Marx, Classical Political Economy and the Problem of Dynamics - Henryk Grossman 1941
The second characteristic feature of the dominant theories since Classical economics (the first was their one-sided view of the valorisation process) is their static character. No one disputes the static nature of the theory of the Physiocrats, the discoverers of the 'economic circuit' (the "Tableau Economique"). The theories of Smith and Ricardo are both similarly static. All of their categories are based on the concept of an equilibrium, in which 'natural price (value) asserts itself as an ideal resting point of economic activity, around which market prices oscillate. As a result, there is no room for crises in Ricardo's theory: such things figure as eventualities introduced from the outside (wars, bad harvests, state intervention etc.). In itself the economic circuit always moves in equilibrium, and always follows the same paths. The eventual deceleration and cessation of capital accumulation which Ricardo forecast for the distant future must be characterised as mere pseudo-dynamics, as the dynamic factor is not inherent in the economic process itself, but is rather a natural force which influences the economic process from the outside, (falling rate of profit as a consequence of a growing population, and hence increased ground rents).
Ricardo's own followers left matters at this stage. In France, Say's theory of markets, that is the doctrine that any supply is simultaneously a demand and consequently that all production, in producing a supply, creates its own demand, led to the conclusion that an equilibrium between supply and demand is possible at any time, and at any level of production. But this implies the possibility of the unlimited accumulation of capital and expansion of production, as no obstacles exist to the full employment of all the factors of production.
Although John Stuart Mill was the first to attempt to give consideration to the dynamic character of the economy, through differentiating between statics and dynamics, this division of the object of science, which he derived from mechanics, proved fatal in the later development of political economy. Mill's analysis was utterly static in nature. After first having analysed the economic mechanism in a static state (with constant population, production, amount of capital and technology), and investigating its laws, he subsequently sought "to add a theory of motion onto the theory of equilibrium - to add the dynamics of the economy to its statics".
A certain number of corrections were made to the static picture: population growth, growth in capital etc., as if such subsequent retouching could serve to remove the essentially statically conceived character of the essence of the economic system; as if in fact there were two capitalisms-a static one and a dynamic one. But if capitalism is dynamic, what is the point of investigating the laws of an imaginary static economy, if one does not at the same time show how the transition from statics to dynamics is to take place?
As theories of equilibrium, the dominant theories cannot, on their own principles, derive generalised crisis from the system, as in their view prices represent an automatic mechanism for the restoration of equilibrium and for overcoming disturbances. Any attempt by these theories to include one of the empirically proven moments of disturbance in their system would necessarily come to grief on this fundamental contradiction: a consistent application of the arguments of equilibrium theory (which they use) can only explain such disruptions of the equilibrium as being externally produced, i.e. by changes in what is economically given. As far as the theories of equilibrium are concerned the economy will always tend in one direction following changes in these givens: by adjustment - i.e. a tendency towards the creation of a new equilibrium. How crisis can arise in such a system is difficult to see.
The theory of Alfred Marshall (1880), who tried to link Classical theory to marginal utility theory, is also decidedly static in construction. Although he investigates the movements of a developing society, these merely constitute an external framework of analysis. His sole concern is with the adjustment of the economy to changing external variables, such as population, capital, etc., but not with those developments which arise from the economy itself. Marshall's economy is totally lacking in development. At the centre of his system lies the concept of a general equilibrium which asserts itself throughout the economic mechanism; the attainment of equilibrium signals the fact that no further changes will take place. This basic idea is then applied to individual problems. Equilibrium is not a heuristic device in the construction of theory, but a tendency which seeks to assert itself in reality.
The whole system is governed by the idea of a general state of equilibrium (maximum of satisfaction), which the economy, under perfect competition, strives to achieve. Marshall only arrived at this static picture thanks to his inadequate method, for, despite his "General Theory of Equilibrium", he does not provide any theory of the system as a whole, where all the sub-markets and the process of production are dealt with simultaneously, i.e. where all the interrelationships in the system as a whole are grasped. What Marshall in fact offers is a theory of particular (partial) equilibria in sub-markets, where the issue at hand is that of the relations between already existing economic givens: for example, in the determination of the level of price given the curves for supply and demand, or the determination of the supply curve, given quantities and prices. In the light of this H.L. Moore, quite correctly, characterised Marshall's method of study as "static and limited to functions of one variable". J.B. Clark, the influential American theorist of a generation ago, did, in Schumpeter's view, "take one basic step further than Mill's standpoint, which carefully defined the static state... He also energetically put forward the postulate of a specific theory of 'dynamics'. But this remained as a "postulate". In resignation Clark says of dynamics: "But the task of developing this branch of science is so large that the execution of it will occupy generations of workers.' In reality what Clark offers is a picture of an imaginary static economy: year after year the mass of workers employed and the number of capitals remain unchanged, along with the tools and techniques of production. No shifts of capital or labour take place from one branch of production to others, and consumer demand also remains constant. The principle of distribution is then investigated under these assumptions; this shows how prices, wages and interest on capital are formed in a static situation: commodities are sold at their "natural" i.e. cost price, so that manufacturers do not obtain a profit. Clark admits: "This picture is completely imaginary. A static society is an impossible one". "Actual society is always dynamic... industrial society is constantly assuming new forms and discharging new functions." But he draws no conclusions from this observation. Clark considers that static forces, isolated in this way, do nevertheless possess real meaning: they are constantly at work in the dynamic world as a fundamental component force, and indicate real tendencies. But there is still more to come. Despite the fact that he stressed the "hypothetical" character of the "static state", and despite all his references to the dynamic essence of reality, Clark almost totally abandoned dynamics in his later principal work, Essentials of Economic Theory (1915), where he adopts a static picture of the economy and society. The static model asserts itself in a competitive economy - although not in an ideally pure form. As long as there is free competition, "the most active societies conform most closely to their static model'. The situation is much the same in contemporary society (with imperfect competition). It is in fact precisely the capacity for movement which the elements of the real economy possess, which enables a static state to be attained so much more quickly than if these elements were less responsive. The "normal" (static) form asserts itself more effectively in the highly industrialised society of North America than in the rigid societies of Asia. "The static shape itself, though it is never completely copied in the actual shape of society, is for scientific purposes a reality". In short, "static influences that draw society forever toward its natural form are always fundamental and progress has no tendency to suppress them". Exactly what the "dynamic" character of the economy consists in, and how disturbances can arise, has not been revealed by Clark. He presents "dynamic" development, with its rapid changes in the economic organism, as a temporal succession of different static states.
