WEBVTT NOTE 7. "Statics" vs. "Dynamics" 1 00:00:00.000 --> 00:00:09.000 Chapter 7, Statics vs. Dynamics 2 00:00:09.000 --> 00:00:17.000 The admirers of Keynes's general theory never tire of contending that it is dynamic. 3 00:00:17.000 --> 00:00:25.000 It has helped to make us think of economics in dynamic rather than in static terms, writes Hansen. 4 00:00:25.000 --> 00:00:32.440 Hansen, and again, the general theory is something more than just static theory, over and over 5 00:00:32.440 --> 00:00:39.000 again Keynes is thinking in highly dynamic terms. 6 00:00:39.000 --> 00:00:44.000 Particularly since the appearance of the general theory, there has grown up a whole pedantic 7 00:00:44.000 --> 00:00:53.640 literature about period analysis, rates of change analysis, and comparative statics analysis. 8 00:00:53.640 --> 00:01:01.640 This last is supposed to investigate the response of a system to changes in given parameters. 9 00:01:01.640 --> 00:01:09.640 Perhaps a word or two would not be out of place at this point about this obsession with methodology. 10 00:01:09.640 --> 00:01:24.640 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. 11 00:01:24.640 --> 00:01:35.640 This disparagement of the static and love of the dynamic long precedes the appearance of the general theory in 1936. 12 00:01:35.640 --> 00:01:52.640 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. 13 00:01:52.640 --> 00:02:11.640 Much 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. 14 00:02:11.640 --> 00:02:23.640 In economics, at all events, the great emphasis on the contrast between the two methods rests in large part on a misunderstanding. 15 00:02:23.640 --> 00:02:31.640 Economic analysis, even among the early classical economists, was to some extent dynamic. 16 00:02:31.640 --> 00:02:39.640 It is hard to think, in fact, of an important example of strictly static analysis. 17 00:02:39.640 --> 00:02:47.640 Such an analysis would merely portray economic relationships at a given instant of time. 18 00:02:47.640 --> 00:02:58.640 It would resemble a single snapshot. Even the analysis of the early classical economists was much closer to a motion picture. 19 00:02:58.640 --> 00:03:04.640 It devoted itself to explaining how and why changes took place. 20 00:03:04.640 --> 00:03:18.640 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. 21 00:03:18.640 --> 00:03:28.640 The concept of the stationary state did not profess to give a picture of the economy at a frozen instant of time. 22 00:03:28.640 --> 00:03:54.640 It 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. 23 00:03:54.640 --> 00:04:07.640 The modern concept of the stationary economy at all events is a concept that envisages change, but change within certain constants. 24 00:04:07.640 --> 00:04:19.640 The stationary economy is one which does not grow and does not shrink, which does not on net balance either accumulate or consume capital, 25 00:04:19.640 --> 00:04:29.640 which is not subject to booms or depressions, in which prices and wages and the relative size of industries do not change, 26 00:04:29.640 --> 00:04:38.640 but in which nonetheless, manufacturers constantly buy new raw materials as they sell furnished products, 27 00:04:38.640 --> 00:04:45.640 and in which production, employment, buying and consumption go steadily on. 28 00:04:45.640 --> 00:04:53.640 Ludwig von Mises has more appropriately called this the evenly rotating economy. 29 00:04:53.640 --> 00:05:07.640 In the evenly rotating economy, the daily round and the seasonal or annual round of production and consumption and capital replacements are endlessly repeated. 30 00:05:07.640 --> 00:05:21.640 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. 31 00:05:21.640 --> 00:05:31.640 In any case, no good modern economist ever mistakes such concepts for descriptions of any actual economy. 32 00:05:31.640 --> 00:05:45.640 Some 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. 33 00:05:45.640 --> 00:06:02.640 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. 34 00:06:02.640 --> 00:06:17.640 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. 35 00:06:17.640 --> 00:06:30.640 It is a concept, a tool of thought, a postulate, an imaginary construction, or, to use a word which is becoming increasingly fashionable, 36 00:06:30.640 --> 00:06:45.640 It is necessary to frame such postulates, such imaginary constructions in order to study their implications and deduce their hypothetical consequences. 37 00:06:45.640 --> 00:06:58.640 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. 38 00:06:58.640 --> 00:07:14.640 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. 39 00:07:14.640 --> 00:07:30.640 This method of setting up postulates, imaginary constructions, simplified models and studying their implications and hypothetical consequences is the main tool of modern economic analysis. 