On the Origin of the Notion of "Intertemporal Equilibrium"

Abstract

A striking feature of contemporary economic theory is the widespread use of the notion of intertemporal equilibrium, which consists of analysing short-period positions of a market economy in sequence over time.' This procedure is customarily regarded as a formalization of the notion of equilibrium adopted by Walras (see, for example, Grandmont, 1977, p. 535). Many would also claim that it was nascent in the work of Bohm-Bawerk and Wicksell. In the modern literature on general equilibrium theory, though historical sketches are rare, the names of Malinvaud, Arrow and Debreu are associated with completing the task of formalization which had been begun by the leading writers of the Swedish school and, in England, by Hicks (see Koopmans, 1957, p. 114 and Grandmont, 1977, p. 536). But in the entire period over which this formalization was undertaken, no fundamental changes in the notion of equilibrium are generally believed to have taken place. In this note it will be argued that this characterization of the development and role of the notion of intertemporal equilibrium is mistaken. Significant original developments, involving changes in the notion of equilibrium, took place in the 1920s and 1930s. It will be argued that to the three names commonly associated with developments in this period (Lindahl, Myrdal and Hicks) must be added the name of Hayek. His role in the origin of the notion of intertemporal equilibrium seems not to have been widely appreciated. Finally, it will be shown that the chief impetus towards the formulation of this notion of equilibrium resided in a growing realization among these writers, simultaneously though not entirely independently, that if the demand and supply approach to the theory of capital and interest was to be retained something would have to be done to free it from the bounds imposed by its need to work in terms of a quantity of capital.