"the possible positions of equilibrium"

"I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium."

-- from Chapter One of The General Theory by J.M. Keynes

The "possible positions of equilibrium" can be understood as different average levels of employment in different periods, due to the economy being in different equilibrium states. A "limiting point" is a minimum or (in this case) a maximum. The level of employment which corresponds to the "special case" described by Keynes is the highest level: the one he called "full employment".

But it is hard to see equilibrium levels of employment on a graph like this:

Graph #1: Unemployment

The cycles may be obvious, but is the equilibrium is not.

Business cycles are like the economy breathing. Even at rest, you're breathing. Even with the economy at equilibrium, the business cycle is going through its phases. As a result, it is not easy to see when the economy is in equilibrium. If there is such a thing.

Is there such a thing as economic equilibrium? Some people say no. You could look at the unemployment graph and say no. And yet, the economy can be "good" for thirty years or more, or "not so good" for thirty years or more. Those could be 30-year periods of equilibrium, even if there are multiple business cycles in each period.

Anyway, Keynes thought the economy experienced equilibrium. The economy could settle into a low-employment equilibrium or a high-employment equilibrium, he said. And who am I to disagree with him.


I was looking at the debt of Domestic Nonfinancial sectors relative to GDP, a US version of the multi-nation data Stephen Cecchetti looks at in The real effects of debt, and I noticed something:

Graph #2: Non-Financial Debt relative to GDP

Three periods of equilibrium. Three different levels of equilibrium in my lifetime. And between times of equilibrium, disequilibrium. Times of undeniable economic calamity: One that ended with a "great" recession. And one that started with inflation so severe that it still informs policy today.


If you want to see equilibrium in the economy, don't look at employment. Look at finance. Why? Because finance is the source of disequilibrium.