EconomicsandPhilosophy

http://journals.cambridge.org/EAP AdditionalservicesforEconomicsand

Philosophy:
Emailalerts:Clickhere Subscriptions:Clickhere Commercialreprints:Clickhere Termsofuse:Clickhere

EquilibriumandDisequilibriuminEconomic Theory:AConfrontationoftheClassical, MarshallianandWalrasHicksianConceptions

MichelDeVroey
EconomicsandPhilosophy/Volume15/Issue02/October1999,pp161185 DOI:10.1017/S0266267100003965,Publishedonline:05December2008

Linktothisarticle:http://journals.cambridge.org/abstract_S0266267100003965 Howtocitethisarticle: MichelDeVroey(1999).EquilibriumandDisequilibriuminEconomicTheory:A ConfrontationoftheClassical,MarshallianandWalrasHicksianConceptions. EconomicsandPhilosophy,15,pp161185doi:10.1017/S0266267100003965 RequestPermissions:Clickhere

Downloadedfromhttp://journals.cambridge.org/EAP,IPaddress:144.173.6.37on25Jul2013

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

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

162

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

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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.

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

168
10

MICHEL DE VROEY

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.

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY

169

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.

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

170

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

172

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

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY 4.2 The treatment of time

175

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.)'

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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.

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

180

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).

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

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.

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

Table 1. The distinctive features of the three equilibrium approaches

The Marshallian approach The Walras-Hicksian approach

00

The classical approach

1. The equilibrium concepts relationship of hierarchy two distinct adjustment processes: - logical time adjustment towards market equilibrium - diachronic adjustment towards natural price equilibrium
yes yes

natural and market equilibrium normal and market equilibrium equilibrium at one point in time and equilibrium over time no organic link between the two concepts one adjustment process: - logical time adjustment towards equilibrium at one point in time - no adjustment towards equilibrium over time

2. The relationship between the relationship of hierarchy two concepts

http://journals.cambridge.org Downloaded: 25 Jul 2013

3. The adjustment process

two distinct adjustment processes: - logical time adjustment towards market equilibrium - diachronic adjustment towards natural price equilibrium

4. Effectiveness of marketclearing

yes

5. Disequilibrium 5.1. meaning

yes

non-coincidence of market and normal prices

non-market clearance no
n
m r*

5.2. possibility of existence

non-coincidence of market and natural prices yes

a
m

IP address: 144.173.6.37

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.
REFERENCES

Arena, Richard., Claude Froeschle and Dominique Torre. 1990. 'Gravitation Theory: Two Illustrative Models'. In Caminati and Petri (eds.). pp. 287-308 Benetti, Carlo. 1981. 'La question de la gravitation des prix de marche dans la Richesse des
Nations'. Cahiers d'Economie Politique, 6:9-31 Bliss, Christopher. 1987. 'Hicks, John Richard'. The New Palgrave. A Dictionary of Economics, Vol. 2, pp. 641-46. Macmillan

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

184

MICHEL DE VROEY

Boggio, Luigi. 1987. 'Center of Gravitation'. Political Economy, Studies in the Surplus Approach,

1:392-4 Caminati, Mauricio. 1990. 'Gravitation: an Introduction'. In Convergence to Long-Period Positions. Mauricio Caminati and Fabio Petri (eds.). Special Issue of Political Economy,
Studies in the Surplus Approach, Vol. 6, pp. 11-44 Currie, Martin and Ian Steedman. 1990. Wrestling with Time. Problems in Economic Theory.

Manchester University Press De Vroey, Michel. 1998. 'Accounting for Involuntary Unemployment in Neoclassical Theory. Some Lessons from Sixty Years of Uphill Struggle'. In Economics and Methodology: Crossing Boundaries, pp. 177-224. Roger Backhouse, Daniel Hausman, Uskali Maki and Andrea Salanti (eds.). Macmillan De Vroey, Michel. 199a. 'The Marshallian market and the Walrasian economy. Two
incompatible bedfellows'. The Scottish Journal of Political Economy, forthcoming

De Vroey, Michel. 1999b. 'Marshall on Equilibrium and Time. A Reconstruction'. The

European Journal of the History of Economic Thought, forthcoming

De Vroey, Michel. 1999c. 'Hicks on Equilibrium and Disequilibrium'. History of Economics Review, 29:31-44
Donzelli Franco. 1989. The Concept of Equilibrium in Neoclassical Economic Theory. An Inquiry into the Evolution of General Competitive Analysis from Walras to the 'Neo-Walrasian'

