Equilibrium: History of the Concept

Till Duppe, Universit du Qubec Montral (UQAM), Montral, QC, Canada

2015 Elsevier Ltd. All rights reserved.

Abstract

Equilibrium analysis largely identies the scope of theory in todays economic research. This prominent place has several
historical origins. Before the notion was rst used, equilibrium arguments were already applied in early modern writings on
trade. Not before the late eighteenth century, the concept became part of the vocabulary of political economists. It was used as
an analogical and, moreover, normative concept referring to the natural order of the economy. At the end of the nineteenth
century, the concept gained analytical meaning, specically because of the difference between static and dynamic equilib-
rium. Between the 1940s and the 1960s, the concept grew into a metatheoretical notion as the corner stone of axiomatic
general equilibrium analysis, which in turn would become the bedrock of current mathematical modeling. Equally in game
theory, the concept is the main analytical tool, though not limited to competitive interactions in markets. It allows
formalizing institutional environments and strategic interaction on an individual and group level. In nearly all macroeco-
nomic modeling, general equilibrium theory continues to be the prevailing reference point.

Equilibrium analysis largely identies the scope of theory in
todays economic research. Since there are many economic
theories, the concept refers only vaguely to specic beliefs or
ideas about economic reality. Instead, it provides cohesion to
the economic way of modeling in the social sciences, and thus
corresponds with a style of reasoning typical for the discipline
of economics (Hacking, 1992).
The prominent place that the concept occupies in
economics today has several origins. Before the notion was rst
used, equilibrium arguments were already applied in early
modern writings on trade. Not before the late eighteenth
century, the concept became part of the vocabulary of political
economists. It was used as an analogical and, moreover,
normative concept referring to the natural order of the
economy. At the end of the nineteenth century, the concept
gained analytical meaning, specically because of the differ-
ence between static and dynamic equilibrium. Between the
1940s and the 1960s, the concept grew into a metatheoretical
notion as the corner stone of axiomatic general equilibrium
analysis, which in turn would become the bedrock of current
mathematical modeling. Equally in game theory, the concept is
the main analytical tool, though not limited to competitive
interactions in markets. It allows formalizing institutional
environments and strategic interaction on an individual and
group level. In nearly all macroeconomic modeling, general
equilibrium theory continues to be the prevailing reference
point despite its limited use for empirical analysis.
Since the concept functioned differently at each point of time,
one better views its history as a sequence of transformations
of different, not necessarily reducible scientic cultures in
economics. The history of the concept is nevertheless signicant
insofar as in current economic research as well as in economic
policy more recent and at the same time older meanings of the
concept are used interchangeably.
Early Forms of Equilibrium Arguments
Before the concept was used explicitly, equilibrium arguments
can be traced back to early modern economic writings of the
seventeenth century. Since the form of argument is fairly
simple, one could without doubt nd yet earlier uses. The
discursive situation from which these arguments emerged was
early modern writings on trade, mostly pamphlets written in
the context of the council of trade. Equilibrium arguments
provided a rationale for xing quantitative measures such as
price limits, tax levels, import quotas, etc. Previous arguments
that used the Aristotelian and medieval concept of the just
price, lacked such a rationale. To give but one example:
William Petty, when speaking of the limit between a reason-
able rate of interest and illegitimate usury, argued that the
interest rate should be as high as the rent of land, for if not,
nancial investment would soon outweigh agricultural
production (Petty, 1899: 48). Similar arguments regarding
excess supply and demand can be found in the writings of
Sir Dudley North or John Locke (Letwin, 1963: 198; Tieben,
2012). Equilibrium arguments are a form of hypothetical
reasoning that replaces normative arguments about economic
measures such as price ceilings or tax levels. They require
a notion of interdependence of two or more economic vari-
ables, the change of one of which induces the change of the
other and vice versa. The causal mechanism of this endoge-
nous change, however, must not be fully specied. Hence,
equilibrium arguments were present in economic writings
before the concept was explicitly used in terms of a specic
ontology of the nature of economic order.
