Intertemporal equilibrium

Intertemporal equilibrium is a notion of economic equilibrium conceived over many periods of time.

In modern economic theory, most models explicitly take into account the fact that the economy evolves over time, and that its equilibrium cannot be fruitfully analyzed from a purely static perspective. Therefore the general equilibrium of the economy is conceived as an intertemporal equilibrium, meaning that households and firms are assumed to make intertemporal decisions. That is, households are assumed to choose consumption and labor on the basis of wages, prices, utility, and wealth over their whole lifetimes, instead of considering these quantities at just one point in time. Likewise, firms are assumed to choose hiring, investment, and output on the basis of productivity and demand over the foreseeable future, instead of considering these quantities at just one point in time.

The intertemporal general equilibrium is then analyzed as the Nash equilibrium or competitive equilibrium of the intertemporal strategies of all the households and firms (and any other economic agents under consideration, such as governments).

Meaning in Austrian economics

In Austrian economics, intertemporal equilibrium refers to the assertion that the economy at any one time is in disequilibrium, and that it is only when looking at it over the long term that it is in equilibrium. Austrian economists hold that it is the interest rate which coordinates this "intertemporal equilibrium", by best allocating resources throughout the production structure. Thus "intertemporal equilibrium" can only be reached when the consumption and investment choices of individuals are matched with the investment being carried out in the production structure which will allow goods to come to market in the future, in accordance with the time preference of the population.

This is a central tenet of the Austrian School, represented by men such as Friedrich Hayek and Ludwig von Mises; and continued on by the Swedish School who maintain that the genius of the free market is not that it perfectly matches supply and demand, but that it encourages innovation to best meet that supply and demand.