Noah Smith — What is an economic equilibrium?

I get asked about this one a lot. And it's also a source of controversy...on one hand you have some econ critics who say "Econ models wrongly assume that the economy is always in equilibrium," and on the other hand you have economists responding that "No, economics models are defined to always be in equilibrium." So I thought I'd try to clear things up...hopefully I don't just end up muddling them further. But anyway:

"Equilibrium" can mean many different things.

There are many different types of equilibria in economics. This may sound intellectually dishonest, but it's not; the same is true in biology, physics, or any other science. "Equilibrium" just means "balance", and there are lots of different kind of things that can balance. In fact, any equation you write down that isn't true by definition can be interpreted as an "equilibrium" relationship, or "equilibrium condition" - the equation is simply a statement that whatever's on the left-hand side of the equation is balanced with whatever's on the right-hand side.

Different economic models have different kinds of equilibria, so it's not like there's one kind of "equilibrium" that is all-important to modern economics....

Noahpinion
What is an economic equilibrium?
Noah Smith | Assistant Professor of Finance, Stony Brook University