What do we mean by economic equilibrium?

Degree in Economics (UBA, 2002), Master in Economics and Business Administration (ESEADE, 2004) and Doctor of Applied Economics from the King Juan Carlos University of Madrid (URJC, 2009).

Regular Professor of Introduction to Economics at the Faculty of Economic and Legal Sciences of the National University of La Pampa (UNLPam).

Contributes to the blog Punto de Vista Económico y en Libertad y Progreso.

This article was originally published at Punto de Vista on October 12th, 2021.

Austrian authors have questioned the use of general equilibrium by some economists on many occasions. The economy cannot be in equilibrium, since that would imply that all our needs are satisfied. In such a state of affairs, nobody would act. The Austrians, on the contrary, and also Marxists and Post Keynesians refuse to believe in this postulate, considering it an excess of the neoclassical economists.

Furthermore, in an economy that was in general equilibrium, there would be no need for a business function that sees investment opportunities. Alertness, acumen, and entrepreneurial function only make sense in an unbalanced economy.

It is in this context, I read this presentation by Dr. Federico Sturzenegger at the National Academy of Economic Sciences. On that occasion, Sturzenegger gave the term “general equilibrium” a totally different meaning. Those eho are readers of this blog may remember the famous lesson from Henry Hazlitt’s book Economics in One Lesson. Looking at the general equilibrium, instead of only looking at a partial equilibrium, responds to this view.

What was this lesson? When we evaluate an economic policy, or in this case a monetary policy, we cannot look at only one part of the economy, a partial equilibrium, but we must observe what happens in all areas at the same time, looking for a general equilibrium. Thus, the general equilibrium acquires an important and even indispensable dimension for a good economy.

Sturzenegger’s article offers several examples. He uses this notion of general equilibrium to question the Keynesian aggregate demand model, arguing that its components are not independent of each other.

The fallacy of partial equilibrium is manifested in arguments such as “public spending is expansive when it transfers resources from high-income segments to low-income segments with a greater propensity to consume“. It is a reasoning we hear every day. It comes in handy for a television show, making the plot look correct and sophisticated at the same time. But wait, economists would say, what about general equilibrium? What about savings? Let’s imagine that for a moment, someone has deposits in a bank. Well, that bank would surely lend it, expanding aggregate demand.

I would just like to open the debate on what is the correct meaning economic equilibrium. What place should we give to the general equilibrium, if there should be any?