Mises on the Evenly Rotating Economy

T he term evenly rotating economy (ERE) was introduced by Ludwig von Mises in order to distinguish the concept of static equilibrium used by economists from equilibrium models used by students of physical systems. In Mises' view, the mathematical model of physical science had been unwisely extended to economics by writers who had failed to recognize the essential difference between the subject matter of human and nonhuman science. This lack of wisdom was evident from the fact that when even the best mathematical economists set out to describe real economic activity, they had to resort to making assumptions or hypotheses about entrepreneurial activities. In introducing the term ERE, Mises was not proposing that economists adopt a new method of describing economic activity. He was merely proposing that economists use a more accurate phrase to describe the method they had always used but that some economists apparently failed to appreciate. 1 The phrase evenly rotating economy was adopted by only one other economist of note, Mises' student Murray Rothbard. Mainstream economists continued to use the terms static equilibrium or general equilibrium. Of course, the words one uses are not crucial. Mises could have continued to use the term equilibrium if he had convinced his readers to interpret it according to its logical meaning and not its mathematical meaning. The mathematical meaning of equilibrium derives from an analogy with the laws or regularities of nonhuman phenomena. An example is equilibrium in hydraulics. Hydraulic equilibrium is based on the law of gravity and describes a mathematical relationship between conditions that prevail when the system is set into motion and the conditions that prevail after some period of time when the motion stops. The logical meaning of equilibrium is based on an analogy with the logic of human action. Equilibrium in human action refers to a hypothetical point in time when a human being stops deliberating and proceeds to perform the behavior that is specified by an assumed plan of action. For an economy, the ERE is an analogous hypothetical point in time when everyone stops deliberating and proceeds to perform the behavior specified by some general plan of action.