- New Directions in Modern Economics series
Chapter 1: Dynamics in the Medium Run
1. 1. Dynamics in the medium run SOME TRADITIONAL DICHOTOMIES There seems to be a widespread consensus among the various schools of thought that economic analysis should be carried out in dynamics terms (see, for instance, Chiarella and Flaschel, 2000, Turnovsky, 2000 and Ljungquist and Sargent, 2004), even though, according to Hicks (1965), it is very difficult to obtain a theory of economic dynamics. ‘I do not think that there is such a theory; I much doubt if there can be’ (p. iii). With respect to the past, mathematics has developed new tools (see Day, 1994 and Kuznetsov, 2004), while in the computer age it is possible to study complex dynamics by means of simulations that were unthinkable only a short time ago. In other words, the mathematical constraints to studying dynamics have been softened so that ‘new’ paradigms may compete with the old ones. One of the many barriers into the scientific arena has fallen, even though Hicks’s perplexities remain valid. The constraint to use linear models has favored the diffusion of dynamic theories based upon exogenous explanations, where the presence of stochastic shocks acts as the engine for dynamics (see Frisch, 1933). In contrast, the possibility of referring to nonlinear systems may encourage the reconsideration of endogenous dynamics (see Velupillai, 2008) that were at the core both of the classical economists (see Vercelli, 1984), even though expressed in non-mathematical terms, and the early Keynesians (see Samuelson, 1939 and Hicks, 1950). Exogenous versus endogenous explanation is only one of...
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