Equilibrium models and explanation

This chapter examines the explanatory purpose of building equilibrium models and the need to consider dynamics and disequilibria. It examines Marshall’s two ‘Principles’ of explanation, the ‘Principle of Substitution’ (essentially the usual neoclassical premise that every decision maker is a maximizer) and the ‘Principle of Continuity’ (that using the assumption of maximization as a basis for explanation is not possible without a continuous range of options to choose among). Marshall’s main mode of explanation using these Principles is his comparative statics analysis. His version of comparative statics introduces a role for time by distinguishing his long-run from short-run equilibria. With this in mind, the chapter goes further to explain why an equilibrium state implies recognition of disequilibrium dynamics and why equilibrium models must recognize the knowledge necessary for the dynamics of equilibrium attainment.