Neoclassical economists love saying critics don't understand...
Mr. Keynes@TyKeynes
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Nov 30, 2025
~2 min read
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1
Neoclassical economists love saying critics don't understand equilibrium.
But the irony is this the more they explain equilibrium, the clearer it becomes that the concept has been stretched so far it barely means anything anymore.
Allow me to explain 👇
🧵1/15
But the irony is this the more they explain equilibrium, the clearer it becomes that the concept has been stretched so far it barely means anything anymore.
Allow me to explain 👇
🧵1/15
Jesús Fernández-Villaverde@JesusFerna7026
A guide for students of economics: Ten statements that demonstrate that someone does not understand modern economics or what an equilibrium is, and that you can safely ignore everything else they say.
1. “Equilibrium means the economy is stable or at rest.”
Many assume that an equilibrium is a peaceful state with no forces at play. Instead, an equilibrium is just an arrangement of actions and expectations over time that are mutually consistent. It can be locally unstable, explosive, or fragile. Nothing in the definition of equilibrium implies stability.
2. “Equilibrium implies optimality or social efficiency.”
Equilibrium is often conflated with efficiency, but equilibrium merely reflects decentralized consistency, not welfare maximization. Market power, externalities, incomplete markets, nominal rigidities, and frictions routinely produce inefficient equilibria. I often teach a first-year macro graduate course, and not a single one of the equilibria I define is efficient.
3. “Equilibrium is a unique outcome.”
Many often expect models to have one equilibrium. In reality, multiple equilibria arise naturally in dynamic, strategic, and incomplete-market environments. Models of coordination failures, self-fulfilling expectations, bubbles, overlapping generations, and liquidity traps all hinge on the existence of equilibrium multiplicity.
4. “Equilibrium requires perfect foresight or perfect information.”
Equilibrium does not assume agents know the future. In fact, equilibria are often stochastic. The definition of equilibrium only requires that beliefs are consistent with the (perceived) stochastic laws of motion implied by the model. Bayesian learning, noisy signals, ambiguity, and subjective uncertainty all fit well within an equilibrium framework, provided beliefs converge to an internally consistent (but possibly incorrect) distribution.
Bonus point: equilibria are compatible with agents having diverging beliefs that never converge to a single Dirac distribution.
5. “Real economies are rarely in equilibrium, so the concept is unrealistic.”
Equilibrium is not meant to describe the daily state of the world. It is a conceptual device used to understand the outcome of our models under the assumptions we make. Also, see point 1 above.
6. “Equilibrium requires agents to be fully rational in a psychological sense.”
Equilibrium only assumes internal consistency: agents optimize given preferences and constraints. It does not assume realism about human cognition. We can and do define equilibria in models with behavioral biases, bounded rationality, inattention, or rule-of-thumb behavior. We only need to ensure that the resulting actions and beliefs are mutually compatible.
7. “Equilibrium eliminates dynamics or learning.”
Equilibrium is sometimes misinterpreted as a static state in which nothing evolves. In fact, many equilibria are sequences of probability distributions over states driven by shocks, policy rules, and endogenous responses. Learning dynamics (Bayesian updating, adaptive rules, experience-based expectations) can occur within equilibrium if the evolution of beliefs is self-consistent.
8. “Equilibrium renders expectations unimportant.”
A common misconception is that equilibrium mechanically determines outcomes. In reality, expectations are often central: they determine investment, consumption, asset prices, and policy responses. Many equilibria differ only in their expectations. This is why communication, credibility, and forward guidance matter even in fully rational models.
9. “Equilibrium excludes policy intervention.”
Some interpret equilibrium as a laissez-faire concept. In fact, equilibrium analysis is the foundation of modern policy evaluation. Fiscal, monetary, and regulatory interventions work through equilibrium responses (prices, wages, interest rates, quantities) and must satisfy equilibrium conditions to be credible. Equilibrium is a tool for policy design, not a barrier to it.
10. “Equilibriums…”
Aequilibrium is a Latin neuter noun of the second declension, which forms a nominative plural in “a”. It is composed of aequus (equal; the same root as equality or equity) and libra (balance or scales or the name of several currencies over history).
