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American Economic Association

Inconsistent Equilibrium Constructs: The Evenly Rotating Economy of Mises and Rothbard
Author(s): Tyler Cowen and Richard Fink
Source: The American Economic Review, Vol. 75, No. 4 (Sep., 1985), pp. 866-869
Published by: American Economic Association
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American Economic Review.
Inconsistent Equilibrium Constructs: The Evenly Rotating
Economy of Mises and Rothbard


The growing disillusionment with the Both Mises and Rothbard propose the fol-
Arrow-Hahn-Debreu model of general equi- lowing uses of the ERE:
librium has led to an examination of alterna- 1) The ERE can be used to explain or
tive constructions. Among the alternatives "predict" the direction of change (Mises, pp.
that have recently been studied are tem- 244-45; Rothbard, pp. 275-76). Since the
porary equilibria, rational expectations equi- market economy is supposedly always mov-
libria, and the evenly rotating economy ing towards the ERE, a clear notion of the
(ERE).' This note will focus on the ERE. relevant end-state will tell us what state of
We will argue that, whatever problems equi- affairs the market is tending to establish (but
librium constructs may have in general, these will never actually reach).2
problems are compounded by serious incon- 2) The ERE is an analytical building
sistencies in both the nature of the ERE and block or stepping stone towards analyzing
its suggested uses. complex phenomena in a world of change
We focus on four particular features of the (Rothbard, p. 276).
ERE. First, it is the result of a convergence 3) The ERE is a starting point for an
process initiated by a freeze of tastes, tech- analysis of the effects of particular changes. If
nology, and resources (Murray Rothbard, we wish to analyze the effects of an exoge-
1962, p. 273; Mises does not specify the nous shock upon the economic system, we
conditions required for convergence); sec- start with a state where there is no change
ond, the events of a single market "day" and then allow the new change to work its
continually repeat themselves (Ludwig Mises, way through the system until the economy
1949, p. 247; Rothbard, p. 273); third, the settles into equilibrium once again. Thus,
ERE does not contain the Arrow-Hahn- we can isolate the effects of this change
Debreu restrictions of perfect futures markets (Mises, p. 248).
and approximate convexities; fourth, the 4) The ERE is used as a foil. Since the
ERE contains money and money prices ERE is so unrealistic, it is supposed to shed
(Mises, pp. 416-17, 538; Rothbard, passim). light upon the real world by method of con-
trast. For instance, examining a world in
which there is no uncertainty and, hence, no
entrepreneurship, may help shed light on the
*Departments of Economics, George Mason Univer- nature of entrepreneurship in the real world
sity, Fairfax, VA 22030, and Harvard University, Cam-
bridge, MA 02138, respectively. We thank the Center (Mises, p. 248).
for the Study of Market Processes for support on this
project. I. The ERE:A Critique
'Not only is the ERE frequently used in modern
"Austrian" literature (see Roger Garrison, 1978, for an
example) but is also gaining numerous other adherents.
Using the ERE to explain the direction of
In a recent talk at Harvard University ("Principles of change in a market rests upon the notion
Monetary and Fiscal Policy," 1984) Robert Lucas ex- that there is a " tendency" for a market econ-
pressed his admiration for Mises' ERE and noted its omy to approach equilibrium. "If our data
close similarity with much of his own work with over- -values, technology, and resources-re-
lapping generations models. However, since Mises and
Rothbard contain the primary statement and defense of
mained constant, the economy would move
the ERE, we shall focus our attention on their writings.
Despite our critical tone, we wish to note our apprecia-
tion of the elements of market process and order analy- 2NMisesattaches the label "final state of rest" (p. 245)
sis in Rothbard and Mises. to this use of the ERE.


