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Loosing sight of the classics. How classical economics became a static approach Christian Schmidt Abstract: It has become commonly accepted to claim that Walras had laid the foundations of the Intertemporal General Equilibrium Theory with his system of interdependent equations. Garegnani argues in his well known article of 1976 that the theory of value and distribution underwent a fundamental change while maintaining the classical long-period analysis in the socalled Neoclassical Revolution of the late 19th century. Elder hypotheses regarding employment and the distribution of wages and profits were abandoned in favour of a neoclassical theory of distribution. Early neoclassical economists presumed the equilibrium determined by the forces of supply and demand on the markets for labour and capital. Later, with the work of Hicks, also the notion of equilibrium changed; for neoclassical theorists realised the incoherencies brought about by the maintenance of the long-period method, which was characterised by a uniform rate of profits on the selling price of all capital goods. This second shift can be called 'Second Neoclassical Revolution' (Schefold 2008), for researchers’ efforts to decompose the classical equilibrating process into dated periods. But the introduction of temporary and intertemporal equilibria has not just had the purpose of eliminating inconsistencies emerging from the combination of a marginalists’ supply and demand approach on the one and a long-period position on the other hand. Its function has been to model interest rates as intertemporal phenomena just as well. This, however, would head for a generalisation of Böhm-Bawerk’s theory of interest, in which the basic idea of an equalising tendency among own rates of interest already shows up. In my talk it will be shown that there are passages in the writings of Böhm-Bawerk, which might confirm Garegnani's thesis that early neoclassical authors have had the concept of a capital stock as a magnitude able to change its content while presuming its value. Especially Böhm-Bawerk points out the path, on which intertemporal general equilibrium theory will pursue decades later with Lindahl and Hicks. But what has been lost with the works of Hicks was a fundamental understanding of the classical approach to economic theorising, and it can be shown that for Hicks took over a mathematical perspective on elder theories, and particularly for his interpretation of concepts like 'static', 'stationary' and 'dynamic' has become standard in economics, the viewpoint of classical economists got out of sight. That the Hicksian confusion has been prepared by the works of early neoclassical economists is implicitly shown by Garegnani‘s critique (1960, 2008) of the original Walrasian system of equations of production and capital formation on the ground of which Eatwell (1975, 1990) has formulated his critique of Morishima‘s proof of existence later on. Neither Marshall, nor Böhm-Bawerk, nor Walras felt the need to get rid of the classic approach to equilibrium, and accepted that at the end it is the overall capacities of an economy together with the forces of competition that renders economic reasoning analytically powerful. Even Lindahl adopted the Walrasian and Marshallian 'classical' perspective that it is the long-period position that defines the capabilities of production and growth of an economy, in which the forces of change and therefore the forces of competition have come to rest, and thereby a position has been reached that permits ongoing reproduction. For this reason he seemed to be forced to assume perfect foresight in order to assure that his model economy reaches a final state of reproduction. It should be clear that turning away from a long-period notion of equilibrium renders it analytically impossible not to introduce a time element in the form of dated variables, as Lindahl, Hicks and later on Morishima did. For the assumption of perfect competition will head for considerable alterations in the system of relative prices. Thus, given the technique, the forces of competition lead the system towards a long-period position characterised by a uniform rate of profits on all necessary capital goods. This, in general – i.e. for an arbitrarily given capital stock that is not perfectly adapted to the given production possibilities – will alter the physical composition of the initially given capital stock wherefore relative prices are going to change from one period to the other. To explicitly picture the path an economy follows while tending or groping towards a long-period position by means of general equilibrium methods one is therefore bound to model multiple or, more general, infinitely many short-period equilibria. While the long-period position is still a point of reference and therefore effective in intertemporal models of capital formation like Lindahl‘s it is thrown away in pure production models as we do find them in modern textbooks presenting Arrow/Debreu economies. What is generously overseen or tacitly accepted by modern theorists is that the assumption of perfect foresight was still a necessity in an intertemporal general equilibrium model of capital formation, but it wastes away to an elegant assumption supplementing mathematical proofs of existence of pure production equilibria. Thus what might be seen as an advantage of modern general equilibrium, i.e. the possibility of giving up the idea of a centre of gravitation and therewith the definition of a uniform rate of profits over all sectors of production, turns out to be no less than giving up the interest in an economy‘s reproduction capabilities. Temporary equilibrium analysis of capital formation reasonably went a step further by abandoning both, the crutch of perfect foresight as well as the interest in a position of rest. That this might lead to a total breakdown of a model economy within several periods might be seen as a central feature not yet fully worked out. To a modern economist it might now seem less clear why such an approach received such a wide acceptance among his fellows. Part of the explanation could be given by restating the misinterpretation of the classical approach, for with the eyes of the classics the original Walrasian model becomes overdetermined, whereas an intertemporal theorist cannot do otherwise than see it as underdetermined. For an intertemporal economist Walras was wearing his monocle on one and Böhm-Bawerk on the other eye, both trying to see an intertemporal general equilibrium, while the one did not want to accept the necessity of an intertemporal framework the other could not see the advantage of a general system of equations. What this perspective cannot grasp is that both theorists never lost sight of the classical conviction that (re)production matters for economic analysis at least as much as the 'revolutionary' idea of utility maximising. What Hicks introduced could be called Neoclassical Dichotomy of Statics and Dynamics, for he took statics as nothing more than a dated point in time supposing the classics to having assumed a stationary state. A dynamic process, however, turns out to be a depiction of dated variables through several periods. As remote as Hicks‘s 'static classics' stood from what classical analysis aimed at, one might render him respect, not for having solved the knot of the early 20th century when a whole bunch of economists discussed what dynamic or static analysis really meant but for having it cut. Unfortunately what he cut off is barely understood by today‘s economists.