Page 72 - Global Political Economy_Understanding The International Economic Order

NEO CLASS ICAL C ONCEP T OF AN ECONO MY
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without regardto initial conditions. In other words, history is gener-
ally irrelevant to an economic explanation of an event. All one needs
to know is the vectors andthe strength of the forces at work. The
attitude of economists toward dynamics is not unlike that of physi-
cists; a physicist does not need to know the history of a baseball game
nor have a detailed knowledge of the batter to calculate the trajectory
of a batted ball. Nevertheless, introduction of the idea of path depen-
dence into economic analysis has helped moderate antihistorical
thinking in economics.
Although the methodof comparative statics is a powerful tool of
analysis, its usefulness as a means of understanding economic change
in the real worldis severely limited. The methodcannot provide an
analysis of the historical forces responsible for the original equilib-
rium position nor of the transitional process involvedin the move
from one equilibrium position to another. In effect, economics cannot
account for the causes of the disequilibrium because the exogenous
variables that produced the equilibrium lie outside the realm of eco-
nomic analysis. Moreover, economics cannot predict, nor is it con-
cernedwith, the course of historical events that leadto the new equi-
librium; yet, as the path dependence concept informs us, the many
important developments on the way to the new equilibrium will have
a determining effect on the nature of the new equilibrium and hence
on the overall condition of the economic system. Finally, even though
an economic system eventually finds a new equilibrium, the system
never returns to the oldequilibrium. In brief, the world has been
transformed, but economics is of no more than limited utility in ex-
plaining the outcome andhow it was achieved.
At the time of the 1973 oil crisis, some economists arguedthat the
price rise was causedsolely by market forces. The high inflation of
the late 1960s andearly 1970s, they asserted, hadcauseda wide gap,
or disequilibrium, between the nominal price and the real price of
petroleum. According to this interpretation, the oil price change was
merely a rapidmovement towardthe new equilibrium between the
price andthe supply of petroleum. While this comparative statics
analysis does indeed tell part of the story, it omits the crucial role
playedby the Yom Kippur War between Israel and its Arab neighbors
andthe impact of the oil price rise on worldaffairs. It is actually
highly doubtful that the huge rise in the price of oil would have taken

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Paul Samuelson, quotedin Rod Cross, ed., Unemployment, Hysteresis and the
Natural Rate Hypothesis (Oxford: Basil Blackwell, 1988), 3.
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