A final thought: “equilibrium” is a term of art. Its meaning in economics differs from its use in the natural sciences or in everyday language. Terms of art are ubiquitous across academic disciplines, and the first act of intellectual diligence when one starts studying a discipline is to learn what they mean.
1. “Equilibrium means the economy is stable or at rest.”
Many assume that an equilibrium is a peaceful state with no forces at play. Instead, an equilibrium is just an arrangement of actions and expectations over time that are mutually consistent. It can be locally unstable, explosive, or fragile. Nothing in the definition of equilibrium implies stability.
2. “Equilibrium implies optimality or social efficiency.”
Equilibrium is often conflated with efficiency, but equilibrium merely reflects decentralized consistency, not welfare maximization. Market power, externalities, incomplete markets, nominal rigidities, and frictions routinely produce inefficient equilibria. I often teach a first-year macro graduate course, and not a single one of the equilibria I define is efficient.
3. “Equilibrium is a unique outcome.”
Many often expect models to have one equilibrium. In reality, multiple equilibria arise naturally in dynamic, strategic, and incomplete-market environments. Models of coordination failures, self-fulfilling expectations, bubbles, overlapping generations, and liquidity traps all hinge on the existence of equilibrium multiplicity.
4. “Equilibrium requires perfect foresight or perfect information.”
Equilibrium does not assume agents know the future. In fact, equilibria are often stochastic. The definition of equilibrium only requires that beliefs are consistent with the (perceived) stochastic laws of motion implied by the model. Bayesian learning, noisy signals, ambiguity, and subjective uncertainty all fit well within an equilibrium framework, provided beliefs converge to an internally consistent (but possibly incorrect) distribution.
Bonus point: equilibria are compatible with agents having diverging beliefs that never converge to a single Dirac distribution.
5. “Real economies are rarely in equilibrium, so the concept is unrealistic.”
Equilibrium is not meant to describe the daily state of the world. It is a conceptual device used to understand the outcome of our models under the assumptions we make. Also, see point 1 above.
6. “Equilibrium requires agents to be fully rational in a psychological sense.”
Equilibrium only assumes internal consistency: agents optimize given preferences and constraints. It does not assume realism about human cognition. We can and do define equilibria in models with behavioral biases, bounded rationality, inattention, or rule-of-thumb behavior. We only need to ensure that the resulting actions and beliefs are mutually compatible.
7. “Equilibrium eliminates dynamics or learning.”
Equilibrium is sometimes misinterpreted as a static state in which nothing evolves. In fact, many equilibria are sequences of probability distributions over states driven by shocks, policy rules, and endogenous responses. Learning dynamics (Bayesian updating, adaptive rules, experience-based expectations) can occur within equilibrium if the evolution of beliefs is self-consistent.
8. “Equilibrium renders expectations unimportant.”
A common misconception is that equilibrium mechanically determines outcomes. In reality, expectations are often central: they determine investment, consumption, asset prices, and policy responses. Many equilibria differ only in their expectations. This is why communication, credibility, and forward guidance matter even in fully rational models.
9. “Equilibrium excludes policy intervention.”
Some interpret equilibrium as a laissez-faire concept. In fact, equilibrium analysis is the foundation of modern policy evaluation. Fiscal, monetary, and regulatory interventions work through equilibrium responses (prices, wages, interest rates, quantities) and must satisfy equilibrium conditions to be credible. Equilibrium is a tool for policy design, not a barrier to it.
10. “Equilibriums…”
Aequilibrium is a Latin neuter noun of the second declension, which forms a nominative plural in “a”. It is composed of aequus (equal; the same root as equality or equity) and libra (balance or scales or the name of several currencies over history).
A final thought: “equilibrium” is a term of art. Its meaning in economics differs from its use in the natural sciences or in everyday language. Terms of art are ubiquitous across academic disciplines, and the first act of intellectual diligence when one starts studying a discipline is to learn what they mean.
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They say: Equilibrium isn't stable, it can explode.
If your equilibrium can be unstable, fragile, or blow up… then what exactly is equalised or balanced?
Redefining equilibrium to include instability strips the term of the meaning it has in every other science.
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If your equilibrium can be unstable, fragile, or blow up… then what exactly is equalised or balanced?
Redefining equilibrium to include instability strips the term of the meaning it has in every other science.
🧵2/15
3
They say: Equilibrium doesn't imply efficiency.
