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AN ESSAY IN DYNAMIC THEORY
1. THEfollowing pages constitute a tentative and preliminary attempt to give the outline of a " dynamic " theory.Static theory consists of a classification of terms with a view to systematic thinking, together with the extraction of such knowledge about the adjustments due to a change of circumstances as is yielded by the " laws of supply and demand." It has for some time appeared to me that it ought to be possible to develop a similar classification and system of axioms to meet the situation in which certainforces are operating steadily to increase or decrease certain magnitudes in the system. The consequent " theory " would not profess to determine the course of events in detail, but should provide a framework of concepts relevant to the study of change analogous to that provided by static theory for the study of rest. The axiomatic basis of the theory which I propose to develop consists of threepropositions-namely, (1) that the level of a community's income is the most important determinant of its supply of saving ; (2) that the rate of increase of its income is an important determinant of its demand for saving, and (3) that demand is equal to supply. It thus consists in a marriage of the " acceleration principle " and the " multiplier " theory, and is a development and extension of certainarguments advanced in my Essay on the Trade Cyc1e.l 2. Attempts to construct a dynamic theory have recently been proceeding upon another line-namely, by the study of time lags between certain adjatments. By the introduction of an appropriate lag the tendency of a system to oscillate can be established. I n these studies there is some doubt as to the nature of the trend on which the oscillation issuperimposed. Supposing
Especially in Ch. 2, seos. 4-5. The " Acceleration Principle " was there designated the " Relation." There is an objection to the use of the term acoeleration in this connection. The study of the condition in which demand and supply are flowing a t an unaltered rate has long been known as Static Theory : this implies that the equilibrium of prices and quantities resultingtherefrom is regarded as analogous to a state of rest. By analogy, therefore, a steady rate of increase of demand, which is our f i s t matter for consideration in dynamic theory, and a major effect of which is expressed by the " Relation," should be regarded as a velocity. Acceleration would be a rate of change in this. However, the use of the expression Acceleration Principle in the sense of...