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History versus equilibrium: a false dichotomy

The title comes from Joan Robinson's famous essay. However, the motivation is to clarify some comments on a previous post on what Keynes meant by unemployment equilibrium (sent to me, but not published). There is a relatively widespread notion among some post-Keynesians that neoclassical economics assumes always a single unique equilibrium, and that Keynes, or at least his closer followers like Robinson, believed in multiple equilibria. The idea is that post-Keynesians believe in an unstable, uncertain capitalist system in which full employment is only one possibility.

Beyond what one may think about equilibrium, there is no basis in the history of economic ideas for that view. Keynes was a Marshallian, and as such did believe in the notion of a single stable long run equilibrium of the system. The radical element in Keynes analysis is that such equilibrium might be suboptimal, that is, one in which resources are not fully utilized. He is very clear when he says in the General Theory that:
"it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse. Moreover, the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence. Fluctuations may start briskly but seem to wear themselves out before they have proceeded to great extremes, and an intermediate situation which is neither desperate nor satisfactory is our normal lot."
So what Keynes said is pretty clear, fluctuations around a normal equilibrium. Unemployment is the normal position, the long run equilibrium around which the system fluctuates. Like the old classical political economists (e.g. Smith, Ricardo, and Marx) and the marginalists of his time (e.g. Pigou, and Marshall) Keynes believed in a single stable long run equilibrium position. Note that nothing in Keynes analysis implies that the long run equilibrium is ever attained, or that it cannot be affected by the process by which it is approached, and, hence that it would be path-dependent [the supermultiplier story with a Kaldor-Verdoorn process is path dependent and is still a long run equilibrium position].

The problems associated to the negative impact of uncertainty, and failed expectations, and the institutions and conventions that are relevant in a certain historical context to minimize the effects of instability are all part of the normal operation of the economy for Keynes, and not, like in neoclassical models, superimposed on an essentially stable system. In other words, Keynes equilibrium theory is not a-historical, and hence does not require the addition of more realistic (historical?) elements to provide explanation of say why the system is stuck below full employment equilibrium.

For example, lack of demand (caused by stagnant wages and not enough fiscal stimulus) means that the US economy will the near future fluctuate around levels of unemployment that are above the previous normal levels. In the graph below (source) that is visible in a trend that was lower in the 1950s and 1960s, and goes up in the 1970s and 1980s, only to go down (as a result of a series of bubbles) in the 1990s, and, as I suggested, is likely to go up again. This trend represents the normal position to which Keynes alluded in the passage cited above. Unemployment fluctuates, but is not violently unstable (sometimes it might be; asks the Greeks). In the neoclassical model, in contrast, without imperfections, be that price rigidities or lack of information or any other kind, the system would move to full employment. That's why they often resort to change what the meaning of full employment is (the natural rate goes up; nudge, nudge; wink wink).
However, the interesting thing is that while the old neoclassical authors shared the classical political economists and Keynes notion of a stable long run equilibrium (optimal for the neoclassical, and not so for Keynes and the classical authors), they have departed from that view after the capital debates. In fact, it is in the Walrasian world of Arrow-Debreu's intertemporal equilibrium, that the notion of multiple equilibria becomes relevant (for the reasons why the mainstream changed their views on equilibrium go here; Garegnani classic paper titled "On a Change in the Notion of Equilibrium in Recent Work on Value" is the source of this idea). But in that world, anything could happen, it is wildly unstable and there no forces bringing the economy back to its normal position. Certainly not what Keynes thought, and also not an accurate description of the graph above.

More importantly, the very idea of long run equilibrium is central to our ability to theorize about the functioning of real, historically and institutionally specific economies. It is the fact that there are persistent forces, with regularities, which allows to say something meaningful about the functioning of the economy. If uncertainty rendered economic calculation impossible, then even Keynes' theory about how effective (autonomous) demand determines income, would be irrelevant, and in that case post-Keynesians would have (notice I said would have, since I don't think this is the right way to describe post-Keynesian economics) more in common with the modern neoclassical economists that have embraced multiple equilibria and all sorts of imperfections.


  1. So uncertainty is the root cause of this unemployment equilibrium?

    1. No uncertainty is NOT central for unemployment. Lack of demand is, even if prices are flexible.

    2. So what is the root cause of lack of demand?

    3. You mean in the US now? Skewed income distribution (the boom required indebtedness in the face of stagnant wages), and not enough fiscal expansion (for political reasons).

  2. Could you clarify for me what you understand by an equilibrium here.

    Do you mean that all prices are stable as well as all quantities? Or do you mean that only quantities are stable, that excess supply or demand may lead to price changes, but that those changes will no effect on quantities traded?

    1. Unemployment equilibrium was for Keynes a long run equilibrium (with flexible prices, as in chapter 19 of the GT) in which autonomous spending determined the level of income, and output (and, hence, employment). Keynes explains why even with flex prices, income distribution and debt deflation effects might imply that the system fluctuates around less than full employment.

  3. Garegnani's paper is a master-piece. Unfortunately, neoclassical models have shifted from this notion of equilibrium towards a temporal one, even trying to define in terms of time length what short-run and long-run are. Regarding this, I think that the term long-run does not fit very well into heterodox models. It holds this time characteristic that does not help it.
    But for me, the saddest part is the departure that most post-keynesians took from harrodian-like models..

    1. No sure who took to Harrodian models. By the way, Harrod model is NOT heterodox, since it really accepts Say's Law. Actually, it is the new growth models, like the AK model, that reintroduced Harrodian instability.

    2. Ok, I get your point. But this is not what I meant. I was not implying the full implications of Harrod's model. I had in mind a harrodian-like model in a broad sense in a more coherent framework, like sraffians and neo-kaleckians growth models. I guess that they are more in line with Harrod than with Solow, however my sentence could be easily misinterpreted indeed.
      As it seens to me, Harrod's model does not "accept" Say's Law, it appears as a mere consequence of its poor assumptions. However, I haven't had the time to read the original and am solely relying on other's interpretation.

    3. Not sure what Harrodian like model would be. Harrod is explicit, in his model savings determines investment in contrast to Keynes, short run story. So it is Say's Law.

    4. Well, what I have in mind is long-run concerns without substitution effects.

  4. If the market equilibrium is stable and unique, wouldn't the market return to it spontaneously after any departure?

    At the other hand, if there were multiple equilibria and the market jumped unpredictably from one to another, not only policy would be useless, but it would be impossible to ascertain its effects.

    Or am I missing something?

  5. "... believe in the notion of a single stable long run equilibrium of the system ..." The only problem with all that is that real (!) economies are never in equilibrium, hence the "system (what's that) cannot return to one. Nor are there any aggregates such as supply, demand, wages, monetary aggregates. Which is why Walras looks great on paper but is like scholastic debates about how many angels would fit on the point of a needle.


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