THE NUCLEUS Issue 2 Spring 2024

Different views on equilibrium in economics

BY GABRIELA BOLOKAN

Keynes had a different view of the equilibrium. He challenged classical notions of market self adjustment and introduced the concept of ‘ macroeconomics’. He argued that aggregate demand is the driving force behind economic fluctuations. He believed government interventions were necessary, unlike Smith who believed in the ‘invisible hand theory’. Keynes believed the equilibrium could stabilise during recessions through interventions such as fiscal policy, monetary and supply side. For example, during periods of economic downturn he advocated to enforce ‘countercyclical fiscal policy’ in order to stimulate demand and create employment. Overall, he believed that equilibrium can be achieved through the government getting involved and that the economy is not self-correcting so without this intervention, it may result in recessions and depressions.

Equilibrium can be defined as ‘ the condition or state in which economic forces (such as supply and demand) are balanced’. One economist who had his own view of the concept of equilibrium was Adam Smith. He referred to it as the centre of gravity of the economic system where the market forces of supply and demand tend to balance each other known as the theory of market equilibrium. He believed in this ‘invisible hand theory‘ which is through the pursuit of self-interest, an efficient economy inevitably results, where market prices are in equilibrium. Adam Smith believed in a free market, this ‘laissez-faire’ attitude by having minimal government intervention results in market equilibrium. He believed like many others that disrupting the economy would cause an intervention in reaching equilibrium by this ‘ invisible hand’. By thinking like this, he laid the groundwork for future economists

Overall, there are two views on equilibrium that I have discussed.

One being the view of not believing in government

intervention (Adam Smith’s view) and the belief that the economy will naturally stabilise due to this ‘invisible hand theory’ and individuals act in their own self interest, seeking to maximise their well-being. He agreed with the concept of ‘laissez-faire’ which is very different to Keynes’s view of the equilibrium. He wanted the government to get involved as without their intervention, it would result in a recession or depression therefore, he implemented policies such as fiscal. This policy insured that aggregate demand was meeting taxation, and it did work to some extent. Keynes and Smith are two different views on how the equilibrium is obtained and how it can remain stable. aggregate supply through government spending and

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