7. "Statics" vs. "Dynamics"

0:00Chapter 7, Statics vs. Dynamics The admirers of Keynes's general theory never tire of contending that it is dynamic. It has helped to make us think of economics in dynamic rather than in static terms, writes Hansen. Hansen, and again, the general theory is something more than just static theory, over and over again Keynes is thinking in highly dynamic terms. Particularly since the appearance of the general theory, there has grown up a whole pedantic literature about period analysis, rates of change analysis, and comparative statics analysis.

0:53This last is supposed to investigate the response of a system to changes in given parameters. Perhaps a word or two would not be out of place at this point about this obsession with methodology. Most of the writers who compare static with dynamic economic analysis use the word static in a derogatory and the word dynamic in a laudatory sense. This disparagement of the static and love of the dynamic long precedes the appearance of the general theory in 1936. It has existed in many fields besides economics. It seems to have had its origin in the popular association of static with stick-in-the-mud and of dynamic with the idea of progress.

1:52Much of the current approbation of the dynamic and dislike of the static can be traced back, in fact, to the fashionable philosophies of Henry Berkson and John Dewey, as developed in the early part of the present century. In economics, at all events, the great emphasis on the contrast between the two methods rests in large part on a misunderstanding. Economic analysis, even among the early classical economists, was to some extent dynamic. It is hard to think, in fact, of an important example of strictly static analysis.

2:39Such an analysis would merely portray economic relationships at a given instant of time. It would resemble a single snapshot. Even the analysis of the early classical economists was much closer to a motion picture. It devoted itself to explaining how and why changes took place. This applies even to the famous concept of the stationary state, notwithstanding the many confusions in that concept as held by Mill and his predecessors. The concept of the stationary state did not profess to give a picture of the economy at a frozen instant of time.

3:28It was not like John Keats' Grecian Urn, with its still-unravished bride of quietness, and its bold lover, never, never canst thou kiss, though winning near the goal, yet do not grieve. She cannot fade, though thou hast not thy bliss, for ever wilt thou love, and she be fair. The modern concept of the stationary economy at all events is a concept that envisages change, but change within certain constants. The stationary economy is one which does not grow and does not shrink, which does not on net balance either accumulate or consume capital, which is not subject to booms or depressions, in which prices and wages and the relative size of industries do not change, but in which nonetheless, manufacturers constantly buy new raw materials as they sell furnished products, and in which production, employment, buying and consumption go steadily on.

4:45Ludwig von Mises has more appropriately called this the evenly rotating economy. In the evenly rotating economy, the daily round and the seasonal or annual round of production and consumption and capital replacements are endlessly repeated. We might even call this, borrowing a phrase from Nietzsche, an eternal recurrence economy, or we might think of it simply as an even-flow economy. In any case, no good modern economist ever mistakes such concepts for descriptions of any actual economy.

5:31Some of the classical economists, it is true, thought of the stationary economy as a condition which would someday be achieved, or they thought of it as an ideal condition. This was sheer confusion of thought, as is also the notion still often met with today, that a state of economic equilibrium is necessarily more desirable than a state of disequilibrium. The stationary or evenly rotating economy is not, in short, a description of any actual state of affairs or even of any achievable state of affairs.

6:17It is a concept, a tool of thought, a postulate, an imaginary construction, or, to use a word which is becoming increasingly fashionable, It is necessary to frame such postulates, such imaginary constructions in order to study their implications and deduce their hypothetical consequences. If we wish to study the effects of certain changes in the economy, we must understand, first of all, what the consequences would be if there were no such changes. We cannot know the meaning of motion unless we know the meaning of rest. We cannot understand a complex dynamic economy unless we first of all understand a simplified static economy.

7:14This method of setting up postulates, imaginary constructions, simplified models and studying their implications and hypothetical consequences is the main tool of modern economic analysis. Analysis. We begin, say, by setting up a model of a stationary or evenly rotating economy, and drawing the deductions and consequences that follow from this simplified model. Next, say, we set up a model of a changing economy, a shrinking or an expanding one, or or one in which the relative size of individual firms or industries is changing.

