This last chapter is dedicated to the development of stability analysis at the end of the 1930s and the beginning of the 1940. American economists changed the perspective taken from the analysis of cyclical fluctuations to the study of adjustments in an economy in disequilibrium. The central problem examined became that of the full employment equilibrium and through the discussion of the existence and stability of this equilibrium new arguments were developed on both sides to defend its possibility or deny that it was obtainable. Hansen argued that it may not exist for a positive rate of interest, Pigou argued that the real balance effect was sufficient to ensure this existence and Samuelson answered that the problem was in its stability rather than existence.
This approach of instability was taken up by Oskar Lange as a way to demonstrate that the capitalist system was unstable, and he presented a rather bleak view of the economy which was unable for him to adjust through market mechanisms. This was the apex of instability analysis, a point which had never been attained in the work of the econometricians, and which was perhaps never attained again. On the other hand, Klein, the first student of Samuelson, also pursued this approach and based it on his empirical exploration of the American economy. The macroeconometric approach that he developed proves thus he was the heir of the debates on economic instability.
Posts in this section:
[chapter 9 posts]
Waiting for the judgment day: Hansen, Samuelson, Pigou and Klein on the classical stationary state
Walking the tightrope: Klein, Patinkin and Schelling on price flexibility and stability