Page 70 - Global Political Economy_Understanding The International Economic Order

NEO CLASS ICAL C ONCEP T OF AN ECONO MY
techniques. In the short term, as the core of a market economy grows,
it incorporates into its orbit a larger andlarger periphery; in the long
term, however, due to the growth process and diffusion of productive
technology, new cores tendto form in the periphery andthen to be-
come growth centers in their own right. Examples of these tendencies
for the core to expandand to stimulate the rise of new competitive
cores andthe profoundconsequences for economic andpolitical af-
fairs produced by such developments will appear throughout this
book.

Method of Comparative Statics
The concept of equilibrium constitutes the foundation of the method
of comparative statics, one of the most important analytic techniques
17
in the economist’s toolbox. It is a methodof analyzing the impact
of a change in a model by comparing the equilibrium resulting from
the change with the original equilibrium. In their analysis of economic
change, economists rely on this presumedtendency of a market to
return to an equilibrium. The methodof comparative statics is as old
as economics itself andwas usedby DavidHume (1711–1776) in his
theory of the price-specie flow mechanism—his analysis of the do-
mestic andinternational effects of a change in a nation’s balance of
payments. The method, however, was not formalized until the 1930s
andthe 1940s in the work of John Hicks (1939) andin Paul Samuel-
son’s classic Foundations of Economic Analysis (1947). 18 Consider-
ation of this methodof comparative statics enables one to appreciate
both the strengths andthe limitations of the economic analysis of
economic change.
In an equilibrium condition, as already noted, no participants in a
market have an incentive to change their behavior. This situation is
assumed to continue until an exogenous factor is introduced. A
change in relative price, a technological innovation, or a shift in con-
sumer tastes provides an incentive for economic actors to alter their
behavior; an exogenous change may also involve imposition of new
constraints on economic actors or appearance of new economic op-
portunities. In response, say, to a change in relative prices, a rational
economic actor will have an incentive to maximize gains or minimize
losses. Or, a new technology that reduces the cost of producing a

17
For a technical discussion of the method, consult Paul A. Samuelson, Foundations
of Economic Analysis (Cambridge: Harvard University Press, 1983), 7–8.
18
Ibid.
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