40 00:07:30.640 --> 00:07:32.480 Analysis. 41 00:07:32.480 --> 00:07:39.800 We begin, say, by setting up a model of a stationary or evenly rotating economy, and 42 00:07:39.800 --> 00:07:45.880 drawing the deductions and consequences that follow from this simplified model. 43 00:07:45.880 --> 00:07:53.800 Next, say, we set up a model of a changing economy, a shrinking or an expanding one, or 44 00:07:53.800 --> 00:08:00.800 or one in which the relative size of individual firms or industries is changing. 45 00:08:00.800 --> 00:08:11.800 Next, perhaps, we study an economy in inflation and deflation, and finally, perhaps, we study the business cycle. 46 00:08:11.800 --> 00:08:20.800 In other words, we make a series of postulates or imaginary constructions beginning with the most simplified 47 00:08:20.800 --> 00:08:25.800 and moving on to the more complex and more realistic. 48 00:08:25.800 --> 00:08:32.800 Despite the enormous recent literature which implies or explicitly states the contrary, 49 00:08:32.800 --> 00:08:41.800 there is no difference in kind between the methods of static analysis and the methods of dynamic analysis. 50 00:08:41.800 --> 00:08:47.800 There is merely a difference in the specific hypotheses made. 51 00:08:47.800 --> 00:09:06.800 Static 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. 52 00:09:06.800 --> 00:09:12.800 We then study the necessary implications or consequences of this hypothesis. 53 00:09:12.800 --> 00:09:25.800 In dynamic analysis, we successively assume that two things, then three things, then four things, then N things change. 54 00:09:25.800 --> 00:09:34.800 The more complicated dynamic hypotheses are not necessarily superior to the simpler static ones. 55 00:09:34.800 --> 00:09:44.800 The appropriateness or utility of the hypothesis we use depends mainly on the particular problem we are trying to solve. 56 00:09:44.800 --> 00:09:57.800 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. 57 00:09:57.800 --> 00:10:17.800 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. 58 00:10:17.800 --> 00:10:20.800 This is self-deception. 59 00:10:20.800 --> 00:10:26.800 No doubt there are enough symbols in the Latin and Greek alphabets to go around, 60 00:10:26.800 --> 00:10:36.800 but there is likely to be considerable question about the quantitative determinateness of the concepts for which the symbols stand. 61 00:10:36.800 --> 00:10:43.800 Even after the algebraic solution of these complicated hypotheses is arrived at, 62 00:10:43.800 --> 00:10:55.800 It will be very doubtful whether real, rather than merely hypothetical, numerical values can be attached either to the symbols or the results. 63 00:10:55.800 --> 00:11:18.800 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. 64 00:11:18.800 --> 00:11:33.800 The 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. 65 00:11:33.800 --> 00:11:44.800 It is a mistake to believe that we can skip over all static assumptions for the superficial reason that such assumptions are unreal. 66 00:11:44.800 --> 00:12:05.800 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. 67 00:12:05.800 --> 00:12:16.800 In order to understand the consequences of dynamic assumptions, we must first of all understand the consequences of static assumptions. 68 00:12:16.800 --> 00:12:25.800 The method of science is that of experimental or, when that is impossible, hypothetical isolation. 69 00:12:25.800 --> 00:12:54.800 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. 70 00:12:54.800 --> 00:13:11.800 The 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. 71 00:13:11.800 --> 00:13:19.800 It disdains a method that is indispensable in order to embrace a method that is inappropriate and illegitimate. 72 00:13:19.800 --> 00:13:25.800 But to the fallacies of mathematical economics we shall return later. 73 00:13:25.800 --> 00:13:38.800 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, 74 00:13:38.800 --> 00:13:46.800 which is commonly cited as preeminently a static concept, is in large part dynamic. 75 00:13:46.800 --> 00:14:08.800 It 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. 76 00:14:08.800 --> 00:14:19.800 The very terms equilibrium and disequilibrium, statics and dynamics are derived from physical and mechanical analogies. 77 00:14:19.800 --> 00:14:29.800 The most frequent examples chosen to illustrate the meaning of static equilibrium in economics are water tending toward its level, 78 00:14:29.800 --> 00:14:39.800 A swinging pendulum tending toward a state of rest, or marbles coming to rest against each other at the bottom of a basin. 79 00:14:39.800 --> 00:14:56.800 But 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. 80 00:14:56.800 --> 00:15:13.800 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. 