Not all arguments involving interdependence, however, are
equilibrium arguments, as, for example, Francoise Quesnays
tableau conomique that traces the causal effects of growth in one
sector, agriculture, onto all others (Quesnay, 1766). Even
though equilibrium arguments do not require full causal
explanations, they equally should be kept apart from identity
arguments that were also frequently used in seventeenth- and
eighteenth-century economic writings. The so-called Says law
might be the best-known example that states that (aggregate)
supply and demand cannot diverge because they are mutually
determined. Identities cannot be unequal and thus serve as
principles from which equilibrium arguments can be con-
structed. An example of a very inuential early equilibrium
argument that shows the difference between identity,

912 International Encyclopedia of the Social & Behavioral Sciences, 2nd edition, Volume 7 http://dx.doi.org/10.1016/B978-0-08-097086-8.03081-6

equilibrium, and causality is Humes so-called price specie ow
(1752: 82ff.). Hume argued that a trade surplus cannot be
maintained in the long run, as mercantilist writers assumed,
because the inow of gold would increase domestic prices that
in turn leads to less export and more import until the balance
of payments is restored. The identity of price level and money
supply is assumed, the equilibrium argument is hypothetical,
and the actual causal mechanism of the economic agents who
respond to price differentials is unspecied.
Analogical Uses of the Concept of Equilibrium
In order to possess explanatory value, equilibrium arguments
must include an ontological dimension beyond hypothetical
reasoning: the nature of the causal mechanism that brings
about endogenous change must be specied. Classical political
economists established this explanatory value of the concept by
means of the analogy between economic and natural order.
Elements of the market economy, say, different parties of trade,
relate to one another like elements in other domains where the
belief in an ordered system was already established. This
analogical usage of the term was decisive for establishing the
belief in an orderly sphere of the economy as an object of
systematic inquiry.
The very rst appearance of the concept in the history of
social thought is difcult to identify because the concept has
been already established in other than social writings where
it described mechanical movements, interstellar forces,
anatomic proportions, which often had, typical for eighteenth-
century authors, also creationist connotations. The French
writer Pierre de Boisguilbert (16461714), to whom Spiegel
assigns rst usage, used the term when comparing economic
and divine order (Spiegel, 1991: 614). For him, equilibrium
refers to a state of opulence. He also used the analogy with
mechanics according to the original Latin root of the word
equal balance in order to explain the price mechanism:
It is like a balance suspended in equilibrium because the weight is
equal in each of the two scales. A hundred pounds of any material
whatever cannot receive an increase of even two pounds in one of the
two scales without destroying the equilibrium. This, then, is precisely
what takes place with regard to the price of grain. An increase or
a diminution of twenty sacks at the market or staple house above or
below the ordinary supply of ve hundred sacks offered every week,
destroys the balance, and makes it fall immediately on one side.
Boisguilbert, 1966[1707]: 859
After such occasional uses in the early eighteenth century,
the concept became part of the vocabulary of political econo-
mists during the Scottish enlightenment of the late eighteenth
century. While the concept was also used by James Steuart in
1769 (see Milgate, 2008), the locus classicus of the analogical
concept of equilibrium is Adam Smith when speaking of the
gravitational force exerted by the natural price (Smith, 1961
[1776]: 60ff.). The natural price, according to Smith, reects
(long-run) production costs while the market price varies
according to short-term deviations of demand or supply. These
deviations are forced back to the natural price by means of
rivalry between either consumers or producers.
Equilibrium: History of the Concept 913
The natural price . is, as it were, the central price, to which the prices
of all commodities are continually gravitating. Different accidents
may sometimes keep them suspended a good deal above it, and
sometimes force them down even somewhat below it. But whatever
may be the obstacles which hinder them from settling in this center
of repose and continuance, they are constantly tending towards it.
Smith, 1961[1776]: 65
Gravitational forces of the market refer to the effects of
changes of demand (that is degrees of wants for conveniences
and of needs for necessities) given the limitations of produc-
tion (that are determined by local natural resources, tech-
nology, capital maintenance, and labor costs). Such are the
economic forces to be brought into balance by the price
mechanism that imposes costs and benets on decisions of
producers and consumers. Being in rivalry with one another,
they react to price differentials.
