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Economic Theory: A Race Against Time?

Economic theory

By Disha Khandelwal

In economic Theory, time is an indispensable component for it allows one to formulate a theory as a whole. But the real question, in the renowned economist Krishna Bhardwaj’s words, is: “How to introduce the element of time into theory while maintaining a difference between statics and dynamics”.

Time: Historical and Logical

One can observe that in economic theory, time enters largely in two forms, Historical time and logical time. The opposition between logical and historical time dates back to Quesnay’s ‘Tableau économique’. A cyclical representation of the calendar time, through advances and then a generation of product net.

While historical time, on the face of it, carries the property of irreversibility, logical time possesses the attribute of reversibility.

Under historical time, the past, present, and future are qualitatively different, linked by expectations and plans. Whereas, the latter Framework imbibes in it a logical set of relations which links the variables in a unique direction, implying a causal relationship between them. While historical time, on the face of it, carries the property of irreversibility, logical time possesses the attribute of reversibility.

The Two Time-Driven Approaches Of Economics

To further appreciate the essence of time in economics, let us observe how economists made use of time in structuring their theories.

1. Classical

The Classical theory is based on the historical time framework. In a capitalist mode of production, the classical framework analyses the generation, distribution, and utilisation of surplus in the context of accumulation within a historical period. The surplus is generated within the production sphere itself. The persistent forces are irreversible, but at the same time, carry observable regularities. These play along in determining ‘natural equilibrium’ by the classicals. It is that Equilibrium towards which an economy gravitates in the long run. Determination of this natural equilibrium is brought about by effectual demand, observed methods of production, and socially determined wages. These are taken not as static magnitudes, but as dynamic.

The theory of distribution in the classical political economy displays a dynamic relationship between levels of changes in output and wages. They are analysed as affected by the accumulative process as much as by allocation process. As a result, growth in this framework is nothing but a circular and cumulative process. The scale of production increases after each period of surplus generation, with historical time and space playing a major role.

2. Neo–Classical

Neo-Classical theory, unlike the classical framework, develops in the logical time framework. Here, the demand-supply forces work simultaneously. Equilibrium is defined as being static, with a presumed set of well-behaved properties, fulfilled by the model as a whole. Changes in this equilibrium are explained via the principle of substitution.  Through this approach, the allocational changes are explained in the face of relative price changes. As a matter of fact, change in the neo-classical framework has nothing to do with institutional and historical changes taking place at the same time. The property of existence of constant returns, which makes the system well behaved, itself clarifies that any change which does not allow for growth is constant.

Is The Logical Time Framework Flawed?

With respect to the neo-classical framework, it becomes evident to look for the insufficiency that arises out of the logical time framework. Krishna Bhardwaj outlines Joan Robinson’s critique of the neo-classical theory focused on the methodological error of “confusing a metaphor based on space to explain a process through time”. She tries to explain that the phenomenon of “irreversibility” i.e backward and forward movements in space and time are unrealistic.

The long run upward sloping supply schedule is deduced as a result of the slope of the production function. It suggests that a producer can move back and forth when changes in prices occur. It is assumed that all techniques of production are present at every point, facilitating alterations in supply. This assumption itself makes the supply schedule an imaginary one. The presence of all possible technology together with the ability to choose any of them at any point in time is an absolutely unrealistic thing to ask for.

A similar behaviour is seen in a factor’s demand schedule which is derived from the factor’s marginal productivity. Here, a change in factor proportions is due to changes in factor prices.

While historical time, on the face of it, carries the property of irreversibility, logical time possesses the attribute of reversibility. | Photo Courtesy: Pixabay

While historical time, on the face of it, carries the property of irreversibility, logical time possesses the attribute of reversibility. | Photo Courtesy: Pixabay

With respect to time, Alfred Marshall pointed out a very interesting paradox regarding the Law of Diminishing Marginal Utility.

“There is an implicit condition in this law which should be made clear. It is that we do not suppose time to be allowed for any alteration in the character or tastes of the man himself. It is, therefore, no exception to the law that the more good music a man hears, the stronger is his taste for it likely to become. If we take a man as he is, without allowing time for any change in his character, the marginal utility of a thing to him diminishes steadily with every increase in his supply of it.”

Loopholes In The Neo-Classical Framework

We can observe the reaction of an individual to two different price sets only at two different times. However, we can’t tell what part of the difference in his purchases is due to the difference in prices and what part due to the change in his preferences.

One of the methodological constraints of the demand-supply equilibrium theory of the neo-classicals is that they base behaviour on an atomistically defined individual.

This takes away the chances of including dynamism, due to changing institutional and social behaviour.

Another relevant critique in the “Time And Space Debate in Economic Theory” surfaces in Joan Robinson’s article “History vs Equilibrium”. She underlines that “The concept of stability based on mechanical analogy is inappropriate in economic analysis. For mechanical movements in space, there is no distinction between approaching an equilibrium from an arbitrary initial position and a perturbation due to displacement from an equilibrium that has been long established”. She tries to emphasise upon the fact that in neo-classical theory when displacement from the equilibrium occurs, one cannot be certain to return to the past equilibrium. She says that reaching an equilibrium in the near future is impossible because the system is already in an equilibrium.

Through The Keynesian Glass

She tries to prove her point by making use of Keynes’ concept of uncertainty and expectations. It is said to be a crucial element in bringing historical time analysis. Under uncertainty of expectations, the classical theory fares well because it takes into account the deviation of market equilibrium from natural equilibrium resulting due to variations and fluctuations in expectations. Robinson goes on saying that “As soon as an uncertainty of the expectations that guide economic behaviour is admitted, equilibrium drops out of the argument, and history takes its place”. She suggests that one must leave equilibrium analysis behind and approach the problem in terms of a historical process. This brings uncertainty into the picture and makes the theory realistic.

But then one cannot get away with the concept of equilibrium as the existence of equilibrium is not flawed.

Marshall made an attempt to fragment theory based on time via the short period and long period differentiation. But owing to its structure, the neo-classical theory could not still accommodate the dynamic historical process in time. Historical and social relations act as an intrinsic bond between production, exchange, and distribution. Therefore, unless all the above issues pertaining to the neo-classical theory are addressed, dynamics of the real economy cannot be captured.


Disha Khandelwal is pursuing her M.A. in Economics at the University of Hyderabad. Issues related to macroeconomics, capital theory, environmental economics and financial economics pique her interest. 

Featured Image Credits: Murray Campbell via Unsplash

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