Equilibrium Theory

Equilibrium is a central concept in neoclassical economic theory and game theory with a precise mathematical definition and an interpretive connotation of self-reinforcing stability. Although the concept draws on the character of human agents as having expectations about future states of affairs when used in the social sciences, originally the idea referred to a mechanical system in which forces are balanced, resulting in a stationary state. Social scientists who study equilibriums are interested in their existence, uniqueness, and stability. The equilibrium concept most useful to contemporary political science is that of the game theoretic Nash equilibrium (by John Forbes Nash). This mathematical definition refers to a competitive interaction in which each agent pursues personal advantage, expects that others will do the same, and no individual has the incentive to deviate from his chosen strategy of action, given the joint outcome of everyone's strategy.

The combination of the mathematical precision of the equilibrium concept, and its connotation of social stability, makes it of great interest to social scientists who are attracted to explanations of social phenomena that may be stated as general laws of human action. Even though he did not use the term “equilibrium,” Adam Smith's famous “invisible hand” argument in essence implies this central idea. Smith proposed that a system of natural liberty, defined as a system predicated on individual self-interest embedded in a framework of commutative justice, will tend toward uniform rates of return from capital investments and uniform wages for labor. In neoclassical economic theory from the late nineteenth-century marginalism to mid-twentieth-century general equilibrium theory, the achievement of an equilibrium denotes that supply and demand across all markets is perfectly balanced, given a certain set of prices.

Even though an equilibrium is defined mathematically and itself is a nonnormative concept, because it describes social stability, it conveys a sense of positive value. This is because most people believe that constancy is superior to chaos and unpredictability and, further, that instability signifies an imbalance between individuals' expectations and the actual outcomes of their actions. Therefore, the Great Depression, marked by overproduction and a collapse of the pricing system because of widespread inability to pay for goods, is deemed to represent disequilibria and to be detrimental. By contrast, according to general equilibrium theory developed in the 1950s, the existence of a general equilibrium is defined by X. This state X guarantees Y and Z. (Two fundamental theorems of welfare economics are Pareto optimality, and the fixed-point theorem.)

Social science is distinct from natural science because it is widely believed that in markets and politics, agents act purposively both in anticipation of how others will act and what the expected outcome of joint actions will be. Thus, it is well appreciated in economics that if individuals expect an en masse cash withdrawal of savings from banks, and act accordingly, the ensuing collapse of the banking system will be the result of a self-fulfilling prophesy. General equilibrium theory did not do full justice to mutually interdependent strategic interactions, and game theory was articulated to address this deficiency. Game theory, which relies on the idea of equilibrium to the same extent that neoclassical economics does, made it possible to address outcomes of interdependent decision processes in nonmarket interactions wherein monetary prices are either irrelevant, or exogenous to the model.

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