Next to physical or celestial analogies, anatomic analogies
are also frequently used in economic writings of the eighteenth
century. After William Harveys discovery of blood circulation,
economic writers commonly described trade in anatomical
terms. Money ows through the economy like blood through
veins. Thomas Hobbes was one of the rst, John Pollexfen, Jacob
Vanderlint, Philip Cantillon, and others followed in calling the
public treasure the heart of the state and money its blood that
makes its organs reach out to other states e.g., by paying armies
(see Walter, 2011: 4047). This anatomical analogy held both
ways to the extent that the notion of the economy was habitually
used in medical treatises when one spoke of the economy of the
body and its natural equilibrium. Diseases were dened in terms
of the divergence from this equilibrium, such that equilibrium
took on older meanings of moderation and lack of excess.
These analogical uses helped establishing the eld of
political economy as an inquiry into an orderly object of study.
It established the belief that certain systematic or persistent
forces, regular in their operation, are at work in the economic
system, which is the most general feature of the concept of
equilibrium according to Milgate (2008). The analogy was put
forward against the belief that economic phenomena are
manifestations of the blind forces of power and thus are not
intelligible or predictable in systematic terms. This contrast
with the concept of power will be present throughout further
transformations of the concept.
The analogical use also established the very prominent
normative meaning of a state of harmony of interests in a free-
market society. Smiths natural price implied harmony between
the three classes of labor, capitalists, and landowners. His
analogy nourished the idea that once left alone, the economy
spontaneously forms its inner order such that market inter-
ventions seeking power over the economy disturb this natural
order, and thus the harmony of interests. Free competition
allows the natural forces of the economy to bring about an
orderly, harmonious, and thus desirable state of the economy.
Even though Smith also propagated many government
responsibilities, he thought of free trade as the system of
natural liberty: complete resource mobility and free entry and
exit in all markets. His system of natural liberty referred to
institutions that induce rivalry between economic agents that
are necessary for the gravitational forces of the market to be at
work (Smith, 1961[1776]: 687).
914 Equilibrium: History of the Concept
Classical political economists hardly ever felt obliged to
spell out the analogy of the concept of equilibrium to such
extent that the nature of economic forces could be empirically
tested or even analytically determined. In fact, if used solely in
an analogical fashion without the hypothetical reasoning
referred to in the previous section, classical political economists
added little to the normative arguments of natural law
philosophers. In turn, the normative meaning of the concept of
equilibrium, until today, has never been fully argued for
without analogical elements (see Dppe, 2011).
The fact that the equilibrium concept rather imported
familiarity into economic discourse than provided explana-
tions of the market mechanism was still true when late-
nineteenth century neoclassical writers used the concept, such
as William Stanley Jevons. His analogy was that of the equi-
librium of prices and that of a pendulum:
We can no more know nor measure gravity in its own nature than we
can measure a feeling; but, just as we measure gravity by its effects in
the motion of a pendulum, so we may estimate the equality or
inequality of feelings by the decisions of the human mind. The will is
our pendulum, and its oscillations are minutely registered in the
price lists of the markets.
Jevons, 1970[1871]: 11
Already before Jevons, however, notably with John Stuart
Mill, skepticism regarding the empirical merits of the analogy
emerged. Mill emphasized that economic laws hold only under
very restrictive conditions that can, in contrast to natural laws,
never be fully observed in reality (because of the absence of
controlled experiments). Due to noneconomic interfering
causes only tendencies toward states of equilibrium can be
observed. The classical laws of the market are true only in the
abstract, that is, they are only true under certain suppositions,
in which none but general causes causes common to the
whole class of cases under consideration are taken into
account (Mill, 1844: 144145). In this fashion, Mill opened
the way to the analytical notion of the concept of equilibrium,
specically by pointing to the signicant fact that initial
conditions of the equilibrium, in the concrete, may change on
the way, and that hence the static idea of a market equilibrium
must be supplemented with a theory of dynamic change (Mill,
1848: 421ff.). Thus, Mill introduced a distinction that was to
remain present in all equilibrium analysis: the difference
between static and dynamic equilibrium analysis.