This static character becomes even more pronounced in the pure theory of marginal utility. Dynamic change in the structure can hardly be reconciled with a construct which presupposes that production is directed by consumers (demand), and that the economy can be reduced to subjective choices between different subjective uses. Structural changes are merely external facts, which the theory takes as presuppositions: but it does not study them or explain how and why they arise. Schumpeter could therefore note that "the great reform of theory through the subjective doctrine of value left the static nature of its system untouched... In fact, the static character of theory gained substantially in rigour and clarity as a result of the new analysis".
As Roche-Agussol confirmed, the main object of analysis of marginal utility theory was an "essentially static problem" -namely the valuation and distribution of goods "at a given stage of the means for satisfying needs, and of needs themselves". The introduction of movement through time had to lead to the breakdown of this theory, even from its own standpoint, as it offered no way of predicting future needs and means for satisfying these needs. Fully conscious of this fact, Menger declares: "The conception of theoretical political economy as a science of the developmental laws of the economy is utterly monstrous. It is tangible proof of the aberrations of judgement'. The theory expounded by W.S. Jevons, the other founder of the theory of marginal utility, is also decidedly static: Jevons operates with concepts borrowed from the science of mechanics (such as "infinitely small quantities") which he uses as a basis on which to erect his theory. "The laws of exchange resemble the laws governing the equilibrium of a lever, as they are both determined by the principle of virtual velocities'. Although Jevons knows full well that all economic phenomena are in motion, and must, therefore, be dealt with in units of time, in Chapter III of his book he manages completely to exclude the time factor from his analysis by recourse to a methodological dodge. Right from the outset he dispenses with the idea "of a complete solution to the problem in its entire natural complexity" (that would be "a problem of movement or dynamics") and confines his analysis to "the purely static problem" of establishing the conditions under which exchange ceases and equilibrium is achieved.
The marginal utility school has retained this character up until the present day: for reasons of space we have to restrict ourselves to a few typical examples.
F.H. Knight, for example, although acknowledging that history never ceases and that "the evolution to other forms of organisation as the dominant type" is inherent in capitalism, thinks that "such a social development falls outside the scope of the economic theorist", as the notion of equilibrium cannot be applied to such changes. He refers the study of these changes to the science of history and comes to the conclusion, "that economic dynamics, in the sense which this expression should have in order to be applicable (in economic theory), does not exist. What is specified as being dynamics in it should be named revolutionary or historical economic theory. Ewald Schams' view does not differ substantially from this. He considers that economics is a theory of "economic quantities", and that an understanding of the relations between variables and dependent variables necessarily requires the functional formation of appropriate concepts, and the construction of equations. However, since the functional theory of relations, as is now admitted, is necessarily static, since it investigates merely the relations between given quantities, Schams arrives at the conclusion (despite recognising the dynamic nature of the capitalist economy), that, since we do not possess a specifically dynamic conceptual apparatus, which could capture dynamic changes, we must work with a static conceptual apparatus.
Mathematical economic theory, as a theory of relations, has no more possibility of development than geometry. Quite independently of whether "there is a stationary reality or simply an economy in complete motion", "logically defined statics will remain a presupposition". Schams therefore directs his criticism at the two-fold division of theory into statics and dynamics. "Any quantitative economic theory is completely static." Economic movement can only be understood as the succession and comparison of various static states of equilibrium, as "comparative statics", "the comparison of the two states of dependent variables over a certain interval of time'.' There can be no specific dynamic problems within mathematical economic theory, but, at most, theoretical problems which are no longer questions of mathematics; that is, theories relating to the development of economic realities. But these lie outside the scope of economic theory.
The knowledge that the grasping of a number of interdependent movements and non-equivalent relations cannot be accomplished mathematically, has clearly led one part of the dominant theory to indulge in an intensified struggle against attempts to make theory more dynamic, and to a renaissance of static theories of equilibrium. In Conrad's view, an economy which does not possess a central management is a "self-regulating mechanism, which seeks a state of rest, i.e. seeks to assume a uniform movement". The essence of "self-regulation" consists in the "mechanism being steered towards a stationary position" - "something which is never achieved, but which is the sole reason why an economy which lacks a unifying central management does not fall into chaos". Conrad knows full well that there are crises and disturbances which cannot be regarded as movement towards a state of rest. The presupposition of the tendency towards equilibrium is therefore "that the regulative apparatus functions correctly (sic! H.G.)". If this is not the case, "then it is possible that the approach to the state of rest may be constantly impeded".
Conrad believes that movement is a succession of states of rest: he does not try to conceptualise the states of non-rest between each of these states. Alexander Bilimovic concedes that up to now theory has merely succeeded in determining the equilibrium equations for a stationary economy, but not for a dynamic one. This explains why "the schemes which have predominated up to now do not correspond to economic equilibrium in the real world". Despite this, these schemes are held to be capable of improvement, and Bilimovic hopes that it may be possible to construct a mathematical "model" which does not only apply to a stationary economy, as in his view the lack of success of previous attempts to make the stationary schemes dynamic cannot be attributed to any inherent fundamental defect.
Is this two-fold division of theory not reminiscent of a similar plan expounded by Mill? And is it not also destined to remain just as barren as Mill's, in view of the fact that no bridge can lead from "statics" to "dynamics", especially not if this "dynamics" is conceived of as a succession of stationary states. For these are successive static states -states which were otherwise singled out for their persistence. The static mode of thought is unable to explain the development of new successive states precisely for the reason "that the equilibrium of static analysis does not allow for growth, that this analysis can only describe an expanding system in terms of successive states of equilibrium with the intervening stages of transition left, and left with danger to the validity of the argument, unanalysed".
