Equilibrium Economics after Marshall

Abstract

This chapter examines aspects of the development of equilibrium analysis within mainstream economics once Alfred Marshall had been ‘got out of the way’ following the Marshallian cost controversies of the 1920s. Attention is focused on the extent to which the equilibrium-based approaches under consideration have been able to address and overcome the limitations that Marshall had insisted were inherent in the application of mechanical equilibrium analogies to economic analysis. Discussion begins with the ‘new’ partial equilibrium theories of imperfect competition developed from the 1930s which Samuelson (1967: 109) characterised as ‘finally exorcising the Marshallian incubus’. Consideration then turns to general-equilibrium analysis, traditionally seen as the flagship of mainstream equilibrium theorising, where the difficulties associated with the incorporation of increasing returns and associated ‘market imperfections’ are emphasised. Important challenges to the ascendency of equilibrium analysis flowing from the ongoing controversies over capital theory and the Sonnenschein—Mantel—Debreu theorem are explored in the context of the methodological issues that had concerned Marshall.¹ This is followed with an evaluation of the game-theoretic approach, identified as a significant ‘redirection’ in modern mainstream economic analysis that in part gained popularity as a direct result of a recognition of the shortcomings in the more traditional equilibrium-based approaches.