that the no-trade point (s, N, N) could be an equilibrium according to Definition 4, and, indeed, it is possible to give an alternative formalization of [1] to [4]. Namely, one might maintain A = {T, N}, but interpret action T as "offering to trade shoes" and N as "not offering." In this case, it is certainly natural to assume that physical possibilities are given by F'(s) = {(N, N), (T, T), (N, T), (T, N)}. Now, because of [3], George might reason as follows: "While I could offer an exchange of shoes, I'm sure that Hermann will not accept such an offer. Therefore, it doesn't matter whether I choose T or N." Thus, George will not prefer T to N. Formally, P'c(s, T) = P'c(s, N) = 0 . And if Hermann reasons symmetrically, P'H(s, T) = P'H(s, N) = 0 . Clearly, for the social space &' = (S, A, (Bir PI), F') any state is an equilibrium in the sense of Definition 4. Hausman argues, however, that to count the no-trade point as an equilibrium would be misleading terminology, for "this seems to be a paradigm case of a disequilibrium." My counterargument is, of course, that (s, N, N) is a disequilibrium for &, but an equilibrium for &'. As both & and &' are possible formalizations of the verbal model [1] to [4], it may seem that (s, N, N) is both an equilibrium and a disequilibrium. But, as I have noted, it is wellestablished practice in general equilibrium theory to define equilibrium relative to an underlying set-theoretic structure, and I cannot see how this kind of relativity could be avoided. In fact, Hausman's line of argument seems to entail that non-Walrasian equilibria should not be counted as equilibria, for, for example, most Dreze equilibria are certainly "paradigm cases of disequilibrium" as well - if one considers them in a Walrasian setting.
5. THE METHODOLOGICAL STATUS OF THE EQUILIBRIUM CONCEPT
It has been noticed repeatedly in the literature that whenever neoclassical theory succeeds in modeling what at first sight seems to be a disequi-
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librium phenomenon, the modeling process will eventually convert it into an equilibrium. For example, toward the end of his book Economics in Disequilibrium, Hey (1981, p. 200) writes: much of the material was directed at problems . . . that we would like to imagine are essentially disequilibrium phenomena. Nevertheless, the framework of analysis has been almost always that of equilibrium. This is no coincidence. Indeed, it is an inevitable consequence of the method of analysis overwhelmingly employed in economics: namely, the optimising model of individual choice . . . optimising and disequilibrium are incompatible. The following proposition, which follows immediately from Definitions 1 through 4, may be regarded as a more precise statement of the "inevitability" of equilibrium modeling. Proposition 1: If & is a social space and M = (&, O, (C,)) is a model of the basic axioms, then (a) every actual state for M is an equilibrium for &, and (b) there is an equilibrium for 6. Part (a) of this proposition expresses that if one wants to use the language of the theory as given by the previous axioms and definitions, one must try to model actual states as equilibrium states. The neoclassical axioms, thus, seem to entail that "all actual states are equilibrium states." Prima facie this contradicts what such distinguished neoclassical economists as Bliss21 and Hahn22 have claimed. However, as I have emphasized, "equilibrium" is always defined relative to a particular social space. Similarly, the expression "actual state" does not make sense in the language of neoclassical theory unless a particular model of the basic axioms has been specified. If one considers a particular model M = (6, O, (C,)) of the basic axioms and a particular social space &', part (a) of Proposition 1 only says that the equilibria of 6' will be actual states of M, if &' "belongs to" M, that is, if &' = &. Of course, if one explicitly or implicitly assumes that actual states are summarized in the 1991 Statistical Yearbook, one cannot be sure that these actual states are equilibria of, say, a particular Walrasian social space. Moreover, as will be discussed in more detail, the word "equilibrium" is sometimes used to denote a "state of rest," and claims that actual states may be "disequilibria" are easily accounted for on the basis of this rather different terminology. A social space is, at best, only a substructure of a complete model of the basic axioms. As the concept of equilibrium is defined for a social space, it can be defined without specifying actual states. Of course, that