These difficulties only really begin to arise when statics are no longer regarded as a real tendency but as a heuristic device, as there is even less of a bridge from this hypothetical situation which can lead to a reality moving through states of disequilibria. "If the economic cycle's entire course is one of disequilibrium -neither cumulative downwards nor upwards -what is the point in regarding particular states of equilibrium as the point of departure or point of intersection of this movement?" If one proceeds from the assumption of a static equilibrium, then the entire problem of dynamics is reducible to that of the factors which "disturb" this supposed state. This can be seen in the work of Haberler, for example, who considers that there is an inherent tendency towards equilibrium in the economic system. As far as he is concerned, the only fact which requires explanation in the course of the economic cycle is recession, "the long swing in the negative direction", but not the upswing, "since the upward movement, the approach to full employment, might be explained as a natural consequence of the inherent tendency of the economic system towards equilibrium".
More recently still, the number of critics of the concept of "the stationary state" as a superfluous, because economically unreal concept, has multiplied among certain sections of bourgeois theory. As Hicks says, this group is forced to admit that, "the actual state of any real economy is never in fact stationary; nevertheless, stationary-state theorists naturally regarded reality as 'tending' towards stationariness; though the existence of such a tendency is more than questionable". "The stationary theory itself gives no indication that reality does tend to move in any such direction." Still more, Hicks holds the concept of a stationary economy directly responsible for holding back the development of economics, because it neglected problems of dynamics.
We can deal with the mathematical tendency quite briefly, as our concern is not to present an exhaustive critique of this school, but rather to bring out its static character. "No presentation is more static than that of Leon Walras." As a memorial tablet in the Lausanne Academy reads, Leon Walras was famed as the theorist "who first determined the general conditions of economic equilibrium". According to Walras, the economy can be compared with a lake whose waves may well be occasionally whipped up by a storm, but which subsequently subsides to form a new equilibrium on its surface. Although the economic disturbances to general equilibrium spread throughout the entire economic system, Walras simply regarded them as oscillations, whose amplitude falls over time until equilibrium is restored. He does not ask whether perhaps such a static case is impossible to realise. On the contrary, Walras is convinced of the possibility of obtaining permanent equilibrium. "In order to be able to quell or prevent crises it is necessary to know the ideal conditions of equilibrium."
The same can be said of Pareto. Hicks calls Pareto's "Manual"; "the most complete static theory of value which economic science has hitherto been able to produce". Pareto distinguishes three areas of research: the theory of statics, which represents the most developed part of economic theory: the theory of successive equilibria -"there are only very few ideas on the theory of successive equilibria": and finally the theory of dynamics, which is concerned with the investigation of the movement of economic phenomena -"except for the specific theory of economic crises nothing is known of dynamic theory". Pareto himself contributed nothing to the investigation of dynamics, and in fact retarded it through his assumption that the above three-fold division of research actually corresponded to reality; his sole concern was with statics. His central, in fact his only, concern was that of equilibrium to which he devoted Chapters III-VI of his book; he never once indicates the bridge which leads from statics to dynamics. Pareto underscores the significance of Walras's equations for economic equilibrium, and allots them an analogous role to that of Lagrange's equations in mechanics, in that he saw reality as a system of "continual oscillations around a central point of equilibrium", and considered this centre of equilibrium to be a moving one. Pareto never posed the question as to whether the concept of economic movement is compatible with that of equilibrium, and in fact excluded it by the insupportable assumption that all economic phenomena share a simultaneous and uniform rhythm.
This static tendency in Pareto's theory can be understood if one considers that his sole concern was with the relations between already existing values in the market-or in Pareto's later formulation with choices between existing combinations of indifference. In his view equilibrium is achieved if two persons possessing a certain number of goods exchange them with each other on the market until the point where, with the approval of each of the parties, no further exchange is possible. The state of equilibrium which is thus attained can therefore be defined as "a state which will maintain itself indefinitely", if no changes in the conditions take place or if these changes are so slight that the system "tends to re-establish itself and return to its original state".
Pareto employs the concepts of "statics" and "tendency to equilibrium", which are borrowed from mechanics, without looking to see whether they make sense in economics. The static character of his theory lies in his much-vaunted method of the general interdependence of all economic variables, the essence of any functional method of study, which was regarded as a modern miracle for a long time, and which dispenses with genetic explanation; it shows simply the relations between already given economic variables (be they utilities or indifference possibilities), but not the capacity of the system for movement, the development of these variables, and hence the direction in which the system is moving. If one wants to do this, it is necessary to look at the process of production as the source of all changes in "economic variables": but this was excluded from Pareto's analysis from the outset. Although Hicks thinks that Pareto's exchange equations could be extended to production processes, given certain corrections, he makes the reservation that they would only be valid for a stationary economy in which there was no accumulation of capital, and no other changes in the given world (Hicks says no net savings). But this makes Pareto's equations, as Hicks admits, "remote from reality'. "They are not a depiction of reality'.
As early as 1846, in his polemic against Proudhon, Marx wrote, "The relations of production of any society constitute a whole". The same authors who stress the "general interdependence" of all economic variables and reject methods which seek to isolate and explain individual groups of phenomena from the process of economic life, themselves break this totality down into individual sectors, into market phenomena separate from the sphere of the labour process, and make this artificially separated sphere of exchange the main object of their analysis. Pareto arrived at "equations for equilibrium" by dealing with the functional connection between given market variables and excluding the dynamic factor of the production process or, in other words, by accomplishing the "complete dedynamising of the system".
The above example also shows how matters stand as far as the precision of the mathematical method is concerned, the method used to construct the system of equilibrium equations. This precision has no relation to the content of the findings of economic science, but is rather a feature of the techniques of mathematical calculation. Despite the precision of these operations, the mathematical method can be a source of very great error, precisely because of the assumptions which underlie the equations, and which in turn determine the value of the knowledge which this method yields.
