Prosperity and Depression.pdf

AnalYsis of TheoriesPart ITo explain the business cycle, or any change of the economicsystem over time, we need either a law about a (cyclical) change incertain data or a dynamic theory. In the first case, we speak ofan " exogenous" theory of the cycle. (See Chapter I.) Theparadigma is the weather theory of the cycle. But explanationsof this sort can be discarded at once as insufficient.By a dynamic theory, we mean" a theory that explains how onesituation grows out of the foregoing. In this type of analysis, weconsider not only a set ofmagnitudes in a given point of time andstudy the interrelations between them, but we consider the magnitudesof certain variables in different points of time, and weintroduce certain equations which embrace at the same time severalof these magnitudes belonging to different instants."l We mayalso say that a theory is dynamic, if a magnitude is explained byanother relating to an earlier (or, more generally, to another)point of time. In still other words : if there are lags in the causalnexus. If we say, for instance, that the volume of production (ofa particular commodity or of commodities in general) is governedby .the relation of cost and prices, we obviously must allow for acertain lag : cost and prices to-day govern production to-morrow.The acceleration principle is a dynamicrelationship: investmentis explained by a previous change in demand for the product.The" multiplier relationship" may be formulated dynamically, byallowing a time-lag between investment and the resulting increasein consumption demand. (In Mr. KEYNES' system, it will berecalled, it is a timeless terminological rule; only incidentally aresome remarks made about the probable change of the value ofdetail the process of transition from one equilibrium to the other (e.g.,in Marshallian manner, by distinguishing between short- and longperiodeffects) marks the first step towards a " dynamisation " of statictheory. For it leads inevitably to the recognition of the fact that, as theresult of certain reactions, the process of transition, and hence the finalequilibrium, may be different. It also suggests that, after a given changein the data, a stable position will be reached only under special assumptions(stability conditions), which cannot be taken for granted withoutcareful analysis.1 Frisch, loco cit., page 171. Tinbergen formulates : U A theory [iscalled] , dynamic' when variables relating to different moments appearin one equation" (loc. cit., page 241).