Sure, in theory.
In practice, mainstream teaching links equilibrium and optimality everywhere: welfare theorems, intertemporal optimization, competitive markets.
They deny the link while building their models on it.
🧵3/15
Sure, in theory.
In practice, mainstream teaching links equilibrium and optimality everywhere: welfare theorems, intertemporal optimization, competitive markets.
They deny the link while building their models on it.
🧵3/15
4
They say: Equilibrium isn't unique.
Great, so we can have 1, 10, or 10,000 equilibria depending on the assumptions. Or simply put, fuckery...
🧵4/15
Great, so we can have 1, 10, or 10,000 equilibria depending on the assumptions. Or simply put, fuckery...
🧵4/15
5
They say: It doesn't require perfect foresight.
True.
But DSGE models requires something stronger, rational expectations.
Agents must know the model's probability structure, something even economists don't know without solving the model.
🧵5/15
True.
But DSGE models requires something stronger, rational expectations.
Agents must know the model's probability structure, something even economists don't know without solving the model.
🧵5/15
6
They say: Real economies aren't in equilibrium, but that's fine, it's just a tool.
If your main analytical tool can't describe the system you're studying, maybe the tool is the problem.
Calling it just conceptual is an admission of weakness and an excuse.
🧵6/15
If your main analytical tool can't describe the system you're studying, maybe the tool is the problem.
Calling it just conceptual is an admission of weakness and an excuse.
🧵6/15
7
They say: Equilibrium works with behavioral biases.
Only if those biases are reverse-engineered to satisfy the model's constraints and optimization conditions. In other words, more pure fuckery.
🧵7/15
Only if those biases are reverse-engineered to satisfy the model's constraints and optimization conditions. In other words, more pure fuckery.
🧵7/15
8
They say: Equilibrium includes dynamics and learning.
Yes, but only dynamics that converge to some internally consistent belief path.
Real-world adjustment, delays, cascades, crises, and amplifying feedbacks don't fit neatly into equilibrium learning.
🧵8/15
Yes, but only dynamics that converge to some internally consistent belief path.
Real-world adjustment, delays, cascades, crises, and amplifying feedbacks don't fit neatly into equilibrium learning.
🧵8/15
9
They say: Expectations are central.
Exactly, and that's the problem.
Expectations in DSGE models aren't measured, they're solved by the model.
It's circular, the model predicts expectations by assuming expectations match the model. More fuckery...
🧵9/15
Exactly, and that's the problem.
Expectations in DSGE models aren't measured, they're solved by the model.
It's circular, the model predicts expectations by assuming expectations match the model. More fuckery...
🧵9/15
10
They say: Equilibrium doesn't exclude policy.
But it forces all policy to be analysed as a move from one hypothetical equilibrium to another.
Most policy works through disequilibrium processes, multipliers, feedback loops and crises.
🧵10/15
But it forces all policy to be analysed as a move from one hypothetical equilibrium to another.
Most policy works through disequilibrium processes, multipliers, feedback loops and crises.
🧵10/15
11
They say: The Latin plural thing.
When economists run out of arguments, they retreat to grammar.
Enough said.
🧵11/15
When economists run out of arguments, they retreat to grammar.
Enough said.
🧵11/15
12
There is a deeper issue, every time a critique arises, equilibrium gets redefined:
Not stability, not optimality, not uniqueness, not rationality, not realism…
At some point you have to ask
If equilibrium is none of these things, then what is it?
🧵12/15
Not stability, not optimality, not uniqueness, not rationality, not realism…
At some point you have to ask
If equilibrium is none of these things, then what is it?
🧵12/15
13
The Answer:
It's a modelling habit.
System dynamics, complexity, and real-world data show we don't need equilibria to study economies.
We need feedback loops, not fixed points.
🧵13/15
It's a modelling habit.
System dynamics, complexity, and real-world data show we don't need equilibria to study economies.
We need feedback loops, not fixed points.
🧵13/15
14
Until macro drops this equilibrium fixation, it will keep explaining the world in terms of the solutions to its own equations, not the dynamics of real economies.
And that's why people question econ equilibrium.
Not because they don't understand it,
but because they do.
🧵14/15
And that's why people question econ equilibrium.
Not because they don't understand it,
but because they do.
🧵14/15
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