Capital in Disequilibrium

This first part of this work consists of two chapters (2 and 3).1 In Chapter 2 I summarize briefly some issues connected with the meaning and existence of equilibrium. This controversial area has been made difficult by the fact that the term “equilibrium” is often used in an inconsistent manner, either by a single theorist in different places and times or as between different theorists. So I try first to clarify what is meant (or what should be meant) by equilibrium. I adopt the Hayekian definition—the mutual consistency of individual plans. From this point of view I examine a current debate, one that is specific to modern Austrian (market process) economics, but is relevant to and, in many ways, reflective of, economics in general. This is the debate about the presence or absence (and, indeed, meaning) of equilibrating tendencies in the economy. The chief (friendly) protagonists in this discussion are Ludwig Lachmann and Israel Kirzner. The legacy of this debate is still with us.

In Chapter 3 I turn to the question of what really is at stake here. I offer a different perspective, a different approach to the question of equilibrium. If we say that the economy is always in disequilibrium, because plans must be inconsistent to some degree, then are we not undermining our ability to do economics, to understand human action in the economy? Or is action possible and understandable in disequilibrium? I shall contend that if we wish to adopt Hayek’s approach to equilibrium, we must mean that we can act in a world where the plans that motivate and define those actions are not mutually compatible. This is hardly controversial. After all, the market process features rivalrous actions, that is, actions that are part of mutually inconsistent plans. Successful plans tend to displace unsuccessful ones. But can we therefore say that, overall, plans tend to become more consistent so that there is a ‘tendency’ toward equilibrium? Is this important? I shall answer both in the negative. Furthermore, I shall maintain that capital accumulation and economic progress depend in a crucial way on the absence of equilibrium and in no way on our ability to discern equilibrium tendencies. More specifically, I shall argue that the Hayekian definition requires too much. Plans are complex, multilayered constructs. Overall “plan consistency” is, therefore, either impossible or hopelessly imprecise. I shall argue that at some levels plans are and must be highly compatible, while at other levels (as part of the market process, for example) they are and, if we are to have economic progress, they must be, incompatible.

The issues discussed in this part and the resolutions offered provide an important backdrop for the consideration of capital in a dynamic world.

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2A shorter version of some of the material in this part appears in Lewin (1997c).

• 1A shorter version of some of the material in this part appears in Lewin (1997c).
• 2This first part of this work consists of two chapters (2 and 3). In Chapter 2 I summarize briefly some issues connected with the meaning and existence of equilibrium. This controversial area has been made difficult by the fact that the term “equilibrium” is often used in an inconsistent manner, either by a single theorist in different places and times or as between different theorists. So I try first to clarify what is meant (or what should be meant) by equilibrium. I adopt the Hayekian definition—the mutual consistency of individual plans. From this point of view I examine a current debate, one that is specific to modern Austrian (market process) economics, but is relevant to and, in many ways, reflective of, economics in general. This is the debate about the presence or absence (and, indeed, meaning) of equilibrating tendencies in the economy. The chief (friendly) protagonists in this discussion are Ludwig Lachmann and Israel Kirzner. The legacy of this debate is still with us.