81 00:15:13.800 --> 00:15:24.800 But when we are considering the process by which an equilibrium is established, we are not in the field of statics but of dynamics. 82 00:15:24.800 --> 00:15:45.800 What 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. 83 00:15:45.800 --> 00:15:50.800 In particular cases, such criticisms may be quite valid. 84 00:15:50.800 --> 00:15:59.800 But if we try to solve any economic problem by assuming nothing as given and everything as variable, 85 00:15:59.800 --> 00:16:06.800 the world becomes simply a chaos, a big blooming buzzing confusion. 86 00:16:06.800 --> 00:16:15.800 Fortunately, the economist is commonly able to do in thought what the physicist is often able to do in fact. 87 00:16:15.800 --> 00:16:33.800 To 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. 88 00:16:33.800 --> 00:16:38.800 Appendix on User Cost 89 00:16:38.800 --> 00:16:47.800 Chapter 6 of The General Theory begins with a few paragraphs about Keynes's concept of user cost. 90 00:16:47.800 --> 00:16:58.800 It goes on to discuss the general concept of income, a discussion which is again interrupted by an 8-page appendix on user cost. 91 00:16:58.800 --> 00:17:06.800 The appendix on user cost is technical, needlessly obscure and a digression. 92 00:17:06.800 --> 00:17:10.800 Few Keynesians give it much analysis. 93 00:17:10.800 --> 00:17:24.800 Alvin H. Hansen, indeed, tells us that the whole section on income, general theory pages 52 through 61 and pages 66 through 73, 94 00:17:24.800 --> 00:17:33.800 is of no great importance for an understanding of the general theory and might quite well be omitted if the student so wishes. 95 00:17:33.800 --> 00:17:47.800 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. 96 00:17:47.800 --> 00:18:00.800 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. 97 00:18:00.800 --> 00:18:11.800 Keynes begins, pages 52 through 54, by throwing at the reader a complicated set of arbitrary algebraic symbols, 98 00:18:11.800 --> 00:18:22.800 with a slapdash and inadequate explanation of what they stand for, and almost no explanation of why they are necessary at all. 99 00:18:22.800 --> 00:18:27.800 It is not until the second half of this appendix that he tells us, 100 00:18:27.800 --> 00:18:33.800 We have defined the user cost as the reduction in the value of the equipment 101 00:18:33.800 --> 00:18:37.800 due to using it as compared with not using it. 102 00:18:37.800 --> 00:18:39.800 Page 70 103 00:18:39.800 --> 00:18:47.800 This definition, which has not in fact been put in this simple and direct form until this point, 104 00:18:47.800 --> 00:18:52.800 should have been at the very beginning of the exposition. 105 00:18:52.800 --> 00:18:58.800 Dudley Dillard has paraphrased it still more simply and compactly. 106 00:18:58.800 --> 00:19:07.800 The loss of value resulting from using equipment rather than not using it is called the user cost. 107 00:19:07.800 --> 00:19:09.960 Cost 108 00:19:09.960 --> 00:19:16.100 The importance of this concept for Keynes's theory is that the entrepreneur is supposed 109 00:19:16.100 --> 00:19:23.360 to have to take this factor into consideration when he decides how many men to employ. 110 00:19:23.360 --> 00:19:25.660 No doubt he does. 111 00:19:25.660 --> 00:19:33.620 But this user cost is usually so small in comparison with total depreciation and maintenance 112 00:19:33.620 --> 00:19:48.620 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. 113 00:19:48.620 --> 00:19:58.620 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. 114 00:19:58.620 --> 00:20:08.620 But if such a special name is needed, a more natural term such as using cost would perform the function better. 115 00:20:08.620 --> 00:20:17.620 Alfred Marshall, indeed, has put this cost under the simple heading of extra wear and tear of plant. 116 00:20:17.620 --> 00:20:28.620 Marshall is right, despite Keynes's protests, when he does little more than mention this in a discussion of prime and supplementary costs. 117 00:20:28.620 --> 00:20:33.620 A. C. Pigot is also right when he assumes that 118 00:20:33.620 --> 00:20:53.620 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. 119 00:20:53.620 --> 00:21:09.620 Keynes 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. 120 00:21:09.620 --> 00:21:29.620 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. 121 00:21:29.620 --> 00:21:51.620 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. 122 00:21:51.620 --> 00:22:07.620 The 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. 123 00:22:07.620 --> 00:22:22.620 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. 124 00:22:22.620 --> 00:22:34.620 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. 125 00:22:34.620 --> 00:22:51.620 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.