Fritz Machlup · 1958
Fritz Machlup’s 1958 methodological article examines the terms “equilibrium” and “disequilibrium” across economic theory, with a long application to international trade and the balance of payments. Its thesis is semantic and methodological: equilibrium is indispensable, but it becomes misleading when economists shift unnoticed from an analytical device to an empirical description or a policy ideal.
A term which has so many meanings that we never know what its users are talking about should be either dropped from the vocabulary of the scholar or "purified" of confusing connotations.
Machlup first distinguishes literal accounting balances, analytical equilibria in models, descriptive claims about historical situations, and evaluative uses in welfare or policy argument. His preferred concept is the analytical one. Equilibrium helps economists conduct a mental experiment: isolate one disturbance and trace the adjustments it induces.
The idea of equilibrium is employed in this scheme as a mental tool, a methodological device; it aids in establishing to our satisfaction a causal nexus between different events or changes.
The core apparatus is a four-step sequence: an initial equilibrium, a disequilibrating change, adjusting reactions, and a final equilibrium. Initial equilibrium guarantees that the disturbance is the relevant cause; final equilibrium guarantees that the listed effects are complete relative to the chosen model.
In a nutshell, we have here a mental experiment in which the first and last steps, the assumption of initial and final equilibria, are methodological devices to ensure that Step 2 is the sole cause and Step 3 contains the complete sequence of effects.
From this follows Machlup’s major conceptual move: equilibrium is relative to selected variables, assumed relations, and adjustment time. A position may be equilibrium in one model and disequilibrium in another if further variables or longer lags are included. Marshall’s market, short-run, and long-run equilibria are therefore different abstractions, not directly observable historical states.
In the light of the preceding discussion we may define equilibrium, in economic analysis, as a constellation of selected interrelated variables so adjusted to one another that no inherent tendency to change prevails in the model which they constitute.
“Misplaced concreteness” names the error of treating this model-dependent construct as if it were an observable fact. Statistical series may be observable, and accounting balances may be measured, but compatibility among variables depends on a specified model. Without that specification, calling an actual situation equilibrium is methodologically empty.
To characterize a concrete situation "observed" in reality as one of "equilibrium" is to commit the fallacy of misplaced concreteness.
Machlup also separates equilibrium from stability and from approval. Stable observed prices need not be equilibrium prices, and volatile prices may be modeled as successive equilibria after successive disturbances. More sharply, equilibrium analysis should not smuggle in a moral ranking of outcomes.
Equilibrium is not a Good Thing, and disequilibrium is not a Bad Thing.
The second pole of the subtitle is “disguised politics.” Machlup accepts that values guide the choice of problems and policies; he rejects making full employment, fixed exchange rates, unrestricted trade, or price stability part of the definition of equilibrium itself.
By infusing a value judgment, a political philosophy or programme, or a rejection of a programme or policy, into the concept of equilibrium designed for economic analysis, the analyst commits the fallacy of implicit evaluation or disguised politics.
The final section tests the argument in international trade theory. Machlup praises Joan Robinson’s insistence that exchange-rate equilibrium depends on interest rates, effective demand, and wages, so that no single “true” rate is determined independently.
The notion of the equilibrium exchange rate is a chimera.
Against this, he reads Nurkse, Ellsworth, and Kindleberger as attaching political criteria to “equilibrium,” while Meade becomes the revealing intermediate case: Meade I uses equilibrium as a value-neutral analytical device, Meade II defines balance-of-payments disequilibrium through undesirable policy conditions, and Meade III returns in practice to narrower distinctions between internal and external balance. Streeten’s critique of “persuasive definitions” supports Machlup’s warning that definitions can make policy preferences look logically necessary.
The article remains relevant as a defense of disciplined abstraction. Machlup does not reject equilibrium analysis; he protects it by limiting its meaning. Equilibrium is useful when it remains a precise fiction for causal reasoning, not an observed fact, honorific label, or political slogan.
This work was divided into 5 sections when it entered the library's research corpus—an apparatus for search and citation, not necessarily the author's own table of contents. Each title opens its summary.
Put a question to this work; the Librarian answers from its 5 sections and cites the passage.
Ask the Librarian