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The distinction between long-run and short-run (or long-period and short-period) equilibrium, introduced by Marshall (see Marshall 1890, pp. 363–80; hints at this distinction are also to be found in some of Marshall’s early works, dated 1870–71, recently re-presented in Whitaker 1975, pp. 119–64), reflected a method which was the generally accepted one at the time, and essentially the same as the method of the classical political economists and of Marx. The use of the method was not affected by the deep change undergone by the theory of value and distribution around the 1870s with the advent of what is nowadays called the ‘neoclassical’ school. This method, called ‘method of long-period positions’ (Garegnani 1976), however, has been abandoned in much of the modern mainstream work on value. Further, there is no uniform meaning attributed to the terms ‘short-period’ and ‘long-period’, but rather a variety of usages depending on the theoretical framework of the writer, a situation responsible for many misunderstandings and debates at cross purposes.

The Classical Political Economists

Since its origin in the writings of 18th-century authors, economic theory has used what has been subsequently named the ‘long-period method’ of analysis to investigate how production, distribution and accumulation take place within a market economy. According to Quesnay and A. Smith, the system ‘market economy’ produces results which are ‘independent of men’s will’ (Quesnay 1758). Competition, Smith thought, tends to establish uniformity in the ‘average’ or ‘natural’ rates of wages, profits and rent. ‘Market’ prices, that is, observed prices, thus tend to gravitate towards their ‘natural’ levels (also called ‘average prices’ or ‘prices of production’), defined as those which allowed the payment of wages, profits and rents at their average or natural rates (Smith 1776, pp. 57–61).

According to the classical political economists, a divergence between the ‘market’ and the ‘natural’ price of a commodity is caused by a divergence between the amount supplied by producers and the ‘effectual demand’ for it, that is, ‘the demand of those who are willing to pay the natural price of the commodity, or the whole value of rent, labour and profit, which must be paid in order to bring it thither’ (Smith 1776, p. 58). This divergence implies windfall profits or losses for that commodity. If supply coincides with ‘effectual demand’, ‘market’ price corresponds to ‘natural’ price. The rate of profit earned in that sector is equal to the one which is uniformly earned in the whole economy. Equilibrium conditions are said to prevail. Within this approach, therefore, fluctuations of supply and demand explain nothing but the deviations of ‘market’ prices from ‘natural’ prices.

The idea that the interaction of competitive market forces pushes the actual level of economic variables towards their ‘natural’ or ‘average’ level was applied to different fields of economic theory. Marx, for instance, applied it to the analysis of the ‘market’ and the ‘average’ interest rate (see Marx 1972, pp. 355–66). The latter rate, according to Marx, was determined by ‘the average conditions of competition, the balance between lender and borrower’ (Marx 1972, p. 363) in the money market over a certain historical period (Marx 1972, p. 363). He rejected previous views determining this rate in terms of ‘natural’ laws, like the rate of growth of timber in central Europe forests (Marx 1972, p. 363 n.) or in terms of the rate of return on capital invested in the productive sectors depending upon the material or technological conditions of production of commodities (Marx 1972, p. 363). In his historically relative determination, the ‘average’ interest rate, being constrained by no ‘natural’ or ‘material’ law, can be at any level. At the same time, the interaction of demand and supply determines the daily variations of the ‘market’ interest rate and makes it converge towards its ‘average’ level.

The application of the ‘long-period method’ to the analysis of the interest rate makes it clear that the essential element of the method is the reference to an ‘average’ or ‘normal’ position around which the actual values of the variable considered gravitate. Reference to the attainment of a uniform rate of profit in all sectors is not strictly necessary if the theory does not determine the variable considered on the basis of the technological conditions of production. In Marx’s analysis, since the ‘average’ interest rate is independent of the rate of profits, it is possible to separate the study of the factors determining the former rate from the study of the technological links between distributive variables and commodity prices, where competitive forces set in motion a gravitation process when windfall profits or losses appear in particular industries. The notion of ‘average’ interest rate, which may be used to identify a position of long-period equilibrium for this variable, can thus be introduced and analysed by referring to a normal position of this variable, which has actually prevailed over a certain period, without making reference to a uniform rate of profits. In a theory determining the ‘natural’ interest rate on the basis of technological conditions of production, instead, no separation can be made between the analysis of the average interest rate and that of the links between commodity prices and distributive variables. In this case, the condition of a uniform rate for return on capital defines the ‘long-period equilibrium’ position for both commodity prices and interest rate.

The Rise of Neoclassical Economics

The long-period method was also used by those economists (like Walras, Menger, Jevons, Böhm-Bawerk, J.B. Clark, Wicksell, et al.) who some years later introduced and developed the ‘neoclassical’ theory of value and distribution. No question was raised by these authors as to the use of this method.

The new theory, unlike the previous one, determined prices, output and distribution simultaneously. The ‘natural’ or ‘equilibrium’ values of all these variables (including the interest rate and the level of activity in the economy, which turns out to be a full employment level) depended, among other things, upon the technological conditions of production and were thus associated with the attainment of a uniform rate of profits in the economy.