21. Bliss (1975, pp. 27-29). 22. See, e.g., Hahn (1984, pp. 3-4).
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equilibrium can be defined does not entail that its existence is somehow crucial and should therefore be proved. But if the basic axioms are seen as background knowledge as it were, the role of existence proofs becomes immediately clear. For not all social spaces can be embedded within a model of the basic axioms, but only those that have an equilibrium. This is exactly what part (b) of Proposition 1 expresses. Thus, existence of equilibrium is a necessary requirement for everybody who wants a theory that satisfies the basic axioms. If one specifies a particular social space, it satisfies the axioms (1) to (3) by definition. But if it has no equilibrium, the remaining axioms (4) to (8) cannot be added to the specification without generating a contradiction. Indeed, existence of equilibrium is not only necessary, but also sufficient for consistency with the basic axioms. Formally: Proposition 2: A social space & can be supplemented by a choice of sets O and (C,) in such a way that (&, O, (C,)) is a model of the basic axioms, iff there exists an equilibrium for &. Proof: If there is an equilibrium for &, say (s*, (a*)), choose O = {s*}, and C; = {af}. The "only if" part is (b) of Proposition 1. I think this explains the crucial role that is played by equilibrium existence proofs in neoclassical economics. Abstract general equilibrium theory investigates social spaces and, thus, prima facie ignores actual states. But, by Proposition 2, a particular social space can be consistently joined to the neoclassical axioms if and only if it has an equilibrium. To prove existence of equilibrium for a given social space is therefore equivalent to prove its consistency with the basic neoclassical axioms.23 Although this completes the main argument of this section, I have used the notion of consistency somewhat loosely, and some clarifying remarks may be helpful. Of course, consistency is usually attributed to sets of assumptions and not to set-theoretic entities such as social spaces or models of the basic axioms. However, if a set of assumptions uniquely determines - or specifies - a particular social space, it is unambiguous to say that the social space itself is consistent with the axioms. To relate existence of equilibrium to consistency of less specific models (sets of assumptions) as well, let W be a set of assumptions about
23. Quirk and Saposnik (1968) come quite close to this conclusion by arguing that, for the competitive model, existence of equilibrium is necessary to ensure logical consistency "of the notion of equilibrium." They go on to explain that there would be "very little merit in worrying about the empirical validity of competitive equilibrium, if the notion, by its very definition, carried within itself contradictions or inconsistencies so as to render the class of objects which it is supposed to identify empty on purely logical grounds" (p. 66). However, regarding a model as a set of assumptions, one may prefer the expression "logical consistency of a model" to "logical consistency of a notion." According to common usage, logical consistency of a model is taken to mean that no contradiction can be deduced. And without something like (Al) to (A8), general equilibrium models do not necessarily entail a logical contradiction, if there is no equilibrium.
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the components of a social space, that is, about agents, actions, etc. The V model V is logically consistent if and only if there is some social space that satisfies W, but in general, W will be satisfied by many different social spaces. Now let A be the set that has the basic axioms (1) to (8) as its elements, that is, A = {(1), (2), . . . , (8)}. Then Proposition 2 can be restated as follows. Proposition 3: The union of W and A is consistent iff there is a social space that satisfies W and has an equilibrium. However, general equilibrium theory commonly proves existence theorems that are of the form: "Every social space that satisfies W has an equilibrium." Evidently, a theorem of this form not only entails that V U A is consistent, but also that every consistent specialization of W V is consistent with the axioms A. Formally,
Proposition 4: If
(a) W is consistent, (b) W C W , and (c) every social space that satisfies W has an equilibrium, then VV' U A is consistent.
6. AN EXAMPLE: THE WALRASIAN PURE EXCHANGE ECONOMY
To illustrate the general propositions about social spaces and equilibria, and how they relate to well-known concepts, it may be useful to consider a simple version of the familiar Walrasian model of pure exchange (WMPE).24 The WMPE consists of the following assumptions. (Bl) There is a finite number n of agents. That is, / = {1, 2, . . . , n}. (B2) A situation is described by the prices of m commodities. That is, S = RU + . (B3) An agent's action or net trade is described by the quantities of the m commodities that the agent buys or sells. A positive (negative) number denotes a quantity that is bought (sold). Thus, A = Rra. (B4) For each agent i /, there is a vector e, G R+ (agent i's initial endowment) such that B,(p) = {a E R"l - e,-| pa < 0}.25 (B5) 2,- 6l c I -eR? + .
24. Compare with, e.g., Aliprantis, Brown, and Burkinshaw (1989, pp. 1-35). 25. As usual, "R + e" denotes the set {x Rm| 3y E R: x = y - e).
