ABSTRACT OF PAPER
Title: Keynes's analysis of stability and modern dynamic analysis
Author: Togati Teodoro Dario
The object of this paper is to provide a critical assessment of Keynes’s vision of stability. While this a rather old topic, the paper seeks to make a new contribution by stressing both advantages and weaknesses of Keynes’s approach in the light of modern perspectives on the stability issue. Keynes’s vision of stability should be understood in the light of his concept of instantaneous equilibrium, which has two key features. First, it is based on a number of causal factors diametrically opposed to those underlying standard theory (i.e. money and expectations that account for the key role of effective demand rather than atomistic preferences and resources) Second, it constitutes the core of his scientific enterprise. In his view, the task of economic theory is not to deal with equilibrium states seen as predefined positions towards which the system inevitably tends but to focus on ‘fragile’ or provisional equilibrium points which do not possess the mechanical stability property of conventional equilibria. Keynes’s formal theory is thus static and has a limited scope: it rejects the ‘long-run’ as object of theory about which precise laws can be stated but focuses on the causal factors at play at a given point in time. Keynes was aware that economies ‘are not homogenous through time’ and therefore cannot be assumed to be stable on a priori grounds. For this reason, he was critical of econometrics and resisted the temptation to build the kind of growth models that have become so popular in later macroeconomics. However, it is wrong to believe that Keynes simply neglected long-run phenomena or concluded that structural phenomena, such as market forms or changes in technology or population, simply do not matter because in the ‘long-run we are all dead’. In particular, there is no doubting that his work suggests a perspective on global stability of capitalism in the long-run. While certainly believing that capitalist economies in general are quite unstable, in the sense that there are no inherent mechanisms such as flexible relative prices that ensure that stability will prevail as in neoclassical theory, at the same time Keynes stresses that there are also no a priori reasons for catastrophic outcomes, i.e., for the systematic dominance of negative effects. He made some assertions concerning the stability of actual economies by drawing on experience rather than on a priori considerations. Whether an actual economy is more or less stable can only be established ex-post, on the grounds of experience, for actual instability is often held in check by appropriate policy and institutional changes. The General Theory also contains insights on how dynamic analysis should be carried out. While ruling out dynamic formal modelling, Keynes did devise an informal, constructive method for dealing with long-run phenomena, based on the distinction between primary and secondary data. Although he only provided a sketch, and not a complete analysis, he emphasized that for this purpose we need take into account the changes that occur in both types of data and the possible feed-back taking place between them. In this way Keynes distinguished his approach from methods of mathematical analysis that provide definitive conclusions by assuming ‘strict independence between the factors involved’ (ibid.: 297); an independence which does not exist in the real world historical context in which Keynes tried to place his theory.
Registred web users only can download this paper - Go back
Please note that files available for download have not been checked for viruses. These files have been submitted by authors of the conference to this web site. Conference organisers can't accept any responsibility for damages caused to users by downloading such files.