toward the final equilibrium position and However, even if we ignore the above
remain there" (Rothbard, p. 275). Although problems, all that the Rothbard-Mises analy-
Rothbard later claims that verbal analysis is sis implies is that there is a tendency towards
capable of explaining the convergence path equilibrium in a world with frozen data. Of
(p. 278), no such explanation is forthcoming. course, this implies little or nothing about
In fact, there is no reason to believe that the whether there is a tendency towards equi-
economic system will settle into an equi- librium in a world where the data are not
librium state, for as the analysis of Gerard frozen. All that ERE theorists are saying is
Debreu (1959) implies, sequential transac- that, if we freeze the disequilibrating forces,
tions are not consistent with the notion of an then the equilibrating forces will prevail. But
intertemporal general equilibrium.3 Instead, on this basis we may likewise assert a ten-
all transactions across time must already be dency towards disequilibrium. By allowing
perfectly coordinated on the first day of trad- the data to change just as it does in the real
ing. Any attempt to do away with this stipu- world, and "freezing" all individual learning,
lation is bound to encounter all of the prob- we can demonstrate that the economy would
lems that have plagued mathematical general degenerate into a series of successively less-
equilibrium convergence theory in the past. coordinated states of disequilibrium. How-
Unless the equilibrium of the system is pre- ever, this would clearly be an illegitimate
ordained (as it is in Debreu), it is nearly proof of a real world tendency towards dis-
impossible for the learning processes of ac- equilibrium, just as the Rothbard-Mises
tors to be so highly proficient and adaptable analysis does not succeed in establishing a
as to allow for an actual convergence to real world tendency towards equilibrium.
equilibrium.4 The second function of the ERE -a start-
Among the specific problems preventing ing point for analyzing the determination of
perfect plan coordination are income effects, market price (or other phenomena)-is also
disequilibrium production and consumption, open to question. While it is desirable to
nonconvexities, strategic behavior (resulting analyze price determination in a simpler set-
from externalities), and the potentially false ting before examining the real world, it is
price signals generated by the process of doubtful whether the ERE is the proper
convergence. Mathematical general equilib- initial setting, because there are no prices in
rium theory usually places serious (and un- the ERE. Prices are institutions that have
realistic) restrictions on these problems in evolved over time in order to help coordinate
order to generate a process of convergence. the plans of market participants. In a world
Even then, it is still often impossible to dem- in which all plans are already coordinated
onstrate convergence (see Franklin Fisher, and actors possess all relevant information,
1976). How can the ERE explain conver- prices would not serve any function.6 The
gence without such restrictions?5 only prices that would exist in the ERE are
the ex post barter ratios resulting from real-
ized transactions, such as " ten apples for one
3Also see Frank Hahn (1972). horse." However, the notion of price as an ex
4Roman Frydman (1982) and George Richardson ante disequilibrium institution which com-
(1960) argue that learning processes will never converge
upon an equilibrium. Existing "Austrian" models dem- municates knowledge (see Friedrich Hayek,
onstrate convergence only for single markets under 1945) has no place in the ERE.
highly restrictive assumptions. See Jack High (1980, pp. Rothbard and Mises simply assume that
148-76); S. C. Littlechild and G. Owen (1980). prices exist in the ERE and then explain
5Because the ERE does not stipulate a convex con-
sumption set, people may have tastes for new and
their determination. Interestingly, the con-
unique events or technologies where the "newness" or tradictions involved with this assumption are
"uniqueness" is valued per se, thus making the initial
"tastes freeze" self-contradictory. Likewise, the notion
of freezing resources or resource patterns makes sense
only in a world with no disequilibrium production or 6See John Hicks (1967, p. 3) who argues that num-
consumption to disturb the ability of physical processes eraire prices are not even used for accounting purposes
to reproduce themselves. by GE (and presumably, ERE) market participants.

