Money and Equilibrium

Economic theory has undergone a very deep transformation during the last forty years. Its method and its tools of analysis have evolved dramatically. The standards by which theoretical statements are now appreciated are far more demanding, especially from a formal point of view, than was the case before World War II. Precision and logical validity in raising questions and problems have increased as well. The set of hypotheses necessary to deal with the usual issues of political economy has been made more explicit, allowing everyone to have a more clearer interpretation of what has been done in the different fields.

The content and the relevance of the concept of equilibrium have been strongly affected by these transformations. This paper, obviously, does not attempt to give an account of all these changes. It will focus on just one consequence of this evolution: the relevance of the concept of equilibrium in dealing with the traditional question of the working of the market, the central institution in our economies.

To put the matter very briefly, the question addressed here concerns the place of equilibrium in economic theory: does mainstream economics allow for another theoretical reference? For two centuries at least, equilibrium was referred to as a particular situation towards which the market mechanism was supposed to drive the economy. An important issue was to prove this conjecture. Whereas mainstream economists (Smith, Ricardo, Stuart Mill, Marshall and Walras) endeavored to prove the stability of the market, critical authors tried to show that certain fundamental flaws of the market mechanism make instability and crisis the rule in a capitalist economy. Among the factors said to be responsible for this result, the monetary character of the economy seems the most important (as was emphasized by Boisguilbert, Sismondi and Marx in the past and by Keynes in our time).