In its youthful enthusiasm, the mathematical school (Walras, Marshall, Edgeworth, Pareto and Boehm-Bawerk) believed it could measure everything and constructed a set of equations for equilibrium, behind which lay the assumption that utility is -in principle -measurable, or would be measurable if we had enough knowledge at our disposal. After one generation a more sober assessment was made. It was generally acknowledged, a fact only objected to by a few at the very beginning, that utility, as a psychological variable, cannot be measured and subjected to mathematical operations. But if marginal utility is immeasurable, then so is aggregate social utility, and hence all the "equilibrium equations" which are constructed on this unreal basis are irrelevant. The critique of the marginal utility theory, which was originally made only by opponents of the mathematical school, was now practised by its supporters and led to the dissolution of the school. However, the breakdown of marginal utility theory did not lead to the abandonment of equations for equilibrium, but rather to efforts to construct them on another basis. In his 'Manual' Pareto took recourse in the concept of "ordinal" indifference curves: he intended to use this as a basis, supposedly taken from experience, on which to construct a theory of preference and its "equations for equilibrium". Criticism proved the untenability of this theory by showing up the arbitrary nature of the assumptions behind the equations. The procedure employed by the mathematical school presupposed the infinite divisibility of goods, and the unlimited substitutability of the various goods (e.g. nuts instead of apples), in the satisfaction of needs; this created a gulf between the premises on which the indifference curve were based and those of reality. The assumption of the infinite substitutability of goods leads to the most absurd conclusions when elevated to the status of a universal principle. For example, in the everyday consumption combination of bread and wine, a very little, or even a minimum, amount of bread can be "substituted" for by a lot of wine, or increasingly smaller amounts of meat by more and more salt. These absurd results, and the indifference curves derived from them, along with the demand curves, price relations and positions of equilibrium, are not an approximate mirror of reality, but "in fact a grossly distorted picture of reality".
If one considers the fact that for the solitary individual and the few commodities at their disposal, there are an infinite number of possible combinations of indifference, one can see that if there were 40 million people and several thousand different types of commodities, "the time and energy of a whole generation would not suffice" to collect the incalculable amount of information needed to construct the hundreds of billions of indifference combinations. And the time and energy of further generations would never suffice to solve the equations which were constructed on this basis.
The post-1918 monetary theories of crisis which spread in the 1920s are also static in nature: these were predominantly the Wicksellian, and neo-Wicksellian, efforts to overcome the business cycle and stabilise the economy, the value of money, and world prices, in a purely monetary way by means of the regulation of interest rates by the central banks. Although Wicksell conceded that "in principle" the real causes of crisis stem from the commodity, this in fact plays no role in his thought as, in his view, the connection of the economy with credit had produced a shifting of the centre of gravity of the economic system towards the monetary side. An appropriate regulation of interest rates would cause "the real moment which produces crisis" to cease working and become reduced to "a gentle swell". This is meant to apply not only to individual countries, but in fact predominantly to the world economy as a whole. It would then be simply a matter of the central credit organisations regulating their interest rates up and down in such a way "so that the international balance of payments remains in equilibrium, along with the general level of world prices, which should remain constant". It is precisely this static conception of the economy which is hailed by Hayek as "the most important basis of any future monetary theory of the economic cycle". And in fact this concept does indeed underlie all the monetary theories of crisis (Irving Fisher and R.G. Hawtrey). For the latter economic fluctuations are not of necessity bound up with the essence of the capitalist mechanism, "but rather arise because of the world-wide restriction of credit".
The cycle of crises is consequently "a purely monetary phenomenon", and changes in economic activity, "the alternation of prosperity and depression", have as their sole cause "the changes in the flow of money". "If the flow of money could be stabilized, the fluctuations in economic activity would disappear", and prosperity could continue indefinitely, and without limit. It was the pressure of the great crisis of 1900-01, and then the economic disturbances of the post-1918 period which began to produce doubts within the dominant theory as to the correctness of the static conception. More attention was paid to the problem of crises, and empirical material began to be collected on past crises. The research institutes which were founded for the purpose of investigating these problems attempted, using this material, to establish the laws of behaviour of the economic cycle. This was the first time that attention was given to the material elements of the production process in addition to the value-aspect, and that the distinction between the production of means of production and the production of means of consumption was introduced into economic analysis, stressing their varying roles in the course of the cycle: the specific role of so-called durable "fixed" capital was stressed as a cause of crisis-for example by Spiethoff and Cassel -, emphasis was given to the role of progressive technical improvements, the disproportion between the structure of the various branches of production and the influence of the length of the period of construction on the course of the cycle (Afflation). These attempts turned out to be unsatisfactory as each of the authors simply took one, individual, isolated material aspect of the entire process as the basis of their theory of crisis, which gave these theories an accidental, eclectic character, resting on partial observations. The same can be said of J.W. Clark, R.F. Harrods, and L. Ayres whose most recent attempts use the durability of the means of production as a possible basis for explaining the periodicity itself, and the pronounced fluctuations in the "capital goods" industries, (the accelerator principle). An attempt is made to explain the special problem of crises by means of individual observable correlations: this in fact leads to a severing of the connection with the theoretical basis of political economy, since these theorists feel that the older static theories of crises are less applicable for explaining a dynamic process. However, since, on the other hand, no conclusive dynamic theory in which the material elements are given a proper theoretical treatment has yet been constructed, these more recent investigations of crisis remain as specific theories of a particular branch of economics, lacking a broader theoretical basis.
Only a very small circle within the dominant theory has perceived the lack of a general theory of dynamics. As H. Mayer stated "the unsatisfactory and inappropriate nature of previous theories was felt more and more". Because of their fundamental errors and conceptual apparatus these theories "could not take up and deal with certain problems thrown up by the actual course of economic events", "The evidently dynamic problem of the economic cycle and crises" could not be grasped by the "previous essentially static systems of price theory" because of its "purely static method of study" of the relations of exchange between given economic variables which "merely described already-attained price relations in a state of equilibrium". The problem of the "analysis of movements of economic reality required an insight into the process of the formation of prices". As we showed previously, all these systems dispensed with the search for the overall course of the economic system in a particular direction, i.e. its developmental tendencies, and, in addition, were incapable of doing this as they confined themselves solely to an understanding of the exchange relations between given variables. But these exchange equations show that all the quantities of goods or prices, which the economic subject disposes of are received as additions by others; hence all these increments (plus or minus) add up to zero in the total sum. There is no calculable remainder which could act as an indicator for a particular direction to the course of the system as a whole. Similarly, the relations of exchange of the "economic variables" are not real movements, or processes in time: they are transcriptions of a timeless "movement" -a circular motion.