not denied; Rothbard and Mises emphasize change into a system that, because it has
the contradictory nature of the ERE, but anticipated all of the old changes, has no
still stress its usefulness. However, by forcing means for coping with the new change. In
prices into a framework (the ERE) where addition, many of the exogenous shocks
they cannot logically exist, we must inevita- introduced into the ERE also contradict the
bly distract attention from the disequilibrium initial equilibrium conditions. For instance,
features of prices that characterize the real using the ERE as a starting point for an
world. Even the static allocative function of analysis of monetary intervention (for exam-
prices is misrepresented by the ERE, since ple, Rothbard and Mises' business cycle the-
the allocative efficiency of the system is ory) involves the contradiction of superim-
achieved by actors' knowledge of the exter- posing an increase in the money supply upon
nal data (the "real factors") rather than by an essentially moneyless world.
their observations of prices. How can an The fourth proposed use of the ERE, as a
imaginary construct illuminate an institution 'foil,"~ seems to command the broadest sup-
that performs absolutely no function within port among ERE theorists. However, using
that construct? the ERE as a foil contradicts the first three
The ERE is also used as a starting point suggested uses of the ERE. If it is possible to
for analyzing the effects of an exogenous look at the ERE in order to see what a price
shock upon the economic system. Much of is not, what an interest rate is not, then this
the analysis of the preceding section is appli- should be the only possible use for the ERE.
cable to our critique of this use of the ERE If, as Mises claims (p. 348), the ERE has no
as well. The most important question for the human action, then we cannot claim there is
economist studying the effects of an exoge- a tendency towards equilibrium, since this
nous shock is how market institutions (prices, would imply the nonsensical conclusion that
interest rates, firms, etc.) will deal with this there is a tendency for human action (and
change and how, in turn, this change will human institutions) to disappear. Nor could
affect these institutions. However, a model it be desirable to analyze price determination
with no institutions (or "make believe" in- in the ERE as an "initial step" since our
stitutions that serve no real function) is un- ERE foil tells us that there is neither price
suitable for this task. nor action in equilibrium. Finally, if the ERE
Depending upon the nature of the prob- reflects everything that the real world is not,
lem, introducing a change into an equi- introducing a change into the ERE and let-
librium setting may either understate or ting it work its way through the system can-
overstate the coordination problems that a not be a promising endeavor. At best, all
market economy faces. Since all other activi- such a procedure could be used for is to tell
ties are already coordinated, the disruptive us how the real world does not react to
nature of the change may be understated change. Yet, when proponents of the ERE
since the actors trying to deal with this change use the construct to analyze change, it is no
need not worry about transactions costs or longer viewed as a foil; instead it is looked
plan conflicts among themselves. Further- upon as the initial "state of rest" that change
more, since the bonds that link individual acts upon. This is a clear inconsistency-the
plans in a disequilibrium world (such as ERE either can be an initial state for an
ex ante prices) do not exist in the ERE, then economy that is about to experience change,
the disruptive effects of the change upon or it can be a foil, but it cannot be both. The
these bonds will be either ignored or misrep- very arguments made by Mises for using the
resented. ERE as a foil explain why it is of little value
The other possibility has equally serious for serving any other purposes:
analytical consequences. In equilibrium,
many of the institutions that help coordinate ... [I]n the evenly rotating economy
behavior in a world of uncertainty are ab- there is no choosing and the future is
sent. Thus, we are giving the market econ- not uncertain as it does not differ from
omy an unfair test. We are throwing a new the present known state. Such a rigid

system is not peopled with living men can Economic Review, September 1982, 72,
making choices and liable to error; it is 652-82.
a world of soulless unthinking automa- Garrison,Roger, "Austrian Macroeconomics,"
tons; it is not a human society, it is an in Louis Spadaro, ed., New Directions in
ant hill. [p. 248] Austrian Economics, Kansas City: Sheed,
Andrews, and McMeel, 1978.
However, the ERE is a poor foil because Hahn, Frank,"On the Foundations of Mone-
it is neither completely unrealistic nor inter- tary Theory," in M. Artis and A. Nobay,
nally consistent.7 If one desires to use equi- eds., Essays in Modern Economics, New
librium as a foil, Debreu's model is superior York: Barnes and Noble, 1972.
to the ERE. The Debreu model is completely , On the Notion of Equilibrium in Eco-
and consistently unrealistic: it has no money, nomics, New York: Cambridge University
no sequential transactions, perfect futures Press, 1973.
markets, and all of the other extreme as- Hayek, Friedrich, "The Use of Knowledge in
sumptions necessary to accurately illustrate Society," in Individualism and Economic
the other worldliness of the equilibrium con- Order, Chicago: University of Chicago
cept. Nevertheless, regardless of one's opin- Press, 1945.
ion of the usefulness of the Debreu foil, the Hicks, John, Critical Essays in Monetary The-
ERE is neither a useful substitute for, nor ory, New York: Oxford University Press,
complement to, the standard GE model. 1967.
High, Jack, "Maximizing, Action, and Market
Adjustment," unpublished doctoral dis-
sertation, UCLA, 1980.
7The most important inconsistencies in the ERE are
the existence of money and money prices and the ab- Littlechild, S. C, and Owen, G., "An Austrian
sence of perfect futures markets. The first inconsistency Model of the Entrepreneurial Market Pro-
tends to generate "neutrality of money" results, while cess," Journal of Economic Theory,Decem-
the second leads to an underestimation of the difficulty ber 1980, 23, 361-79.
of reasonably tight interpersonal coordination. Mises, Ludwig, Human Action, New Haven:
Yale University Press, 1949.
Richardson,GeorgeB., Informationand Invest-
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