The Rate of Interest, and Other Essays

The Rate of Interest, and Other Essays

The Rate of Interest, and Other Essays

The Rate of Interest, and Other Essays

Excerpt

The theme of these essays is the analysis of a dynamic economic system. The characteristic of a dynamic analysis, in the sense intended here, is that it cannot explain how an economy behaves, in given conditions, without reference to past history; while static analysis purports to describe a position of equilibrium which the system will reach (or would reach if the given conditions remained unchanged for long enough) no matter where it started from.

Short-period analysis is concerned with the equilibrium of a system with a given stock of capital and with given expectations about the future. Past history is thus put into the initial conditions, so that the analysis is static in itself, and yet is part of a dynamic theory. (This explains the paradox that although Keynes' General Theory is strictly static in form, it has opened the way for a great outburst of analysis of dynamic problems.)

We have all been studying dynamic economics all our lives, for no one can refrain from reflecting, from time to time, on actual economic events, and actual events are always dynamic. Only in the scaled vacuum of the classrooms where equilibrium theory is taught can static problems be discussed, and even there the outside air is always leaking in. Most of the results of the following analysis are therefore obvious and familiar. It seems, however, worth while to try to connect the familiar problems with the classroom analysis, for so long as the analysis is static and the problems dynamic the two are for ever at cross-purposes.

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