However, if one wants to discover the particular direction of the overall course of the economy, one must investigate not only the relations of exchange of given variables, but also their development, growth and passing away or (as Mayer says) the process of "price formation". It is insufficient to look at relations of exchange; one must also study the production process as well as the process of circulation, i.e. the process as a whole. It then becomes clear that the positive and negative changes do not balance out to yield a zero, but that they assume definite values (e.g. the falling rate of profit). That is, they reveal the direction of movement of the system as a whole, its developmental tendencies. We can now see how the main task of theory, as Marx characterised it in Capital, namely the investigation of the "economic laws of motion" which was banished from the realm of theory by the marginal utility school, finally appeals in the foreground in the dominant theory too. This was the first time that a small group of theoreticians within the dominant school -Streller, Amoroso, Rosenstein-Rodan, Ricci, Morgenstern, Bode and others - turned, in principle, against the central argumentation behind the equilibrium theories, with its fictitious assumption of a simultaneous rhythm to economic events, criticism of which was meant to be preparation for the basis of a dynamic theory of the economy; this group observes that on the more realistic assumption of a variable rhythm of economic events "it would be a matter of coincidence if an equilibrium was established". The reason for this is that the tendency toward equilibrium is merely a possibility; an alternative is that due to the unsimultaneous rhythm of economic movements, the change of one operation "could bring about other changes: there would be a perpetual series of changes, the time coefficients would never be the same and there would be no equilibrium". Theories of equilibrium would have to prove that this second constellation of time coefficients cannot take place. They have not been able to provide such a proof, and because of their assumption of a simultaneous rhythm in all economic processes, they have blocked the way to an understanding of problems of dynamics.
The "equilibrium system" of the mathematical school only exists by virtue of the fact that it represents "economics without time". "The equilibrium system of the mathematical school, which embraces neither indices nor coefficients relating to time, can in no way capture the real state of equilibrium." The critique of the mathematical school does not single out one particular aspect of the theory or a particular axiom, but rather the theory itself, "as it offers the most precise formulation of one train of thought common to all economic schools, so that its proven defects affect all other formulations all the more acutely". The basic error of theories of equilibrium is not that "they have regarded moving, changing variables as invariable", for if these movements were to share the same duration, if they were equi-temporal, the real course of the economic process could indeed be understood as a series of "successive equilibria", of which each individual state could be defined by a system of equilibrium. However, states Schams, at the moment when the theory proceeds to deal with non-equitemporal movements, i.e. to express explicitly the time factor "t", "one encounters the static system at its weakest point, the assumption of a pseudo- constancy of economic periods". This is because any ranking of the time elements, i.e. varying periods of movement, shatters the equivalence of the relations which constitute the basis of the mathematical system behind the equations, and renders them no longer amenable to a mathematical solution. It is easy to see why there was talk of the failure of economic theory, as it progressively lost all relation to reality. A theory which sees capitalism as a mechanism tending, through "self-regulation", towards equilibrium, is incapable of understanding the economic developments of the last few decades -namely the attempts to establish such an equilibrium through the conscious monopolistic intervention which characterised this period. The dominant theory is therefore faced with a dilemma. Mathematical economics could celebrate its "triumph" as long as it was governed by the idea of equilibrium. However, this failed to explain the dynamic movement of the economy. It regarded these movements as mere "oscillations" around a state of equilibrium or as temporary "disturbances" prior to the attainment of a new equilibrium, whereas reality exhibited long term movements away from equilibrium, in fact towards disequilibrium. The reason why all tendencies within the dominant theory stressed the static character of the economy and its capacity for adjusting to the changing needs of society, for over 100 years -from Ricardo to the present day -has clearly been the need to justify the existing social order as a "reasonable", "self-regulating" mechanism, in the context of which the concept of "self-regulation" was intended to divert attention away from the actually prevailing chaos of the destruction of capital, the bankruptcy of firms and factories, mass unemployment, insufficient capital investment, currency crises, and the arbitrary distribution of wealth. It is only by appreciating this that we can understand why the concepts of "statics" and "dynamics", which originate in theoretical physics, were introduced into economic theory without any discussion as to whether such a two-fold division of theory was justified.
The untenability of such a separation becomes clear when one considers that there are no "non-moving" processes in the economy: that the so-called "stationary" economy "moves", and is a circular process. Hence the characteristic distinguishing feature of statics and dynamics cannot lie in the fact that one of them investigates non-moving, and the other moving and variable phenomena. Rather, we characterise as "static" a kinetic economic process which has reached the complete equilibrium of its movements, and as a result of the persistence of all the subjective and objective conditions repeats itself endlessly, in unchanged form, from one period to the next (a circuit). Consequently, a dynamic economy should be understood to mean not a "moving economy" (since the "static" economy also moves), but rather an economic process which has not reached equilibrium, i.e. one which moves into disequilibrium in the course of time, which simply means that the conditions of the economic process change from one period to another, resulting in the eventual outcome of the economic process - the economic structure -also undergoing change.
Ever since Mill theory has been forced into this two-fold division: but only one aspect has been developed and worked on, - the static, the tendency towards equilibrium. The question of dynamics, and the necessity of "dynamising" theory has remained at the level of discussion without anyone actually being capable of constructing a conclusive theory of dynamics. Success in breaking away from the traditional dictatorship of these concepts has come only very slowly, and late. As Bode states, it has finally been realised that there is no sense in clinging to the concept of equilibrium, if in reality "there is nothing which seeks, passes through or leaves equilibrium".