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(B6) For each i 7 and each u A , Piip, a) is independent of p, and the relation b Pt(p, a) is a complete, continuous, strictly monotone, and strictly convex preordering of R+ - e,. (B7) F(p) = {(a,) n, 6/ (R7 - e,)\ 2,-e, a, = 0}. We may now define: DEFINITION 5. A social space & = (S, A (B,, P,), F) is a Walrasian pure exchange economy (WPEE), if the assumptions (Bl) to (B7) ZioW. It is evident that, for a WPEE, the general concept of equilibrium as given by Definition 4 is exactly the familiar notion of Walrasian (or competitive) equilibrium. Because of proposition la, a neoclassical economist may say that,;/ the assumptions (Bl) to (B7) were true, actual states would be Walrasian equilibria (and therefore, e.g., Pareto efficient). This conditional statement is certainly not very "strong," but as it cannot be derived from the axioms of logic and set-theory alone, it is not a purely mathematical theorem, but may be regarded as a counterfactual that must be (accepted as) valid inasmuch as the basic neoclassical axioms are. The classical existence theorem states that every WPEE has an equilibrium. Thus, by Proposition 2, every WPEE can be consistently joined to the basic axioms. In fact, by Proposition 4, every consistent specialization of (Bl) to (B7) is consistent with the basic axioms. The WMPE may also serve to illustrate the distinction between axioms and assumptions that was mentioned in Section 3. To begin with, it must be emphasized that a WPEE as defined above is an abstract entity. For example, the elements of / are numbers, not concrete human beings. To apply the theory to the real world, the components of a specified WPEE must be interpreted; that is, the elements of / must be mapped to concrete agents and some mapping must be given that associates a particular state of the abstract WPEE with actual prices and actually traded quantities of goods and services. When a particular interpretation is fixed, the theory generates propositions about the concrete agents' actions and preferences, but, for a given WPEE, quite different interpretations may be conceivable. And what is true under one interpretation may be false under some other. Thus, even in the case of assumptions such as (B6) one cannot discuss their empirical validity unless some intended interpretation of the whole social space is fixed. Except, perhaps, for (Bl), the assumptions of the WMPE nevertheless differ from axioms in that most neoclassical economists do not regard them as universally valid. The assumptions (B2)-(B6) are certainly not related to ordinary language in the way the axioms are. (In the case of (B7), however, the "marketclearing" condition is certainly implied by the common usage of the expressions "to buy" and "to sell" - once (B3) is swallowed.)
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However, there are good grounds for regarding the WMPE as inapplicable. Inapplicability is here taken to mean that there is no WPEE that can be interpreted in such a way that no false proposition is generated. The view that the WMPE is inapplicable will grow out of repeated unsuccessful attempts to provide an interpretation of some WPEE that does not contradict one's convictions about the world in any fundamental way. But even if the WMPE is regarded as inapplicable to the real world, it may still be worth studying, as any WPEE represents a conceivable economy. The view that the WMPE is indeed inapplicable is certainly shared by most general equilibrium theorists. Therefore, modifications of the assumptions have been attempted that have led, for example, to the model of general equilibrium with quantity rationing, the model of temporary equilibrium, and many others. While replacing (some of) the assumptions, these more recent models maintain the fundamental structure of general equilibrium theory, and thus can be easily adapted to the framework of Section 4. Admittedly, it cannot be claimed that these modifications have led to a general equilibrium model that is applicable to the world in which we live, but general equilibrium theorists regard such modifications as an attempt "to move closer to economic reality" (Grandmont, 1982, p. 879).