Research Programme. Ph.D. Dissertation. University of Cambridge Dos Santos Ferreira, Rodolphe. 1989. 'Equilibre marshalien et equilibre walrasien'.
Recherches economiques de Louvain, 55:399-424 Dumenil, Gerard and Dominique Levy. 1993. The Economics of the Profit Rate. Competition, Crises and Historical Tendencies in Capitalism. Edward Elgar

Eatwell, John. 1987. 'Natural and Normal Conditions', The New Palgrave. A Dictionary of Economics, Vol. 3. Macmillan Friedman, Milton. 1968. 'The role of monetary policy'. American Economic Review, 58:1-17 Frisch, Ragnar. 1950. 'Alfred Marshall's Theory of Value'. The Quarterly Journal of Economics, 64:495-524 Garegnani, Pieranjelo. 1976. 'On a Change in the Notion of Equilibrium in Recent Work on Value and Distribution'. In Essays in Modern Capital Theory, pp. 25-45. M. Brown, K. Sato and P. Zarembka (eds.). North-Holland Garegnani, Pieranjelo. 1987. "The surplus approach to value and distribution'. The New
Palgrave Dictionary of Economics. Vol. 4, pp. 560-74

Grandmont, Jean Michel. 1977. 'Temporary general equilibrium theory'. Econometrica, 45:535-72 Grandmont, Jean Michel. 1987. 'Temporary Equilibrium'. The New Palgrave. A Dictionary of Economics, Vol. 3, pp. 620-23. Macmillan
Hansson, B. A. 1982. The Stockhom School and the Development of Dynamic Method. Croom Helm Hayek, Friedrich A. 1984. Money, Capital and Flucutations. Early Essays. Routledge

Hicks, John R. 1946. Value and Capital. 2nd. edn. Clarendon Press Hicks, John R. 1965. Capital and Growth. Clarendon Press Hollander, Samuel. 1987. Classical Economics. Blackwell. Ingrao, Bruna. 1989. 'From Walras' General Equilibrium to Hicks's Temporary Equilibrium'.
Recherches economiques de Louvain, 55:365-97 Ingrao, Bruna and Giorgo Israel. 1990. The Invisible Hand. Economic Equilibrium in the History

of Science. The MIT Press Kubin, I. 1990. 'Market prices and natural prices: a model with a value effectual demand'.
Political Economy, Studies in the Surplus Approach, 6:175-92 Kurz, Heinz and Neiri Salvadori. 1995. Theory of Production. A Long-Period Analysis.

Cambridge University Press

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37

EQUILIBRIUM AND DISEQUILIBRIUM IN ECONOMIC THEORY

185

Leijonhufvud, Axel. 1984. 'Hicks on time and money'. Oxford Economic Papers, November, Supplement, pp. 26-46 Lindahl, Erik. 1939. Studies in the Theory of Money and Capital. Reprint. Augustus M. Kelley, 1970 Malinvaud, Edmond. 1977. The Theory of Unemployment Reconsidered. Basil Blackwell Marshall, Alfred. 1920. Principles of Economics. 8th edn. Macmillan Milgate, Murray. 1987. 'Equilibrium: Development of the Concept'. The New Palgrave. A Dictionary of Economics, Vol. 2, pp. 179-82 Newman, Peter. 1960. 'The erosion of Marshall's Theory of Value'. Quarterly Journal of Economics, 74:587-601 Panico, Carlo and Fabio Petri. 1987. 'Long-run and Short-run'. The New Palgrave. A Dictionary of Economics, Vol. 3, pp. 238-40. Macmillan Patinkin, Don. 1965. Money, Interest and Prices. 2nd. edn. Harper and Row Petri, Fabio. 1991. 'Hicks's recantation of the Temporary Equilibrium Method'. Review of Political Economy, 3:268-88 Radner, Roy. 1991. 'Intertemporal General Equilibrium'. In Lionel W. McKenzie and Stephano Zamagni (eds.). Value and Capital Fitfy Years Later, pp. 423-60. Macmillan Roncaglia Alessandro. 1990. 'Is the Notion of Long-Period Position Compatible with Classical Political Economy?' In Caminati and Petri (eds.), pp. 103-11 Smith, Adam. 1976. An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford University Press Viner, Jacob. [1931] 1953. 'Cost Curves and Supply Curves'. In Readings in Price Theory, pp. 198-232. George Stigler and Kenneth Boulding (eds.). Allen and Unwin Walras Leon. 1954. Elements of Pure Economics. Trans. W. Jaffe. Allen and Unwin

http://journals.cambridge.org Downloaded: 25 Jul 2013

IP address: 144.173.6.37