CHAPTER 6
THE MEANING OF EQUILIBRIUM

THE word equilibrium, in ordinary speech, describes a relation between bodies in space. The scales of a balance are in equilibrium when the balance is at rest. If we throw a handful of coppers into the right-hand scale the balance wobbles for a short time and comes to rest again in a new equilibrium position with the bar tilted further to the right than before. If we are continually throwing coppers at random into either scale, the balance is continually wobbling and never reaches equilibrium; but, at any moment, there is a definite equilibrium position which it would quickly reach if, from that moment, we left it alone.

The metaphor of equilibrium can be applied to economic affairs only with great caution. In some conditions a system may be said to be in equilibrium, as a balance is when it is stationary. For instance, the market for placements may be said to be in equilibrium when all owners of property are content with their holdings, at the ruling prices, and the only transactions taking place are ins and outs due to personal reasons, not motivated by price differences. Such an equilibrium position, however, is likely to be temporary and to contain within itself causes of change which will operate as time goes by (as though the balance were to grow restless and begin to shift without any change in the weights). The prices of bonds, for example, may be in equilibrium for a time at a level which is higher than the average experienced over the recent past. An upward movement was recently checked and brought to rest by the expectation of the market that the high prices will not last. A number of placement owners are holding cash or very short-dated bonds at low yields in the expectation of being able to buy long bonds cheaper in the near future.

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