The Analytical Concept of Equilibrium
It was only in the last decades of the nineteenth century,
specically after the work of Lon Walras (18341910) that
equilibrium became a theoretical concept that could be
analyzed in its own terms without reference to other domains
of research. Decisive was the idea of representing the economy
as a system of equations in Walrass Elements of Pure Economics
(2003[1874]). Similar to nonconceptual uses of the word when
one speaks of a balance of payment to be in equilibrium,
equilibrium as the solution of a system of equations refers to
the state of market clearance where aggregate demand is equal
to aggregate supply. Equations are separately dened for
demand and supply in all goods and factor markets that each
depend on the price of the good of this market and all other
goods and factor prices being either complements or substi-
tutes. Equilibrium refers to a set of prices that solves all equa-
tions simultaneously.
Even if Walrass inspiration was a textbook by Louis Poinsot
on the mechanical equilibrium of a solar system (Ingrao and
Israel, 1990: 88), and even if later in his life he defended his
approach by an analogy between economic and mechanical
concepts (scarcity and utility relate to one another like force
and energy, see Mirowski and Cook, 1990), Walras did not
believe that economic and natural phenomena are reducible to
one another. He moved beyond analogical reasoning insofar he
put emphasis on the common mathematical structure while
recognizing the ontological differences between these domains.
Accordingly, Walras distinguished, similar to Mill, between
pure, applied, and social economics, while only in the context
of pure economics, an equilibrium could be properly dened.
Little ontological commitment was transmitted by Walrass
analytical concept of equilibrium. Instead, he opened the door
to mathematical modeling, specically to linear algebra.
The aim of Walrass system was the representation of the
interdependence of all markets. Agents all over the economy
that appear to be unrelated are connected by the price system.
Equilibrium thus contrasts to fragmentation of the economy, in
which case one could say very little about a market economy as
a whole. This interest in capturing interdependence is often
contrasted with Alfred Marshalls (1920[1890]) analysis of
markets: the latter representing partial, the former general,
equilibrium theory. Marshall sought to understand the mech-
anism of single markets, ceteris paribus all effects on other
markets. What allowed Marshall to do so was a distinction
between causal factors being relevant for different periods of
time (1890: Book V). He distinguished, rst, the market period
in which goods had been already produced, supply is thus
xed, such that prices depend solely on demand; second, the
short-run period in which production can be expanded altering
some production factors, but not all due to prime costs; third,
in the long-run all production technologies can change, while
demand is stable. Consequently, as to whether or not one
considers being in equilibrium depends on the period of time
one considers. Such was Marshalls take on the problem of
dynamics the problem that the endogenous changes induced
by a disequilibrium changes the initial conditions of equilib-
rium, such as income and technology.
Walrass instead, in his framework of general equilibrium
analysis, bypassed the problem of dynamic change by speaking
of an auctioneer who identies the set of equilibrium prices
by crying out random prices before any transaction is taken
(Jaffe, 1967). This comparison with the stock market was clearly
not an identication of the causes that bring prices into equi-
librium, as Marshall would have it, but the possibility of an
algorithm that describes the change of prices within his system
of equations. The Walrasian auctioneer, as an analytical crea-
tion, allowed for equilibrium theory to develop theoretical
problems of its own prior to its applications. When Walras
considered actual price changes, he drew back and referred once
again to a natural analogy, a lake agitated by the wind, saying
that initial conditions are in continuous change due to the
changes caused by a disequilibrium (Walras, 2003[1874]: 380).

Nature, no longer a source of the belief in an orderly domain,
changes faster than the market can adapt.
Next to the static and dynamic equilibrium, another
analytical difference that became prominent from contrasting
Marshall and Walras was that of aggregation and disaggrega-
tion: Can the conditions of market equilibrium be traced down
to the individual level? Marshall assumed what is nowadays
called a representative agent such that even the marginal utility
of income was supposed to be the same across all income
levels. Walras equally started from aggregate market demand
and supply functions, even if his set of equations could in
principle be spelled out in terms of disaggregated individual
functions or so he and other neoclassical economists
assumed for a long time until the opposite was proven in the
1970s, as we see below.
In the hands of Walras, a signicant transformation of the
concept took place regarding its normative welfare dimension.
