Value & Capital, CHAPTER IX, Section 2

This section discusses the analysis of economic dynamics by exploring the question of whether one could apply static analysis (of the sort presented in the book up to this point) and simply date all the quantities to the same moment in time.  The discussion notes that the main problem with such an approach is that "the adjustments needed to bring about an equilibrium take time."

A rise in the price of a commodity exercises, at once, only a small influence upon the supply of that commodity; but it sets entrepreneurs guessing whether the higher price will continue.  If they decide that it probably will continue, they may start upon the production of a considerably increased supply for a future date.  This decision will affect their current demand for factors;  the current position in the factor markets will thus be governed by the way entrepreneurs interpret the rise in the price of the product.

Similarly, the current supply of a commodity depends not so much upon what the current price is as upon what entrepreneurs have expected it to be in the past.  It will be those past expectations, whether right or wrong, which mainly govern current output;  the actual current price has a relatively small influence.

This is the first main crux of dynamic theory ... 

The author lays out two alternatives for how to proceed:  either incorporate the fact that quantities such as supplies and demands depend as much on expected prices as on current prices, or else "evade the issue by concentrating on the case where these difficulties are at a minimum."  He describes the first alternative as being "the method of Marshall."  He describes the second as
"(broadly speaking) ... the method of the Austrians."

The remainder of this section focuses on this second alternative, and in particular on what some Austrian-school economists called "the stationary state."  Hicks clearly states up front that "it is my firm belief that the stationary state is, in the end, nothing but an evasion" but he believes it to require attention because of the large part it had played in economic thought of the time.  He defines the stationary state as "that special case of a dynamic system where tastes, technique, and resources remain constant through time."  If entrepreneurs expect these constant conditions to remain in effect, then we can expect current prices to be the same as expected prices.  We can conclude that a price system in such a stationary state is the same as the static price-system already studied.  The explanation of this similarity with "the static world" notes the importance of a "'stationary' assumption that capital remains intact."

The discussion then notes that the static theory left out any account of the dependence of input-output (i.e. production) relations on the quantity of capital (in the form of intermediate products).  The author asks how this quantity of capital will be determined, with the answer being "through the rate of interest."  The assumption of a stationary state gives a relation between the (constant) size of the capital stock and the interest rate.  We have a second relation between the interest rate and quantity of capital stock by virtue of the effect of a stationary state on the (constant) level of saving.  This level "depends partly upon the propensities to save of the individuals composing the community, partly upon their real incomes -- and these depend again upon the size of the stock of intermediate products."  Thus there are two equations to determine the two unknowns:  size of capital stock and rate of interest.  While this is "a plausible theory of a stationary state" there are many complications that are left out.

The section closes with a discussion of the various real-world complications that are left out of the stationary state model.  The discussion also highlights the model's questionable assumptions and finishes the section with a withering criticism of the stationary state model.  If one does not assume a stationary state, then it is no longer valid to equate actual prices with expected prices, or interest rates from one period with those of another, or income with product, or money rates of interest with real rates of interest.  While it has always been known that the actual state of a real-world economy is never stationary, "stationary-state theorists naturally regarded reality as 'tending' toward stationariness;  though the existence of such a tendency is more than questionable."  The stationary state theory only "tells us that if we got to a stationary state, then (other things being equal) we should stick;  but it gives us no indication that we are in fact aiming for such a position;  for it can tell us nothing about anything actual at all."