However, the discovery of the untenability of the equilibrium thesis has not made the position of the dominant theory any easier. On one hand, it now states that a dynamic theory is needed to explain reality: on the other hand, it is forced to admit that the construction of such a theory implies fundamental difficulties of principle.
Theories of Surplus Value, II, p.497.
Mill, Principles of Political Economy, Chap. 1.
"The main problem now is to proceed from static to dynamic economics" .(John M. Clark, The Relation Between Statics and Dynamics op. cit. p.46).
Cf. H. Grossmann, Das Akkumulations-und Zusammenbruchsgesetz des kapitalistischen Systems, Leipzig, 1929, p .284.
"The general theory of equilibrium of demand and supply is a fundamental idea running through the frames of all the various parts of the central problem of distribution and exchange." (Alfred Marshall, Principles of Economics, 1st Ed. London, 1890, Preface p.IX.) .
"When demand and supply are in stable equilibrium, if any accident should move the scale of production from its equilibrium position, there will be instantly brought into play forces tending to bring it back to that position."
(op. cit. Book V, Chapter III, Sect. 5, p.404) .
Marshall was conscious of the weaknesses of his construct, namely its unrealistic character. "He recognised the impossibility of solving real problems by his method unless his hypothetical, static constructions could be replaced by concrete, dynamic functions", which he hoped would follow the improvement of the mathematical "scientific machinery". (See Moore, Synthetic Economics, New York, 1929, p.93). Hicks also emphasised this static character of Marshall's construction, stating, "how reluctant Marshall is to abandon static conceptions even in this dynamic analysis . . . His dynamics are not made easier by running in terms of a very static equilibrium and by the fact that their central passage leads up to the introduction of the 'famous fiction', the stationary state". Also, the Marshallian distinction between "short" and "long periods", with the further supposition that a "full adaptation" between supply and demand will occur in the latter, "is not a concept that fits very well into a general dynamic theory". (J.R. Hicks, Value and Capital, Oxford, 1939, p .120-121).
Joseph Schumpeter, Theorie der wirtschaftlichen Entwicklung, op. cit. p.86.
J. B. Clark, The Distribution of Wealth, New York, 1899. Quoted from the 2nd Ed. 1931, p.442.
ibid. p.400 and pp.Vl-VII.
ibid. p.VI and p.30.
"The static state which has here been pictured is the one towards which society
is at every instant tending." ibid. p.402.
J.B. Clark, Essentials of Economic Theory, New York, 1915, p.195.
"The actual form of a highly dynamic society hovers relatively near to its static model though it never conforms to it." op. cit.
ibid. p.196. A more recent critic of Clark says, quite correctly, that as a result of all his abstract assumptions the picture of reality which he projects is totally alien to reality . "Such an isolation of static forces, it is admitted, gives to the study an unlifelike appearance and makes it 'heroically theoretical'." (Paul T. Homan, Contemporary Economic Thought, New York, 1928. p.38).
Joseph Schumpeter, op. cit. p.86.
Roche-Agussol, "Die Werttheorie" in Wirtschaftstheorie der Gegenwart, Vienna, 1932, Vol .11, p.36.
Carl Menger, Untersuchungen Ober die Methode der Sozialwissenschaften and der politischen Okonomie (1883) in Series of Reprints of Scarce Tracts in Economic and Political Science, London, 1933 p.29.
W.S. Jevons, The Theory of Political Economy, London 1879, Preface.
F .H . Knight, "Statik and Dynamik" in Zeitschrift for Nationalokonomie, Bd.ll (1931). p. 25.
ibid. p.7 .
Ewald Schams, "Komparative Statik" in Zeitschrift for Nationalokonomie, Bd. I (1931) p.46-8.
Cf. H. Mayer, "Der Erkenntniswert der funktionellen Preistheorien" in Wirtschaftswissenschaft der Gegenwart, Bd.11 (1932) .
Schams, op. cit. p.49.
One interesting additional reason why -despite the acknowledgement of the dynamic nature of reality -there is a passionate struggle waged against attempts to "dynamise theory" and directly introduce the time factor into analysis is cited by Schams. If one sees economics as "economic mathematics", then the mathematical method will prove indispensable in the "exact" treatment of complex mathematical relations, which cannot be mastered by means of the "conventional logic" . The most important methodological principle in the construction of such mathematical systems is the "equivalence of relations, i.e. the construction of equations in which the numerical variables can be expressed" (op. cit. p.48). However, this method places one right in the centre of statics, as the functional method can only represent relations between given values and quantities, but not their formation . If one now introduces movement, i.e. change through time, what will happen is that "the law-like nature of the disproportional movement will destroy the equivalence of the relations" as Schams freely admits. "The simultaneity of more than two independent movements cannot be dealt with mathematically" (op . cit. p.49). "The use of differential and integral equations is scarcely possible with non-equivalent relations." However, if one does not proceed from given prices and quantities, and introduces change through time, one is faced with the task of dealing with future changes, and instead of establishing the exact relations between given variables one has to be content with "the calculation of correlations and price-expectations" . In doing this, however, one turns one's back on exact theory and "enters the company of the dice-throwing probability theorists" (op .cit.) . The "exact" mathematical method, originally designated as being indispensable, as it was supposed to be the best means for the exact investigation of reality, is now raised to the level of an end in itself. Reality is dynamic, but since it is impossible to capture dynamic movement, one restricts oneself to statics, so that one can avoid having to dispense with the "exact" method of mathematics.
Cf. Otto Conrad, "Die Grundannahme der Gleichgewichtstheorie" in Zeitschrift fur Nationalokonomie, Bd.VII (1936), p.243.
M. Lachmann similarly sees "a dynamic theory of equilibrium" as being one which is concerned "with changes in equilibrium through time and describes the process of the transition from one equilibrium to the next". The difficulties surrounding the theory of dynamics are difficulties of either its principles or content, and are more to be attributed "to the deficiencies of our analytical tools" (M. Lachmann, "Preiserwartungen and intertemporales Gleichgewicht" in Zeitschrift fur Nationalokonomie, Bd.VIII (1937), p.33-4.
Cf. Harrod. op. cit. p.496.