8:00Next, perhaps, we study an economy in inflation and deflation, and finally, perhaps, we study the business cycle. In other words, we make a series of postulates or imaginary constructions beginning with the most simplified and moving on to the more complex and more realistic. Despite the enormous recent literature which implies or explicitly states the contrary, there is no difference in kind between the methods of static analysis and the methods of dynamic analysis. There is merely a difference in the specific hypotheses made.

8:47Static analysis is a necessary first step to dynamic analysis. In static analysis, we assume that only one thing, or one set of things, changes and everything else remains the same. We then study the necessary implications or consequences of this hypothesis. In dynamic analysis, we successively assume that two things, then three things, then four things, then N things change. The more complicated dynamic hypotheses are not necessarily superior to the simpler static ones.

9:34The appropriateness or utility of the hypothesis we use depends mainly on the particular problem we are trying to solve. As we complicate our hypotheses, we never, of course, do reach the nearly infinite complications of the real economic world, but we approach them as a limit. Many modern economists, in a hurry, despise all the more simple or static assumptions, and imagine that they can analyze full dynamic reality in a single leap by a sufficiently complicated set of simultaneous algebraic equations. This is self-deception.

10:20No doubt there are enough symbols in the Latin and Greek alphabets to go around, but there is likely to be considerable question about the quantitative determinateness of the concepts for which the symbols stand. Even after the algebraic solution of these complicated hypotheses is arrived at, It will be very doubtful whether real, rather than merely hypothetical, numerical values can be attached either to the symbols or the results. But the more modest method of beginning with simple hypotheses and advancing step by step to increasingly complicated ones has been increasingly refined and clarified and used with increasing awareness, care and precision by a long line of great economists since the time of Ricardo.

11:18The method was developed to deal precisely with the problems of a dynamic economy, to deal precisely with the characteristics of the economic society in which we actually live. It is a mistake to believe that we can skip over all static assumptions for the superficial reason that such assumptions are unreal. This would be as foolish as it would be for a ballistic missile designer to skip over all preliminary calculations of the probable flight or parabola of his missile through a frictionless medium on the ground that no actual medium is ever really frictionless.

12:05In order to understand the consequences of dynamic assumptions, we must first of all understand the consequences of static assumptions. The method of science is that of experimental or, when that is impossible, hypothetical isolation. It is the method of successive approximations. It is to study one change, force or tendency at a time, whenever that is possible, even when it usually, or perhaps always, acts in combination with other forces, and then to study later the combinations, interrelations and mutual influences of all the main changes, forces or tendencies at work.

12:54The belief that we can skip over all these tedious preliminaries and surprise the secrets of the actual economy in one great leap by the use of simultaneous differential equations is a double delusion. It disdains a method that is indispensable in order to embrace a method that is inappropriate and illegitimate. But to the fallacies of mathematical economics we shall return later. Before we leave this topic for the time being, it may be pointed out that even the concept of equilibrium, of a single price, a set of prices or the whole economy, which is commonly cited as preeminently a static concept, is in large part dynamic.

13:46It is a mental tool for enabling us to study not merely a frozen state or a state of stable rest, but the forces and tendencies that are constantly at work, even when thwarted by institutional forces, to bring a state of disequilibrium back toward a state of equilibrium. The very terms equilibrium and disequilibrium, statics and dynamics are derived from physical and mechanical analogies. The most frequent examples chosen to illustrate the meaning of static equilibrium in economics are water tending toward its level, A swinging pendulum tending toward a state of rest, or marbles coming to rest against each other at the bottom of a basin.

14:39But when we examine any specific problem, or even these analogies, we find that we are chiefly concerned with equilibrium in economics not as a state of rest, but as a process of moving toward rest. We are concerned not with the abstract conditions of achieved equilibrium, the balance or mutual cancellation of opposing forces, but with the forces which bring a tendency toward equilibrium. But when we are considering the process by which an equilibrium is established, we are not in the field of statics but of dynamics.