7. EQUILIBRIA A N D "STATES OF REST"
In the preceding sections, I tried to show how the basic formal structure of neoclassical economics is related to its axioms and how these axioms motivate the general equilibrium concept of Definition 4. The remainder of the paper attempts to clarify the relation and methodological difference between that equilibrium concept and the alternative definition that characterizes equilibrium as a "state of rest." This seems to be of some importance, as the distinction is most often ignored and sometimes even denied in the literature. The locus classicus for the alternative concept is Machlup (1958, pp. 54-55), where equilibrium is defined as "a constellation of selected interrelated variables so adjusted to one another that no inherent tendency to change prevails in the model which they constitute." Strangely enough, Machlup rejects the phrase "balance of forces" as "simply another metaphor," but offers "peaceful co-existence" as potentially "helpful in defining or explaining equilibrium," and infers that "as an alternative definition of equilibrium we may propose mutual compatibility of a selected set of interrelated variables of particular magnitudes." It should be clear that "mutual compatibility" in this sense has nothing to do with logical consistency. However, Machlup's pair of definitions is sometimes interpreted in such a way that compatibility is related to actions of economic agents. For example, Malinvaud (1979, p. 3)
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accepts Machlup's two definitions as equivalent, but notes that they "do not refer to the subject matter of economics," and therefore adds the following explication: The compatibility has two dimensions that are always present, even if only implicitly in some models: (i) the various actions of an agent must be compatible with one another and with the constraints imposed on him, as well as with the aims he tries to achieve; (ii) the actions of the various agents must be mutually compatible: a trade for instance is a purchase for an agent and a sale for another. It seems to me that this elucidation of compatibility is nothing but a somewhat loose statement of the conditions in Definition 4. According to (i), individual actions must be subjectively optimal, and according to (ii), the simultaneous implementation of the individuals' actions must be possible. At any rate, "compatibility" of this kind certainly does not entail stationarity. However, it is sometimes suggested that simultaneous optimization and stationarity amount to the same thing. This is most explicit in Allingham (1973, p. 13): "Since the economy is nothing but the totality of the agents comprising it, it will be in balance if and only if each agent is in balance, or does not move - that is change his action." And: " . . . an agent moves, . . . if so doing takes him to a higher level of preference." To make this precise, however, requires the specification of the dynamic structure of the model. Of course, many different dynamics can be associated with a given set of optimizing agents. For example, actions may change preferences and /or beliefs in many different ways, and nothing" prevents one from trying to model the process of comparing the different action-possibilities itself. But as long as one considers a static model, where all actions are carried out at a single date, one abstracts from any such process that may lie behind the static model. In fact, to define equilibrium as a state of rest "makes sense only in relation to some dynamic framework describing the evolution through time of the system under consideration" (Balasko, 1988, p. 17). Nevertheless, Machlup's definition is somehow meant to be applicable even to purely static models, for "more often than not, time is left out in the construction and operation of equilibrium models" (Machlup, 1958, p. 51). In the past 30 years, the situation may have improved somewhat, but still it seems impossible for many important neoclassical models to make Machlup's definition precise. In fact, while the state-of-rest characterization of equilibrium is very often found in introductory chapters of economic textbooks (e.g., Mansfield, 1989, p. 43; or Levacic and Rebmann, 1982, p. 10) and sometimes in informal elucidations, it is strikingly absent from formal economic theory unless there is an explicitly dynamic analysis, as, for example, in the stability literature. Thus, if it is at all possible to give a precise definition of equilibrium that is general enough
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to include the formal equilibrium definitions of purely static general equilibrium models as special cases, that general definition cannot refer to any stationarity conditions.
8. DYNAMIC SOCIAL SPACES AND EQUILIBRIUM PROCESSES
Plainly, there is nothing in Definition 4 that requires an equilibrium to be a state of rest. However, the property of being a "state of rest" cannot, strictly speaking, be even discussed in the static framework introduced so far. On our rather general level of discourse, however, it is quite easy to supplement the above "snapshot" concept of a social space (where the individuals' carried-out actions are contemporaneous) and to define a structure that admits the description of dynamic phenomena. We have to recognize the fact that the actions that are carried out in some situation will, in general, change the situation. Formally, we can introduce a correspondence that specifies for each state of the economy the set of situations that could follow the original state. DEFINITION 6. The structure (&, G) is a dynamic social space, iff &
is a social space, and G.Z S. The correspondence G (from the state> space Z to the situation-space S) is called the outcome-correspondence.
By restricting the set of situations that could follow a state of the social space, the outcome-correspondence can represent processes of physical transformation, but also of learning, adaptation of aspirationlevels, etc. Now, the elementary events that can be described by the theory are processes, represented by sequences of states, (z,),6N. But not all processes that can be described, will be processes that are possible, given the agents' beliefs, preferences, and the laws of motion represented by G. DEFINITION 7. A process (zt) is an equilibrium process for the dynamic social space (&, G), iff for all t
(a) z, is an equilibrium for &, (b) s,+i G(z,), (where it is understood that s,+1 is the situation that belongs to the state z,+1.) Much of what has been said about equilibrium states holds a fortiori for equilibrium processes. Without proof, one cannot be sure that, for a given dynamic social space, equilibrium processes exist at all. If they do, there are, in general, many of them. Again, it is crucial for the theory that the components of (&, G) be so specified that an equilibrium process exists. (For otherwise, the model will be inconsistent with basic axioms, and hence it cannot be used by a neoclassical economist to explain or predict actions.) But an equilibrium process need not, of course, be a stationary process.