Alexander Bilimovic, "Zur Verteidigung der Gleichgewichtsidee" in Zeitschrift fur Nationalokonomie, 1937, pp.220-224.
G. von Haberler, Prosperity and Depression .Geneva, 1937. p.167.
J.R. Hicks, Value and Capital, op. cit. p.119.
Hicks considers that Knut Wicksell should be included in the Lausanne school, alongside Walras and Pareto, because he thinks just as statically as the other two. Wicksell's "capital theory is limited to considering the artificial abstraction of a stationary state" (op. cit. p.3.) .
J. Schumpeter, Theorie der wirtschaftlichen Entwicklung,op. cit. p.86.
L. Walras, Elements d'economie politique pure, 4th Edn. Paris, 1926. p.261-74 .
J.R. Hicks, "A Reconsideration of Value" in Economica (1934), p.52.
V. Pareto, Manuel d'economie politique, Paris, 1909, p.148.
"This division corresponds to concrete reality" (op. cit. p.147). As if we had two different objects of perception, a static and a dynamic economy, alongside one another!
"The principal object of our study is economic equilibrium."
Rosenstein-Rodan consequently says correctly, "No doubt, mathematical, as any static theory, only wishes to explain tendencies to equilibrium, and understand the real course of the economy as deviations from the state of equilibrium". "In this it is supposed that a state of equilibrium will develop after numerous oscillations, which will then continue to exist unchanged ." (Rosenstein-Rodan, "Das Zeitmoment in der mathematischen Theorie des wirtschaftlichen Gleichgewichtes" in Zeitschrift fur Nationalokonomie Bd .l 1929. p.136).
The supposition that economic phenomena share a simultaneous rhythm was explicitly emphasised in Pareto's 'Manuel'(Ill Chap.10); the same applies to a successor of Pareto, De Pietri Tonelli.
As Amoroso points out "two factors underlay Pareto's economic statics: supply and demand. No substantial distinctions exist in production". Amoroso asks; what about the former division of economics into production, exchange, consumption and distribution? He answers this question, saying that according to Pareto, there is no division of things which corresponds to a difference in language . . . all problems of economics are contained in the conditions for general equilibrium, limited by the forces and connections of the initial state! Luigi Amoroso, "La Meccanica Economica" in Giornali degli Economisti, Roma, 1924. p.46-47.
R . Hicks, "Gleichgewicht and Konjunktur" in Zeitschrift fur Nationalokonomie Bd.IV (1933) p.442.
"The circulation of the commodity is naturally only concerned with already existing values."
Hans Mayer "Der Erkenntniswert der funktionellen Preistheorien" op.cit. p.239. Of course, Mayer is not consistent enough. As a marginalist he regards consumer demand as the "locomotive force of the entire system" (op. cit. p.239). Demand, however, as the most recent work of the Keynesian school admits, is not a determining force, but is much more only a product, a result which depends on the volume of investment; and, in turn, investments are conditioned by the profitability which can be obtained in the process of production.
"Utility is, and will remain, only a comparable but not a measurable magnitude . . . Attempts to treat utility like an extensive magnitude, in our opinion . . . are bound to fail . . . One cannot subject utility to the ordinary arithmetic and algebraic operations" (Cf . Irving Fisher, Mathematical Investigations in the Theory of Value and Prices, New Haven, 1892. p.88) .
"It is a curious process of a self-decomposition of a theory - a supreme example of Hegelian dialectics-which not so long ago had been hailed as the essential steps in putting economics on a scientific basis" (H. Bernadelli, "The End of the Marginal Utility Theory?" in Economica, May 1938).
 Schumpeter states: "Pareto discarded the Walrasian theory of value and based his own on the indifference-curve apparatus invented by Edgeworth . . .".(History of Economic Analysis p.860).
Can someone who possesses 100 apples and 100 nuts ask, for example: How many nuts would compensate them for giving up 10 or 20 apples? Would, for example, a combination of 80 apples and 140 nuts come about?
Hans Mayer, "Der Erkenntniswert der funktionellen Preistheorien" op . cit. p.214.
op. cit. p.211-2, p.212. Cf. p.216. Cf. too Umberto Ricci, "Pareto e l'economia pura" in Giornali degli Economisti 1924 p.43. Cf. in addition, Henry Schultz, "The Italian School of Mathematical Economics" in Journal of Political Economy,Vol.39, (1931) p.77ff.and H. Hayer, op. cit. p.207-8, who stresses that the indifference combination only takes the form of a curve with two goods; a combination of three goods produces a three-dimensional diagram; under real conditions, i.e. with thousands of goods one would obtain an "unimaginable" creation, of thousands of dimensions (!) "a kind of hyperspace", which would be purely imaginary and have no relation to reality.
In addition, the method of the general interdependence of all economic variables, expounded by the Lausanne School, and so admired in its time, is today held responsible for the fact that the School never went beyond worthless generalities. It led to "a theoretical waste of effort" on the part of the Lausanne School (0. Lange, "Die allgemeine Interdependenz der Wirtschaftgrossen and die Isoliermethode," in Zeitschrift fur Nationalokonomie Bd.IV (1933), p.56). Hicks points to the "apparent sterility of the Walrasian system", owing to its great distance from reality, (Hicks, Value and Capital, op. cit. p.60). As Husserl correctly says, the danger of such failures is inherent to the essence of mathematics itself. "The same researchers who operate the marvellous methods of mathematics with such incomparable mastery, and in doing so enrich them, often reveal themselves to be utterly incapable of giving sufficient consideration to the limits of its justifiable application" (Husserl, Logische Untersuchungen, 1913, p.10). The result in the field of economic theory: the dazzling application of mathematical techniques, and the poverty of its results .
Knut Wicksell, Vorlesungen uber Nationalokonomie auf Grundlage des Marginalprinzips Jena, 1920 Vol.11, p.253-4.
ibid. p.241-2 .