15:24What most economists really mean when they accuse other economists of using merely static analysis is that these other economists consider some important factor or factors as given or fixed, rather than as unknown or variable. In particular cases, such criticisms may be quite valid. But if we try to solve any economic problem by assuming nothing as given and everything as variable, the world becomes simply a chaos, a big blooming buzzing confusion. Fortunately, the economist is commonly able to do in thought what the physicist is often able to do in fact.

16:15To change A, B, C, D, etc. one at a time, then perhaps two at a time, then three at a time, to discover the separate effect of each, as well as their interrelations. Appendix on User Cost Chapter 6 of The General Theory begins with a few paragraphs about Keynes's concept of user cost. It goes on to discuss the general concept of income, a discussion which is again interrupted by an 8-page appendix on user cost. The appendix on user cost is technical, needlessly obscure and a digression.

17:06Few Keynesians give it much analysis. Alvin H. Hansen, indeed, tells us that the whole section on income, general theory pages 52 through 61 and pages 66 through 73, is of no great importance for an understanding of the general theory and might quite well be omitted if the student so wishes. However, not merely the section on income, but the appendix on user cost deserve discussion for the light they throw on Keynes's thinking and writing in general. The discussion on user cost, in fact, is an outstanding example of the incredibly awkward exposition that marks the general theory through most of its length.

18:00Keynes begins, pages 52 through 54, by throwing at the reader a complicated set of arbitrary algebraic symbols, with a slapdash and inadequate explanation of what they stand for, and almost no explanation of why they are necessary at all. It is not until the second half of this appendix that he tells us, We have defined the user cost as the reduction in the value of the equipment due to using it as compared with not using it. Page 70 This definition, which has not in fact been put in this simple and direct form until this point, should have been at the very beginning of the exposition.

18:52Dudley Dillard has paraphrased it still more simply and compactly. The loss of value resulting from using equipment rather than not using it is called the user cost. Cost The importance of this concept for Keynes's theory is that the entrepreneur is supposed to have to take this factor into consideration when he decides how many men to employ. No doubt he does. But this user cost is usually so small in comparison with total depreciation and maintenance The role played by it, in fact, is probably so small that it may be questioned whether a special name is needed to identify it.

19:58But if such a special name is needed, a more natural term such as using cost would perform the function better. Alfred Marshall, indeed, has put this cost under the simple heading of extra wear and tear of plant. Marshall is right, despite Keynes's protests, when he does little more than mention this in a discussion of prime and supplementary costs. A. C. Pigot is also right when he assumes that The differences in the quantity of wear and tear suffered by equipment and in the costs of non-manual labor employed that are associated with differences in output can be ignored as being, in general, of secondary importance.

20:53Keynes tries to make his concept of user-cost seem important by including in it the cost of raw materials, say, pounds of copper, that are used up in the process of manufacturing. The costs of such raw materials can, of course, be decisively important, but it is only confusing, not clarifying, to lump such costs with the cost of using fixed equipment that is depreciating or growing obsolete anyway. When the raw material is of an unspecialized nature, as it most often is, the individual manufacturer commonly has the choice of deciding to resell it in the open market rather than use it to make some specialized finished article for which demand may have fallen.

21:51The traditional analysis, in short, here corresponds much more closely with the facts of economic life and the decisions of entrepreneurs than does the more academic classification of Keynes. If Keynesians wish to call the cost of using up raw materials the using-up cost, which would suggest the facts better than user cost, they are entitled to do so. But in that case it would avoid confusion and be more appropriate to call the cost of using equipment rather than not using it the wear and tear cost. All this may be making much ado about a matter of very minor importance, but Keynes makes much ado about it in this appendix, though the matter plays no discoverable role whatever in the rest of this volume.