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NEOCLASSICAL ECONOMICS AND THE EQUILIBRIUM CONCEPT 9. EQUILIBRIUM PROCESSES WITH SPECIAL PROPERTIES A N D THEIR METHODOLOGICAL STATUS
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Within the framework of a dynamic social space, one may inquire whether there are equilibrium processes with special properties. For example, one may ask whether there is an equilibrium process that is stationary, that is, such that 2, = 2 for all t. Of course, for many conceivable economies there is such a stationary equilibrium process. Sometimes there is just one stationary equilibrium process and sometimes every nonstationary equilibrium process converges toward a stationary one. It is well known, however, that these are special cases; typically, neither uniqueness nor stability of a stationary solution can be expected in a dynamic model. What is important here, is the methodological difference between "existence of an equilibrium process" and "existence of a stationary equilibrium process." While the former is necessary to use the theory for explanations of (conceivable) actions, it is not at all necessary to establish existence of a stationary process. A dynamic social space can be perfectly consistent with all axioms without having a stationary solution. As Balasko (1988, p. 17) has remarked, nonexistence of a stationary solution "is no more than a mathematical property of a vector field and suggests no logical inconsistency. Furthermore, such a vector field may exhibit asymptotic behavior . . . that translate mathematically into periodic orbits or even more complex attractor sets which are at least as interesting as stationary points." To be sure, there are definitions of equilibrium that do not require full stationarity, that is, z, = z for all t, but turn on stationarity of certain particularly interesting aspects of the process, that is, of certain components of 2, only. For example, Hahn (1973, p. 25) defines an economy to be "in equilibrium when it generates messages which do not cause agents to change the theories which they hold or the policies which they pursue." According to this definition, an agent in equilibrium may well buy a pipe today, but tobacco tomorrow. It is only required that the agent is neither learning nor revising his policy that specifies how he would react to possible messages. Now, in a completely specified dynamic model the agents' theories and policies have to be represented as, presumably rather complex, aspects of the situation. Thus, Hahn's definition amounts to stationarity of those components of z, that represent theories and policies. It should be obvious, however, that what was said about full stationarity applies equally well to such restricted stationarity. It is certainly interesting to know whether it is possible that learning and policy revision ceases, but it is certainly not true that any dynamic model must have an equilibrium in Hahn's sense to be theoretically sound. There must, however, exist an equilibrium process according to our Definition 7 and, a fortiori, there must be equilibria in the sense
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of Definition 4 if the model is to be consistent with the neoclassical axioms. Similar remarks apply to "rational expectations equilibria" (REE). It is, of course, interesting to know the properties of an equilibrium process that is such that no agent systematically makes forecasting errors. It may even be of particular interest to investigate REE in the framework of a fictitious economy, if one is concerned with political doctrines that are guided by the idea of some more or less precisely defined "ideal world." But, again, there is no particular methodological relevance in establishing existence of an equilibrium process where all agents have rational expectations. If my reasoning has been correct, there is a rather sound commonsense basis for accepting (Al) to (A8). But nothing similar can be adduced in favor of the rational expectations hypothesis. Of course, if it so happens that all or most equilibrium processes of a dynamic economy converge toward one particular limit process, one may treat this limit process as describing the "long-term" behavior of the economy. But, in general, one can neither be sure that such limit processes exist nor, if they do, that they will be stationary or satisfy the rational expectations hypothesis. Thus, existence of equilibrium processes with particular special properties may be more or less interesting - just as, in a static model, some equilibrium states may be more interesting than others. But just as a static model does not contradict the neoclassical axioms, if it has only trivial equilibria, a dynamic model does not contradict the axioms, if all its equilibrium processes are nonstationary. Moreover, explaining stationary processes or REE contributes to an understanding of real world phenomena in a still more indirect way than does, for example, an explanation of monetary equilibria, of business cycles, etc., for fictitious economies. As it is true for the real world that the price of money is not zero and that there are fluctuations of employment, one may hope that explaining these phenomena for fictitious economies might help us to understand some of the mechanisms that operate in the real world as well. Insofar as general equilibrium analysis aims at such an "understanding of real world phenomena," it is a vice and not a virtue to consider only stationary or RE-equilibria. One may be forced by the technical complexity of a model to restrict oneself to such processes, but the removal of such restrictions should belong to the research agenda of general equilibrium theory.
