A realist approach to equilibrium analysis

Conclusion Science seeks to explain objective facts by reference to constant relationships that link them to other facts. Yet economic science deals with human action, which is directed by individual choice, which seems by its very nature to contradict the notion of constancy. How can we reconcile the idea that there are laws of human action, that manifest themselves in market prices and the structure of production, with the idea that there is also freedom of choice? All modern discussions of the relevance of equilibrium economics revolve around this problem. We have argued that there are constant relationships in choice itself — in particular, in the dichotomy of success and failure. Recognizing this fact paves the way toward a realistic equilibrium analysis, which consists in comparing an actual choice with its counterfactual alternatives in terms of success and failure. This approach underscores Mises’s insight that equilibrium analysis deals only with a very limited range of phenomena — it is only a part of economic science. And, in distinct contrast to all previous approaches, it does not rely on fictions of the mind or unrealistic constructs. It is an integral part of a realistic science, a precious tool for the understanding of reality. Completion of this essay would not have been possible without financial support by the DAAD, the Humboldt Foundation, and the Mises Institute. Comments by Hans-Hermann Hoppe, Joseph T. Salerno, Christian Comanescu, Barry Smith, Jeff Tucker, David Gordon, Robert Murphy, Jeffrey M. Herbener, and Alexandre Padilla are gratefully acknowledged.