Among the earlier neoclassical economists, Marshall deserves special consideration, since he introduced the notion of short- and long-period equilibrium (see Marshall 1890, p. 80). In his writings, Marshall tried to show how the neoclassical principles of price determination in terms of supply and demand functions could be applied to analytical levels which were closer to actual events. He thus analysed price determination for each single market (partial equilibrium) and within this analysis he referred to three different notions of equilibrium (temporary, short-period and long-period), which differed as to the conditions determining the supply functions. In a temporary equilibrium, it was supposed, there is no time to change the supply of the commodity. The amount supplied is fixed and the equilibrium price is that which allows that quantity to be demanded.

Analyses of short-period equilibrium assume that there is time to change supply through production, but there is no time to change the structure of fixed capital goods existing in that industry. This assumption constrains the technological possibilities of production. As in the case of temporary equilibrium, short-period equilibrium is compatible with windfall profits or losses.

In long-period analyses, it is assumed instead that there is time to adapt the structure of fixed capital goods of the industry so that quasi-rents (that is, entrepreneurial net profits) disappear. The price then guarantees just the ‘normal rate of profits’ (that is, the ‘equilibrium’ real rate of return on capital which is uniform in the whole economy).

Marshall’s partial equilibrium analysis appears to rely on general equilibrium analysis for the determination of the ‘equilibrium’ rate of return on capital and of ‘ceteris paribus’ prices. The view that the ‘general equilibrium’ analysis was logically prior appears accepted in some major contributions of the debate on Marshall’s theory of value of the 1920s and the early 1930s (see Sraffa 1925 and 1926, and Pigou’s reply, 1927). Marshall’s starting point thus was the same as that of Walras, Wicksell, and of the other neoclassical economists mentioned above.

Long-period general equilibrium must not be confused with ‘secular’ equilibrium, which results from allowing enough time for factor endowments to change under the influences of demographic factors and propensity to save, so as to cause the economy to reach ‘stationary’ or ‘steady growth’ conditions (see Robbins 1930).

Short- and Long-Period in Keynes

By the end of the 1920s, dissatisfaction with the neoclassical conclusions as to the level of activity of the economy and with the analysis of capital led some economists to new analytical developments, which affected for the first time the method used too.

J.M. Keynes criticized the neoclassical conclusion that the market economy has an inherent tendency towards full employment. In the preparatory works and in the introduction to the General Theory he insisted that his concern was not the analysis of the temporary and cyclical fluctuations of the level of activity, but the theory dealing with the more fundamental forces which tend to prevail in the economic system (see Keynes 1936, pp. 4–5, 1973, pp. 405–7, and 1979, pp. 54–7). He wanted thus to replace the neoclassical long-period theory of the level of output with a new one. Yet the way he presented his new theory has raised many problems of interpretation also related to the method used.

First of all, Keynes stated in his book that he assumed as given the structure of fixed capital goods existing in the economy. This can lead to consider his theory as a short-period one, arguing that it would determine the level of capacity utilization in the economy. It is difficult, however, to support this interpretation also with the argument that in the General Theory Keynes was following Marshall’s definition of short-period, which was confined to partial equilibrium analysis. Marshall knew that the time required for adjustment of the structure of fixed capital goods differed from one industry to the other, so that it would have been unreasonable to extend the hypothesis of a fixed structure from one industry to the whole economy, as Keynes did. This element of ambiguity as to the use of the concepts has raised many puzzling questions among the interpreters of Keynes.

At the same time, Keynes explicitly stated that his theory was meant to explain why the level of employment, over a specific historical period, oscillates round an intermediate or average position (often not a full-employment one), whereas in other periods it oscillates round a different one (Keynes 1936, p. 254). This reference to ‘specific historical periods’ and to ‘average or normal positions’ can lead to consider Keynes’s theory as a long-period one, in the same way as Marx’s theory of the ‘average’ interest rate. The assumption of a fixed structure of capital goods would thus play a secondary role in Keynes’s theory.

Besides, Keynes hinted towards an analysis of accumulation which emphasizes the role played by effective demand (Keynes 1936, pp. 372–80). The trend followed by a growing economy in which adjustment in the structure of fixed capital goods has occurred, is affected by the level of effective demand. The possibility of assuming in this analysis an adjusted structure of fixed capital goods (to which a uniform rate of profits corresponds) can lead to consider this as the long-period theory present in the General Theory.

Finally, the maintenance in the General Theory of elements belonging to the neoclassical tradition, like the acceptance of the principle of diminishing marginal returns for capital from which the existence of a full-employment level of the rate of interest is derived (see Keynes 1936, pp. 147–8, 178, 203, 235 and 243, 1973, pp. 456, 615, 630) has allowed some interpreters to consider Keynes’s ‘underemployment equilibrium’ as a situation in which market forces have not yet worked out their effects fully, consequently defining it as a position of ‘short-period equilibrium’ (see Patinkin 1976, pp. 116–19; Winch 1969, p. 167).