10. ON THE RELATION BETWEEN THE TWO CONCEPTS OF "EQUILIBRIUM"
"Equilibrium" in the sense of simultaneous optimization and "equilibrium" in the sense of stationarity have frequently been treated as the
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same thing. I have argued that, in general, these two notions do not coincide and that, from a methodological point of view, it is most important to distinguish carefully between them. What complicates matters, however, is that the standard method of proving existence of equilibrium by means of a fixed-point argument seems to suggest that stationarity is an essential property of equilibria. In their well-known textbook, Arrow and Hahn (1971, p. 22) explain the notion of equilibrium thus: "There are really two sets of ideas involved in [the] notion of equilibrium. On the one hand, in such a situation every agent can achieve what he wishes to achieve. On the other hand, . . . there will be no mechanism to bring about a change . . . ." The existence proof that follows is accompanied by remarks such as: "As much as possible, we shall use the economics of our problem to construct a procedure [for raising or lowering disequilibrium prices]" (p. 26), and: "It is intended that M,(p) represents an adjustment . . ." (p. 27). As the M,(p)s are, essentially, the components of the mapping that is shown to have a fixed point, one is thus led to believe that, far from being just a mathematical technique with no economic content, the fixed-point argument exploits an idea that is already "involved" in the very notion of equilibrium.26 It would be strange, however, if careful theorists like Arrow and Hahn would have been trapped by an equivocation, and if there were no deeper reasons for the frequent failure to distinguish between two concepts that, after all, have been clearly defined in particular models of general equilibrium theory. Indeed, it is easy to see that the two concepts are related as follows. Proposition 5: For every social space & there is a correspondence G such that the following holds: there is an equilibrium for 6 if and only if there is a stationary equilibrium process for (&, G). That is, every social space & can be supplemented by an outcome correspondence in such a way that proving existence of an equilibrium state for & amounts to the same thing as proving existence of a stationary equilibrium process for that suitably defined dynamic social space (&, G). This outcome correspondence G can be defined in such a way that (*) s G(s, a) iff a F(s).
26. Similarly, E. S. Phelps (1987) claims that "the fixed-point character of equilibrium . . . has a human, or real, interpretation." Or cf. the following passage from L. Samuelson (1986, p. 19): "Walrasian models are often characterized as 'equilibrium models,' and non-Walrasian models as 'disequilibrium' ones. However, the standard analysis of the disequilibrium model is to demonstrate, via an appropriate fixed point argument, the existence of equilibrium quantity constraints. Hence, we have the equilibrium of a disequilibrium model, a rather convoluted expression."
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In fact, it is this method of supplementing an economy & that is used in the standard technique of proving existence of an equilibrium state for &. For example, in the context of the Walrasian model, where s is a vector of prices and a is a vector of excess demands, one defines a "price adjustment rule" G that assigns a set G(s, a) of price vectors to any state (s, a). This adjustment rule is defined in such a way that for any a that represents nonvanishing aggregate excess demands, all elements for G(s, a) are indeed "new," that is, different from s.27 This construction that is familiar from the explicitly dynamic stability literature, is thus also introduced within proofs of theorems that establish existence of equilibrium states for completely static models, where equilibrium is formally defined by the requirements of subjective optimality and collective feasibility of actions. Now, what at first sight seems to be an unnecessary detour turns out to be mathematically most convenient. For, once G has been defined according to (*), one can define another correspondence T:Z ** Z by T(s, a) = {(s'; (a/)) Z\s' G G(s, a), and, for all i e /, Pi(s, /) D Bj{s) = 0 and a\ B{s)},
and a fixed point of T is readily seen to be an equilibrium state for &, corresponding to a stationary equilibrium process for (&, G). If one can prove that T is defined on some convex and compact subset D of Z, that T is convex-valued, upper hemicontinuous, and that T(D) C D, then Kakutani's fixed-point theorem establishes existence. It goes without saying that there are no objections against this method of proof, and I agree that, for example, the existence proof for the competitive equilibrium model is very perspicuous when it uses a mapping that mimics the reactions of a hypothetical auctioneer or market player. But this does not justify a preoccupation with stationary processes in general. When Hahn (1984, p. 3) characterizes equilibria as "critical point[s] of an implicit or explicit dynamics," he is right insofar as for every social space & some (fictitious) dynamics may be constructed such that the equilibria of 6 are critical points of that dynamics, but it is perfectly consistent with the neoclassical axioms to assume that (&, G) correctly describes agents, preferences, beliefs, etc., and that s G(s, a) for all equilibrium states (s, a). That any equilibrium state corresponds to a stationary process of some conceivable dynamic social space does not imply that in every dynamic social space, stationary processes deserve more attention than the nonstationary ones.