Fr. von Hayek, Geldtheorie and Konjunkturtheorie, Vienna, 1929. Wicksell's neo-Malthusianism also originates in an undynamic conception of the productive forces, according to which a country can only feed a certain optimum population: exceeding this optimum will necessarily lead to the impoverishment of the country -a view which represents an unambiguous relapse to the level of observation of the first half of the eighteenth century (Cf. J.P. Sussmilch, Die Gottliche Ordnung in den Veranderungen des menschlichen Geschlechts, Berlin 1761, Bd.1, p.142).
Cf. Irving Fisher, Stabilising the Dollar, New York, 1920.
R.G. Hawtrey, Currency and Credit, London, 1950.
Cf. C. von Haberler, Prosperity and Depression, p.16 and R.C. Hawtrey, Trade and Credit, London, 1928, p.98.
Cf. Haberler, op. cit. p.72.
ibid. p.28. Quite correctly, Haberler says of the non-monetary, overinvestment theories, whose representatives he names as A. Spiethoff and G. Cassel:
"In the writings of these two authors, we find the culmination of a very important line of thought which can be traced back to Marx". On the now general usual distinction between the production of means of production and the production of means of consumption, see for example, in Marx:" "The Two Departments of Social Production"(Capital, II, p.399): on the specific role of durable (fixed) capital "Replacement of the Fixed Capital"(Capital, II, p.453); on the influence of the length of the period of construction on the course of the cycle, see Capital II p .462 . This distinction between the material elements was first introduced into the recent literature by Tugan-Baranovsky's book on crises in England (1901), and subsequently by Spiethoff and others, all of whom were influenced by Marx as can be seen from Tugan's schemes of reproduction which were copied from Marx. However, Tugan was celebrated by Sombart as the "father of modern theories of crises" and Tugan's book was praised by Spiethoff as the "first scientific monograph on crises" (Cf . W. Sombart, "Schriften des Vereins fur Sozialpolitik" Bd.113, p.130 and A. Spiethoff, "Die Krisentheorien von Tugan-Baranovsky and L . Pohle", in Schmollers jahrbuch Bd. 27 (1903) p.70.
J.M. Clark, "Business Acceleration and the Law of Demand" in Journal of Political Economy, Vol .25 (1917).
R.F. Harrod, "Relations between Capital Goods and Finished Products in the Business Cycle" in Economic Essays in Honour of W.C. Mitchell, New York, 1935) .
L.P. Ayres, Turning Points in Business Cycles, New York, 1939.
Thus P.T. Homan writes in an essay entitled "The Present Impasse" : "It is probably no exaggeration to say that recent investigations into the causes of cycles have done as much to destroy adherence to older types of theory as any other single cause. And it has led to the casting of their problems by many economists into terms of a changing process, rather than into terms of a static situation" (Contemporary Economic Thought op. cit. p.453).
H. Mayer, "Der Erkenntniswert der funktionellen Preistheorien" op. cit. p.148.
Cf. H. Schams, "Komparative Statik" op. cit. p.30.
 P.W. Rosenstein-Rodan, "Das Zeitmoment in der mathematischen Theorie des wirtschaftlichen Gleichgewichtes" in Zeitschrift fur Nationalekonomie, Bd. I (1929) p.131, 134.
Consequently the concept of "moving equilibrium" is a contradiction, as the real movements of the elements of the economy are in constant disequilibrium. Nevertheless H .L. Moore tried, in his book Synthetic Economics, Chap. V. "Moving Equilibria", to prove the parity of movement of exchange, production, distribution and accumulation, "as a moving general equilibrium", using empirical material from American potato production over a long period. However, he did not succeed. As Umberto Ricci showed in his critique, Moore did not describe a moving equilibrium, but in fact a moving disequilibrium. Cf. H.L. Moore, Umberto Ricci "Die synthetische Okonomie" in Zeitschrift fur National Okonomie Vol. l (1929) p.654.
E. Schams, op. cit. p.42.
ibid. p.55. Or, as Streller formulated this idea: The formulas for equilibrium would only have been possible at a higher abstraction from reality: however, it turns out that "an introduction of the time factor "t" in the equation clearly makes them immediately incapable of a solution" (R . Streller, Die Dynamik der theoretischen Nationalokonomie 1928, p .12).
Thus, Carver wrote recently: "In fact every dynamic movement is either a disturbance of a static condition, or a series of movements by which the static condition is reasserting itself, or rather by which a new static condition is being established after the disturbance" (Thomas Nixon Carver, "The Static State" in Economic Essays in Honour of John B . Clark op. cit. p.29) .
Ricardo stressed that despite changing conditions in the economy, the mechanism of self-regulation will distribute capital exactly according to the needs of the respective branches of industry, "without often producing either the effects of a glut from a too abundant supply, or an enormously high price from the supply being unequal to the demand" (Ricardo, Principles op. cit. Chap. IV). Conrad likewise assures us that it is only the striving for equilibrium which prevents an economy lacking central direction from slipping into chaos. Hayek's language is very characteristic: he sees merely the "adjustments" of the economy, but regards the intervals of disruptions and catastrophes between these "adjustments" as unproblematic (F.A . Hayek, Preise und Produktion, Vienna, 1931. p.23).
This is only a vague indication of the concept of "dynamics": within the static line of thought it is only statics which have to be defined: dynamics is the other, the "counterpart" which does not have to be defined and which is somehow supposed to "complement" statics (R. Streller).
Alexander Bilimovic, "Zins and Unternehmergewissen im Cleichungssystem der stationaren Wirtschaft" in Zeitschrift fur Nationalokonomie Bd. VII (1937) p.218.
"Only static theory can be regarded as being known: dynamic theory is almost totally uninvestigated and formulated; up until now only the necessity for such a theory has probably been shown" (R . Streller op. cit. p.26). John M. Clark assures us that "We possess a substantially complete static economics, while dynamics is in its infancy . . . and very possibly is destined always to remain in that stage" ("The Relation between Statics and Dynamics" op . cit. p.46, 48). And similarly Hicks states: "a dynamic theory -the theory which many writers had demanded, but which none, at that time, had produced" (Value and Capital, op. cit. p.4.). Cf. Harrod, (in Zeitschrift fur Nationalekonomie Bd.VIII (1937) p.498) and many others.