The presence of several lines of development of its basic principle (that of effective demand) and the lack of precision and coherence as to the concepts and the analytical elements used appear to be an endless source of discussion as to the interpretation of Keynes’s work. The existing evidence does not seem to support, however, the view that the General Theory wanted to move along the same lines as Hayek, Hicks and others, who in those years were proposing the neoclassical theory of value, distribution and the level of output on the basis of a method of analysis different from the long-period one.

Post-Walrasian Developments

In the same years, dissatisfaction with the neoclassical analysis of capital was leading to a shift in method, owing to the adoption of what may be called ‘post-Walrasian’ notions of general equilibrium, elaborated by Hayek and Lindahl around the 1930s, but first proposed to a wider audience in 1939 by Hicks’s Value and Capital (see Garegnani 1976; Milgate 1979). The change in method derives from the change in the treatment of the capital endowment.

In the traditional neoclassical treatment, dominant up to the 1950s, the conception of equilibrium as a centre of gravitation of time-consuming adjustments (a conception incompatible with taking as given the equilibrium endowments of the several capital goods) had been reconciled with the supply-and-demand approach to factor pricing by conceiving capital as a single factor of production, capable of changing ‘form’ (that is, of embodying itself into different vectors of heterogeneous capital goods) without changing in ‘quantity’, so that its ‘form’ (that is, composition) could be left to be determined by the equilibrium condition of a uniform rate of return on the supply price of capital goods – the distinguishing element of long- period positions. Capital so conceived had ultimately to be measured as an amount of value, because in equilibrium different capital goods earn rewards proportional to their values. Within the neoclassical framework, therefore, the reference to a homogeneous factor ‘ capital’, a value magnitude, was a logical necessity, entailed by the attempt to explain distribution through the equilibrium between demand for and supply of ‘factors of production’, without abandoning the traditional method of longperiod positions (Petri 2004). With one exception, this conception of capital was in fact more or less explicitly adopted by all founders of neoclassical theory and it was the target of the Cambridge critique of the 1960s (Harcourt 1969; Garegnani 1970). The only exception had been Walras, who intended as well to determine a long-period equilibrium and accordingly maintained the uniform-profit-rate condition, but took as data the endowment of each kind of capital goods, with the result that his model was generally devoid of solutions.

Walras’s treatment of the capital endowment as a given vector is maintained in post-Walrasian general equilibrium analyses, but the condition of uniform profit rate on supply price is dropped. Existing capital goods are treated like natural resources; commodities are dated, so prices of future commodities are distinguished from prices of currently available commodities; and the current composition of the production of new capital goods is determined in either of two ways: by assuming the existence of complete futures markets (intertemporal equilibria, see for example Debreu 1959), or through the introduction of expectations among the data (temporary equilibria, see for example Hicks 1939 and Grandmont 1977).

The difference between the notion of equilibrium entailed by such a treatment of capital and that entailed by the long-period method of analysis warrants emphasis (Garegnani 1990). The latter attempts to represent states of the economy which have the role of centres of gravitation of observed day-to-day magnitudes: chance movements away from such a state set off forces tending to bring the economy back to it. Changes in the economy can then be studied by comparing the long-period positions corresponding to the situation before and after the change. Post-Walrasian equilibria cannot have such a role, because they rely on data some of which (the endowments of capital goods and, where futures markets are not complete, expectations) would be altered by any chance deviation from the equilibrium: thus the forces set off by this deviation would not tend to bring the economy back to the same equilibrium. For the same reason, stability questions relative to post-Walrasian equilibria can only be asked for imaginary atemporal adjustment processes which exclude the implementation of disequilibrium production decisions before the equilibrium is reached.

A Variety of Usages

The introduction of new equilibrium concepts, together with the tendency to overlook the existence of differences with previous ones and to use the same terminology for the former and for the latter, has been a source of confusion and misunderstandings in recent debates on theoretical and applied work.

The term ‘short-period equilibria’ has been sometimes applied to post-Walrasian equilibria (including ‘fix price’ equilibria with quantity adjustments, which share the same impermanence of data). On other occasions, Keynes’s notion of equilibrium has been identified with temporary equilibrium. In both cases, the very great difference between Marshall’s and Keynes’s analyses on one side and post-Walrasian analyses on the other side has been neglected: in post-Walrasian models, all capital goods, including circulating capital goods, are given, while in Marshall’s short period analyses only the fixed plant of a single industry is a datum, and in Keynes’s work only the fixed capital goods of the whole economy are given.

At the same time, the term ‘ long-period equilibrium’ has been used in recent years to refer (a) to post-Walrasian intertemporal equilibria with futures markets extending far into the future; (b) to sequences of temporary equilibria; (c) to stationary or steady-growth equilibria. In all these cases, an incomplete grasp of the changes introduced in the notion of equilibrium appears to emerge.

Finally, modern neoclassical economists sometimes develop applied analyses using the traditional method of long-period positions, although rejecting, as their theoretical foundations, the traditional versions of neoclassical theory in favour of the post-Walrasian ones, which are not compatible with that method.

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