Perfect competition for Walras means that prices are indepen-
dent of demand and supply functions, i.e., they are given to
economic agents. Gone was the close link between rivalry and
free-market institutions such that it was no longer obvious in
which institutional context equilibrium theory would apply.
This was indeed not the task of pure economics according to
Walras. As a result, the normative meaning of the concept of
equilibrium was no longer the harmony of interests and the
natural system of liberty, but the absence of waste and the
efcient use of resources as the formal implication of market
clearance. Neoclassical welfare economics is in fact less an
argument for specic economic institutions or policies, but the
development of criteria according to which various institutions
and policies, interventionist or not, could be evaluated.
Equilibrium and Time
The distinction between static and dynamic equilibrium
remained the driving force of innovations involving the
concept of equilibrium in the rst half of the twentieth century.
An important complication of the problem of dynamics was,
rather than income effects, the uncertainty of long-term
investment decisions that has short-term effects. An impor-
tant consequence of this uncertainty is that there is no reason to
trust that prot rates are unique across all markets. And so the
concept of equilibrium was in the background of a range of
institutional questions regarding monetary and business cycles
theories that were put forth by Austrian economists. Bhm-
Bawerk, for example, spoke of an intertemporal equilibrium
considering both long-term and short-term plans simulta-
neously in a trade off between current and future consumption
(Bhm-Bawerk, 1959[1899]). In further course, including
uncertainty in equilibrium analysis, most notably after John
Maynard Keynes, generated a whole bunch of new analytical
problems that were largely unknown to political economists,
and, in further course, only vaguely linked with traditional
price theory. What came to be labeled as macroeconomics
gained shape in a certain distance to equilibrium analysis.
It was not before John Hicks (190489), in response to the
work of Lindahl and Hayek, and in trying to reconcile
Keynesian and Walrasian theories, that a different interpreta-
tion of equilibrium was introduced to solve problems of time
Equilibrium: History of the Concept 915
and uncertainty: the temporary equilibrium (Hicks, 1939).
Hicks specied the process by which an equilibrium comes
about in sequential terms. He spoke of a market period called
a week dened as the period in-between transactions that
allow for carrying out production plans. Equilibrium was thus
no longer dened in terms of long-run forces and short-run
disturbances. Adaptations and decisions were sequentially
separated. Insofar as at each transaction day a new equilibrium
is achieved Hicks bypassed problems of the coordination of
expectations. At each period of time there are different market
clearing prices.
Also the normative dimension of the equilibrium concept
was heavily inuenced by these new problems of time, as is
evident in Oskar Langes idea of market socialism (1938).
Lange reinterpreted Walrass general equilibrium theory as an
economic theory of socialism with public ownership of
production factors. The central planning bureau sets prices like
a Walrasian auctioneer, observes excess demand and supply via
inventory data, and reaches equilibrium by adapting factor
prices accordingly. Against this use of equilibrium analysis,
Friedrich Hayek put forth a concept of competition that is
opposed to any notion of equilibrium: competitive institutions
are preferable as they result in the most adaptive utilization of
local knowledge. It is only in a continuously changing envi-
ronment, that is, in disequilibrium, that the price mechanism
shows to be superior to a bureaucratic system (Hayek, 1945).
Axiomatic Equilibrium Analysis
Between the 1940s and the 1960s the concept of equilibrium
became the central means by which mathematical modeling
was advanced, and conceptual and other literary economic
theory were replaced. The concept of equilibrium became the
symbol of the culture of economics being different from other
social sciences (Dppe and Weintraub, 2014). The joint of this
development was the application of the axiomatic approach in
mathematics to general equilibrium theory. The early contri-
butions to this development were mathematical existence
proofs written by John von Neumann, John Nash, Kenneth
Arrow, Grard Debreu, and Lionel McKenzie (using various
versions of Brouwers xed-point theorem, see Weintraub,
1983; Debreu, 1987). This launched the period of several
decades of advancing mathematical tools in order to determine
axioms that are necessary to prove, next to existence, unique-
ness, stability, and the optimality of an equilibrium (Ingrao
and Israel, 1990). By the 1970s, denitions of equilibrium
conditions (the axioms) became a necessary requirement for all
economic theory.
