Getting to Economic Equilibrium: A Problem and Its History

Abstract

The very concept of equilibrium, economic or otherwise, presupposes a dynamic system which determines change as a function of state variables. An equilibrium is a vector of state variables for which no change occurs. In economics, this is interpreted as a set of quantities and prices for which there is no incentive on anyone’s part to change. The dynamics runs in terms of profit opportunities or incentives to outbid others for scarce commodities or for market opportunities. The idea that traders will respond to profit opportunities by increasing their activities and by, doing so, tend to wipe them out must have been recognized whenever there was trade. A 12th century rabbinical commentary argues that if someone charges ”too high a price”, others will offer the good at a lower price and thereby bring it down. Somewhat more systematic discussions of economic equilibrium are to be found in the founders of modern economic theory, Adam Smith and David Ricardo. Smith’s principal emphasis was on the flow of capital from low-profit to high-opportunities, leading to a zero-profit equilibrium. Ricardo added the adjustment of population to wages and the setting of rents on scarce land.