Prosperity and Depression.pdf

Chap. I Preliminary Remarks 9It has been attempted to give more precision to the distinctionbetween exogenous and endogenous theories by saying that theformer assume movements in the data, while the latter supposethe data to remain constant.! This distinction is precise enoughonce the general theoretical system on which a writer builds histheory of the business cycle has been determined and accepted;but it is not possible to lay down beforehand once and for all whatphenomena are to be regarded as accepted data and what aremagnitudes to be explained and determined in the light of thosedata. What the theory of yesterday accepted as data, we try toexplain to-day; and the independent variables (data) on whichwe build to-day may become dependent variables to-morrow.All attempts to make a definite distinction between data and resultslead back to the earlier conception which regards forces or movements'ofa " non-economic" nature or " external " to the economicsystem as the" data" of economic theory. But this distinctionbetween "economic" and "non-economic" phenomena is apurely conventional onc. There is no reason why forces or movementsnot to be classified as economic should not become " dependent"or " explained" variables of a general-as distinct froman economic-theory.With very few exceptions, all serious explanations are neitherpurely exogenous nor purely endogenous. In almost all theories,both the " originating factors " and the " responses of the businesssystem)) (to use the expression of J. M. CLARK2) play a role.On the one hand, a purely exogenous theory is impossible. Even ifone assumes a weather cycle, the peculiar response of the businesssystem, which converts harvest variations mto a general alternationofprosperity and depression, has still to be explained. On the otherhand, a purely endogenous theory is hardly satisfactory. It isnot likely that, without outside shocks, a cyclical movementwould go on for ever : and, even if it did go on, its course wouldcertainly be profoundly influenced by outside shocks-that is, bychanges in the data (however these may be defined and delimitedby economically explained variables).1 See especially Tinbergen: "Suggestions on Quantitative BusinessCycle Theory" in Econometrica. Vol. III, NO.3, July 1935, page 241 •J See his book : Strategic Factors in the Business Cycle, passim.