27. See, e.g., Arrow and Hahn (1971, pp. 25-29), Debreu (1982, pp. 698-715, in particular 708-10), or Cornwall (1984, pp. 26-28).
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Last but not least, the "outcome-correspondence" that is used in an existence proof need not have any economic interpretaton whatsoever.28 When interpreted as a "law of motion," that correspondence may even contradict the laws of nature. The fixed-point argument is a convenient mathematical device to prove existence of equilibrium, but stationarity is not a constitutive element of the equilibrium concept that is so essential for neoclassical theory.
11. CONCLUSION
The main argument of this article may be summarized as follows. There are certain axioms that belong to the "hard core" of neoclassical economics insofar as they are treated as irrefutable. These axioms may be considered as explicit statements of rules of language that are frequently presupposed in ordinary language as well. Thus, one cannot reject the axioms without sacrificing important presuppositions of everyday communication. The neoclassical axioms imply that every actual state must be an equilibrium state in the sense of "simultaneous optimization," and a model that does not allow for existence of equilibrium in this sense contradicts the neoclassical axioms. However, nothing comparable can be said about existence of equilibrium in the sense of a "state of rest." It is true that for every given equilibrium in the first sense, some tailormade "adjustmenf'-function (or -correspondence) can be defined that does not change that equilibrium. This fact can be exploited in existence proofs, but it does not imply that the two concepts of equilibrium coincide. Of course, I do not claim that there is a "true" meaning for the word "equilibrium." In a dynamic framework, it is perfectly legitimate to define "equilibrium" as a "state of rest." However, it is important to understand that in neoclassical economic theory, there is a different concept of equilibrium that does not imply the "absense of any inherent tendency to change." The equilibrium concept of Definition 4 has a peculiar methodological relevance: existence of equilibrium is necessary and sufficient for logical consistency with the neoclassical axioms. The equilibrium concept would not have this kind of methodological relevance, if "equilibrium" is defined to mean "state of rest." Finally, it may be worth emphasizing that acceptance of the basic neoclassical axioms does not entail any ideological prejudice. In particular, it does not entail the presupposition that, in the absence of ex28. A similar remark has been made by F. Fisher (1983, p. 13): "However interesting certain adjustment processes may be, unless there is reason to believe that they arise from the optimizing behavior of agents, they cannot be regarded as providing more than a computational algorithm for finding equilibria."
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ogenous disturbances, market coordination will result in, or tend to, some state of rest or an efficient or just allocation. Moreover, one can accept the neoclassical axioms and maintain that the future is to a large extent "unknowable and unpredictable." Even highly restrictive dynamic social spaces support that view by allowing for infinitely many different equilibrium processes (Woodford, 1984), for highly unstable and even for chaotic ones (Benhabib and Day, 1982). To be sure, there are assumptions that exclude such features of market economies, but the basic neoclassical axioms do not.
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Vilks A Set of Axioms For Neoclassical Economics

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ASetofAxiomsforNeoclassicalEconomicsand theMethodologicalStatusoftheEquilibrium Concept

Linktothisarticle:http://journals.cambridge.org/abstract_S0266267100000481 Howtocitethisarticle: ArnisVilks(1992).ASetofAxiomsforNeoclassicalEconomicsandthe MethodologicalStatusoftheEquilibriumConcept.EconomicsandPhilosophy,8,pp 5182doi:10.1017/S0266267100000481 RequestPermissions:Clickhere

Universitat Hamburg, Institut fur Statistik und Okonometrie, Germany

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NEOCLASSICAL ECONOMICS AND THE EQUILIBRIUM CONCEPT

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2. WEINTRAUB'S APPRAISAL OF GENERAL EQUILIBRIUM ANALYSIS

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(a) for each i G /: a, B,(s),

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