7 - Disequilibrium and Instability (Not Equilibrium) as the Normal State of the Industrial Economies

Summary

Equilibrium is an organising principle of economic thinking subject to incompatible interpretations. The idea of a Keynesian equilibrium as a position of rest with involuntary unemployment contrasts with Pasinetti's notion of an equilibrium situation, that is, an unstable position with full employment. In the former, an equilibrium state cannot be separated from the mechanisms that may (or may not) lead to it, whereas in the latter, the explicit separation between both layers is crucial.

This chapter explores how Pasinetti's methodological standpoint, formulation of the principle of effective demand and conceptualisation of equilibrium, cumulatively build up into a scheme of structural dynamics. It is argued that compositional changes in the structure of demand and the uneven pace of productivity increases render equilibrium situations impossible to maintain through time, especially as regards (full) employment. Therefore, rather than seeking explanations as to why the economy does not return to its equilibrium path, it proves fruitful to specify and empirically implement computable norms to quantify how far (or close) actual economies are from them, providing a compass for policy.