A Better Understanding of Equilibrium

For economists

I've thought a lot about equilibrium recently. At the same time that I'm reading some excellent game theory books (including a nice little book by David Kreps that is accessible to non-economists), I am also studying agent-based modeling.

Game theory uses equilibrium heavily and distinguishes a billion different types of equilibria. Agent-based modeling rejects equilibrium as central to economic analysis.

Oh yeah, and I just got done with a full course on general equilibrium theory. Throw that on top of my skepticism of equilibrium as an important concept and you have one confused grad student.

This jumble has me thinking heavily about the meaning of equilibrium. Is it useful? When? How do we need to adjust our understanding? What is the role of disequilibrium?

Then I re-watched a speech by Mario Rizzo title "A Better Concept of Coordination." In it, Rizzo is trying to clarify our understanding of coordination and equilibrium. He is trying to understand the relationship between aspects of the economy that lead to equilibration, or better coordination, and disequilibration, or when people's plans don't align.

For Rizzo, equilibration and disequilibration are like yin and yang. They cannot be separated.

I just love the quote he starts out with from Oskar Morgenstern.

I'm not sure I have any more insight to add to Rizzo's speech. It is clear to me that a focus on equilibrium has killed much of the interested parts of economics. What is a better option to replace it? I don't know. I just enjoyed the speech and thought you might too.

2 thoughts on “A Better Understanding of Equilibrium

  1. I have not been able to completely understand Rizzo or Hayek's point of view. But from the little that I think I get, it seems to me that not all situations or contexts require an elaborate description of the underlying procedure or the associated learning methodology to get to the outcome. However, when it does, then they can be (like evolutionary game theory). Given our past experiences, movement towards equilibrium might be an expected move (justifying Hayek's distinction) rather than a discovery. Am I missing something here?

    • I don't think you are missing anything. Instead, it's a difference of emphasis. I (and I'll say Rizzo and Hayek) don't think that "all situations or contexts require an elaborate description of the underlying procedure," but some do.

      Whether you want to spend your time looking at the underlying procedure or the equilibrium state depends on the situation. Austrians tend to focus on the underlying procedure; Samuelsonian economists focus on equilibrium. I'd like to see more people looking at processes, less on equilibrium.

      The evolutionary game theory point is interesting. The field has come a long way since Rizzo gave that speech. I see it as a method that fills part of the game between the two approaches. Yet, it seems to still miss part of what Hayek and Rizzo are trying to get at.

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