The axiomatization of equilibrium theory was, similar to
mathematics at the same time, coined by an image conict
(Dalmedico, 2001). In the spirit of John von Neumann, several
mathematical economists understood the axiomatic approach
as a clarication of the behavioral and institutional elements of
equilibrium theory: producers and technologies, consumers
and commodities. Axioms are seen as basic ontological prop-
erties that must be true for an equilibrium in a competitive
economy to possibly exist, to be empirically determined
(uniqueness), to be stable, and to have desirable welfare
properties (optimality). The early existence proofs were
916 Equilibrium: History of the Concept
considered a preliminary exercise that would generate new
solutions to traditional questions (Arrow, 1968). The success of
the axiomatic method would depend heavily on the plausi-
bility of its axioms as being descriptive of economic reality.
Specically the rationality of optimizing agents emerged as the
pivotal condition of equilibrium.
According to another image of the axiomatization of equi-
librium theory, however, the mathematical structure of the
theory is only loosely related to its possible interpretations.
Innovations of new mathematical tools can then enlarge, limit,
or create new forms of explanations on the level of economic
theory. Several mathematical economists, many of which were
associated with Grard Debreu, focused on the development of
new mathematical tools such as measure theory and nonstan-
dard analysis, among others. The guiding epistemic virtue was
mathematical generality (which does not necessarily correlate
with greater economic applicability): topology being more
general than, for example, differential equations. As questions
of stability, among others, required tools that are lower in this
hierarchy than those necessary for existence proofs, the latter
played a greater role than the former. The pivotal axioms that
emerged from this axiomatic approach were properties such as
convexity, monotonicity, differentiability, continuity rather
than the behavioral notion of rationality. Moreover, equilib-
rium analysis was not related to competitive institutions,
a concept that does, for example, not appear in Debreus Theory
of Value (1959). The axiomatic method results in the separation
of mathematical and economic reasoning that has indenite
and uncontrolled effects on the latter.
This image conict was hardly ever confronted such that
there was never a consensus among practitioners in economic
theory what the exact status of axioms is: hypothesis, basic
ontological property, or auxiliary construct for creating
a plurality of contextual theories (Dppe, 2012). Accordingly,
the concept of equilibrium, until today, plays a double role in
economic theory: it refers to the analytical solvability of
a model, and at the same time to the solution concept of actual
economic problems by modeling the consequences for an
entire system. After the diffusion of general equilibrium models
in the entire discipline during the 1970s, the concept drove
a wedge between the analysis of theoretical structures and the
elaboration of economic interpretations.
Within the inner circles of mathematical economists,
however, the research program of axiomatic general equilib-
rium theory showed rather negative results: stability could not
be specied, uniqueness of an equilibrium required ad-hoc
assumptions that were considered rather strong, and at the
top of it, in 1974, Hugo Sonnenschein, Rolf Mantel, and
Debreu showed that excess demand functions lack structure
even if one assumes well-behaved, i.e., rational individual
preferences. The theory imposes little structure on empirical
data. Even simple questions of comparative statics (such as the
effects of tax cut on demand and supply) that were already by
the 1960s and still are standard in economic education could
no longer be considered rigorous. One has to impose addi-
tional structure in order to generate empirically denite results
(such as constant elasticity of utility functions, a specic
income distribution, and the like).
By the mid-1970s, the hopes of early post-World War II
years for the future of general equilibrium theory were largely
disappointed. Mathematical economists such as Frank Hahn,
however, considered these negative results most valuable
insofar as they allow for a falsication of the beliefs that were
traditionally linked with the notion of equilibrium, above all
its normative aspects (Hahn, 1973). In terms of the present
article, axiomatic analysis of equilibrium theory helped cor-
recting the beliefs that the analogical concept of equilibrium
has established.
