On the Danger of Considering Only Equilibrium and the Foolishness of Claiming All Theory Should Be Equilibrium Theory

This informational characteristic of equilibrium serves to explain why equilibrium does not provide an adequate framework for studying how an economic system solves the knowledge problem involved in discovering profit opportunities: in equilibrium the problem is already solved. To the extent that many observed market phenomena arise as a consequence of this knowledge problem, an economics interested exclusively in equilibrium would never be able to explain them satisfactorily. Specifically, such an economics is unable to say much about any informational role that prices may perform in disequilibrium. An economic theory of disequilibrium is necessary for this task. 

Many economists appear to be reticent about studying disequilibrium situations, both because they believe that most economic phenomena of interest will, sooner or later, be accommodated within an equilibrium framework, and because they fear that a concern with disequilibrium is synonymous with the abandonment of rigorous economic theorizing. However, some have started to take a different attitude and to point out that much is missing by neglecting the study of disequilibrium. Because their remarks to this effect do not seem to have received much attention, they will be quoted here at some length. One example is provided by Frank Hahn’s (1984:4) comments regarding the ‘danger’ of considering ‘nothing but equilibrium’ and the ‘foolishness’ of claiming ‘that all theory should be equilibrium theory’:

What is plain is that by narrowing our viewpoint in this manner we shall remove a great deal of interest and importance from scrutiny. For instance, imposing the axiom that the economy is at every instant in competitive equilibrium simply removes the actual operation of the invisible hand from the analysis. By postulating that all perceived Pareto-improving moves are instantly carried out all problems of co-ordination between agents are ruled out. Economic theory thus narrowly constructed makes many important discussions impossible.

—Esteban F. Thomsen, Prices and Knowledge: A Market-Process Perspective, Foundations of the Market Economy (London: Taylor and Francis e-Library, 2002), 10-11.