Value & Capital, CHAPTER XX -- THE TEMPORARY EQUILIBRIUM OF THE WHOLE SYSTEM

In this first section of the chapter, a section titled "Its Imperfect Stability," the author, Sir John Hicks, introduces the analytical methods he will use to analyze the effects of changes in data, such as prices, on the workings of a dynamic economy.

He begins by noting how his method of analysis allows for an easy transition from analyzing the behavior of a single individual or firm to analyzing "the great issues of the prosperity or adversity, even life or death, of a whole economic system." His method works by deriving laws of market behavior for idealized, representative individuals and firms.  These laws, elaborated for what he calls "those tenuous creatures" then 

become revealed 'in their own dimensions like themselves' as laws of the behavior of great groups of economic units, from which we can readily evolve the laws of their interconnexions, the laws of the behaviour of prices, the laws of the working of the whole system.

The author then notes that an earlier chapter laid out the conditions for a (temporary) equilibrium of an economy during a particular 'week' although the discussion in that chapter did not use the "representative economic units" described above.  These equilibrium equations define the prices that will result when conditions such as preferences, resources, and expectations are specified.  The author's goal in this chapter is to "begin to set the equations to work" to determine what happens when some of the conditions change.

He explains that the analytical process will "follow out a programme exactly parallel to that which we previously followed when dealing with a static price-system," but with an important difference.  In the present context, "the laws of the working of a temporary equilibrium system" are not the ultimate goal of the analysis in the same way that the corresponding laws of a static system were.  For a temporary equilibrium system, the changes in data that will be analyzed are only hypothetical.  But investigating these changes is a necessary precondition for being able "to examine the ulterior consequences of changes in data."

He also defends the value of the short-term analysis used in the theory of temporary equilibrium.  "For many purposes, what we want to know is exactly what the theory of temporary equilibrium tells us—what immediate alteration in the course of events will follow from a particular change in data."  He also revisits the use of a 'week' as the planning period for his analysis;  he points out that such usage is rather arbitrary and that 

The main problems where it is necessary to consider more than one 'week' are those where we are specially interested in the consequences of accumulation or decumulation of capital.  These have to be held over for later consideration;  they belong to a part of dynamics which falls outside temporary equilibrium theory.

He concludes the section by discussing the distinction between two kinds of effects from price changes, namely those effects that "result simply from people's awareness of the initial effects" and "those effects which depend on capital accumulation" (and whose speed may be limited by the "duration of the processes needed to bring about changes in productive equipment.")  He explains that his method of analysis will "[suppose] the first sort of effect to go through with the maximum of rapidity," and that while this may not be realistic, it poses no great difficulty.

Value & Capital, CHAPTER XIX, Section 5

In this section, the final one of the chapter, the author begins by noting that the preceding discussion of an entrepreneur's expenditures assumed these expenditures to include both those expenses going toward running the business, as well as spending on consumption goods.

The author explains that it was a "theoretical convenience" to suppose the entire financial aspect of the business to involve transfers into or out of the entrepreneur's private account, although in practice this supposition is unrealistic.  For a private firm, the distinction between the firm's account and the individual's account may be somewhat artificial; for a joint-stock company, however, the situation is different.

There is a real line of division;  the financial side of the firm's operations has an existence of its own quite separate from the private accounts of the shareholders—a separation maintained by the legal principle of limited liability.

The analysis of the present chapter would apply "perfectly well" to a firm's financial account being treated as a sort of private account, but there is a remaining difficulty when it comes to joint-stock companies, namely their decisions about payment of dividends.  The author concludes this section (and the chapter) by explaining the difficulty as follows:

No clear principle is left to determine on what scale dividends should be paid—that is to say, how much should be paid out in dividends in the current period and how much should be 'ploughed back into the business'.  Nor does there seem to be any theoretical device by which this arbitrariness can be removed;  it is a ... real peculiarity of the joint-stock company. ... [T]he only implication for the general dynamic theory ... is that we must be prepared sometimes to treat dividend policy as an independent variable.