Golden Age

Abstract

The notion of equilibrium or steady state in economics differs from that in mechanics because, unlike particles and molecules, economic agents are guided in their action by expectations of the future. Moreover, expectations are often being falsified by actual events forcing the economic actors to revise continuously and adapt their expectations in the light of experience. However, in an economic equilibrium expectations are never falsified; what happens must be compatible with what people expected to happen in every period of time and all expectations are being continuously fulfilled. Since all expectations cannot always be fulfilled in actual history, this in itself should be an adequate warning about the utter implausibility of the notion of equilibrium in economics. Economic equilibrium is something that we can never observe in reality; at best, it has to be recognized as a ‘thought experiment’ designed to facilitate analysis (Robinson 1979).

This chapter was originally published in The New Palgrave: A Dictionary of Economics, 1st edition, 1987. Edited by John Eatwell, Murray Milgate and Peter Newman