Game Theoretical Concepts of Equilibrium
After John von Neumanns and Oskar Morgensterns seminal
book, The Theory of Games and Economic Behavior (1944), also
game theory, with a certain delay, transformed the concept of
equilibrium. One research question that has been pursuit
during the 1960s was specically formative, that of core
convergence. The core is an equilibrium concept going back to
Edgeworths theory of exchange: it includes all allocations, for
which no subset of individuals would be better off, if they
separated from the other individuals (in the case of two indi-
viduals, the core excludes those allocations, which leaves
individuals worse than alone). The question of core conver-
gence was whether or not, once the amount of individuals
increase, the set of core allocations shrinks toward the
competitive price solution. Core convergence thus opened
a path to integrate game theory in the tradition of economic
theory enlarging the scope of equilibrium theory from
competition to strategic behavior. In fact, competitive behavior
appeared to be a special case of noncooperative games
oceanic games, as Milnor and Shapley called them (1961).
Core convergence helped in rescuing the standards of
mathematical modeling that were established in general equi-
librium theory where they led into the rather negative results
mentioned above (Rizvi, 1994).
Historically speaking, this revival of game theory in the
1960s bore aspects of irony. The core referred back to another,
slightly more general concept in cooperative game theory, the
stable set. Cooperative game theory allows for some coalitions
to be binding even if some individuals would be better off
without partaking in this coalition. This was the central equi-
librium concept in von Neumanns and Morgensterns book
(1944). Mostly because of the interpretations of the Austrian
trained economist Morgenstern, game theory was initially
presented in contrast to competitive equilibrium as the latter
excluded the exertion of strategy and power. This opposition
was forgotten once competition was considered to be analyti-
cally reducible to game theory.
The most dominant equilibrium concept in game theory,
however, is the noncooperative solution concept named after
John Nash: no player can gain by changing behavior unilaterally
taking into account the behavior of other players. The existence
proof of such equilibrium was an inspiration also for Arrow and
Debreu to proof existence in general equilibrium theory (Dppe,
2012). Further renements of the Nash equilibrium became
central to all game theory, causing an entire industry of research
elaborating information constraints imposed on all or a subset of
players: different kind of games (asymmetric games, sequential
games, mixed strategies, evolutionary games where players act
according to (genetic) traits), different market forms (for

example, Cournot equilibrium in a duopolistic market, or Lin-
dahl equilibrium as a solution to public good problems), but also
different types of auctions. Game theory, much in contrast to
general equilibrium theory, is thus considered descriptive of
behavioral content and institutional contexts. None of its insti-
tutional applications, however, replace the concept of Nash
equilibrium.
Game theory also proved to be crucial for the import of new
empirical methods into economics, such as cognitive theories and
experimental methods. The results, however, concern the
behavioral assumptions, but not the concept of equilibrium itself.
It is still difcult to imagine a theory identiable as economic
theory without reference to the concept of equilibrium.
Equilibrium Analysis in Todays Macroeconomics
Despite the fact that competitive general equilibrium analysis,
as shown above, has turned out to imply little for empirical
research, it continues to be the sheer exclusive reference point,
in combination with econometric methods, for all macroeco-
nomics theories. General equilibrium theory has been omni-
present ever since the work of Robert Lucas, Thomas J. Sargent,
Edward C. Prescott, and among others (Snowdon and Vane,
2005). It is used as the analytical solution to so-called
dynamic stochastic general equilibrium models. These
models use the general equilibrium framework subject to
stochastic shocks in order to explain historical time series data
given calibrated exogenous variables. The analytical problems
stated in axiomatic equilibrium analysis are bypassed by
imposing structure on economic agents (usually CobbDoug-
las functions, which brings back the representative agent of
Marshalls partial equilibrium analysis).
After the 2008 nancial crisis, dynamic stochastic general
equilibrium (DSGE) models and with it the imperative of
equilibrium analysis was put under heavy attack (Colander,
2010). Even though in newly emerging elds such as in econ-
ophysics the concept of equilibrium appears to be expendable,
since agent-based simulation techniques bypass analytical
solvability of mathematical modeling, the great mass of
macroeconomic theory is far from incorporating these tools
and moving away from equilibrium analysis.
See also: Axiomatic Theories; Cooperative Game Theory;
Discipline Formation in the Social Sciences; Economics,
History of; Game Theory: Noncooperative Games; Game
Theory; Liberalism: Political Doctrine and Impact on Social
Science; Political Economy, History of; Social Mechanism;
Welfare Economics.
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