An Historical Investigation
Chapter 7: Statics and Dynamics in Classical Economics
INTRODUCTION There is an uneasy tension between equilibrium analysis and the concept of time in economics. On the one hand, equilibrium theories are the economist’s main tool to distinguish between economic effects of different duration. This is done by means of the familiar method of comparative statics, which assumes that supply and demand constantly work to bring markets closer to equilibrium. As causal factors can be assumed to affect market equilibrium over different time periods, the distinction between equilibrium of different duration (for example short term versus long term) allows one to isolate and analyze the causal forces of the time period in question. But, on the other hand, the theory that is used to deal with the element of time in this manner is timeless. How long does it take to establish equilibrium in the transition phase between the old and the new position? Supply and demand analysis usually does not address this question, but simply assumes that market equilibrium re-emerges after a disruption. This recognition brings Diamond (1994, 7) to argue that neoclassical equilibrium theory is not about equilibrium at all, but about the working of forces. The roots of the static conception of market equilibrium are said to lie in the work of Adam Smith and his classical successors. For instance, Hollander (1987) argues that Smith’s discussion of natural and market prices contains an ‘embryonic’ account of neoclassical general equilibrium theory, involving such concepts as supply and demand schedules and the concept of the margin. Smith’s theory...