There Is Always Disequilibrium in the Real Economy and the State of “Equilibrium” Never Becomes Actual

A new sophisticated version of the image of the perfect society has arisen lately out of a crass misinterpretation of the procedure of economics. In order to deal with the effects of changes in the market situation, the endeavors to adjust production to these changes, and the phenomena of profit and loss, the economist constructs the image of a hypothetical, although unattainable, state of affairs in which production is always fully adjusted to the realizable wishes of the consumers and no further changes whatever occur. In this imaginary world tomorrow does not differ from today, no maladjustments can arise, and no need for any entrepreneurial action emerges. The conduct of business does not require any initiative; it is a self-acting process unconsciously performed by automatons impelled by mysterious quasi-instincts. There is for economists (and, for that matter, also for laymen discussing economic issues) no other way to conceive what is going on in the real, continually changing world than to contrast it in this way with a fictitious world of stability and absence of change. But the economists are fully aware that the elaboration of this image of an evenly rotating economy is merely a mental tool that has no counterpart in the real world in which man lives and is called to act. They did not even suspect that anybody could fail to grasp the merely hypothetical and ancillary character of their concept.

Yet some people misunderstood the meaning and significance of this mental tool. In a metaphor borrowed from the theory of mechanics, the mathematical economists call the evenly rotating economy the static state, the conditions prevailing in it “equilibrium,” and any deviation from “equilibrium” disequilibrium. This language suggests that there is something vicious in the very fact that there is always disequilibrium in the real economy and that the state of “equilibrium” never becomes actual. The merely imagined hypothetical state of undisturbed “equilibrium” appears as the most desirable state of reality. In this sense some authors call competition as it prevails in the changing economy imperfect competition. The truth is that competition can exist only in a changing economy. Its function is precisely to wipe out disequilibrium and to generate a tendency toward the attainment of “equilibrium.” There cannot be any competition in a state of “static equilibrium” because in such a state there is no point at which a competitor could interfere in order to perform something that satisfies the consumers better than what is already performed anyway. The very definition of “equilibrium” implies that there is no maladjustment anywhere in the economic system, and consequently no need for any action to wipe out maladjustments, no entrepreneurial activity, no entrepreneurial profits and losses. It is precisely the absence of the profits that prompts mathematical economists to consider the state of undisturbed static equilibrium as the ideal state, for they are inspired by the prepossession that entrepreneurs are useless parasites and profits are unfair lucre.

—Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2005), 241-242.