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Structural change and 'new facts' in Pantaleoni's non-equilibrium dynamics

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The goal of this paper is to investigate Maffeo Pantaleoni’s early 20th century dynamic theory, and, in particular, to highlight the novelty of his notion of second-kind dynamics. The main thesis is that Pantaleoni employed the notion to build a
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  Structural change and ‘new facts’ in Pantaleoni’snon-equilibrium dynamics Nicola Giocoli Uni  v ersita` di Pisa, Dipartimento di Scienze Economiche, Via Curtatone e Montanara 15, Pisa 56126, Italy Recei v ed 1 November 2001; recei v ed in re v ised form 1 October 2002; accepted 1 January 2003 Abstract The goal of this paper is to in v estigate Maffeo Pantaleoni’s early 20th century dynamictheory, and, in particular, to highlight the no v elty of his notion of second-kind dynamics. Themain thesis is that Pantaleoni employed the notion to build a truly srcinal, non-orthodoxdisequilibrium dynamic theory capable of accounting for the dynamic and structuralinstability of the economic system as well as for the ‘true’ uncertainty affecting decision-making processes. # 2003 Else v ier Science B.V. All rights reserved. JEL classifications: B13; B52; D50 Keywords: Structural change; Disequilibrium; ‘True’ uncertainty; Dynamics; Pantaleoni; Equilibrium 1. Introduction The fortune of Maffeo Pantaleoni’s (1857  Á  / 1924) theory of economic dynamics hasgone through v arious ups and downs, following the changing interpretations of theo v erall scientific contribution of the founder of Italian Marginalism who has been v iewed, alternati v ely, as a champion of orthodoxy or as an explorer of re v olutionarypaths and whose works has been judged either systematic and unitary orfragmentary and occasional. Yet, despite a fairly rich, though heterogeneous, E-mail address: giocoli@mail.jus.unipi.it(N. Giocoli).Structural Change and Economic Dynamics14 (2003) 213  Á  / 236www.else v ier.com/locate/econbase0954-349X/03/$ - see front matter # 2003 Else v ier Science B.V. All rights reserved.doi:10.1016/S0954-349X(03)00004-3  literature on Pantaleoni’s dynamics, 1 what is still lacking is a proper assessment of the analytical features of his peculiar notion of  dinamica del secondo genere (literally,‘second-kind dynamics’, or SKD) formulated at the beginning of the 20th century.The goal of this paper is precisely to in v estigate the latter and, in particular, tohighlight its no v elty in the context of early 20th century dynamic theory.My main thesis is that Pantaleoni employed his new notion to build a trulysrcinal disequilibrium dynamic theory capable of accounting for phenomena such asthe dynamic and structural instability of the economic system. Pushed by the firmbelief that empirical occurrences such as endogenous cumulati v e processes andstructural discontinuities should and could be analyzed using the tools of economics  *  / that is, without making recourse to other disciplines, such as sociology,history or biology  *  / Pantaleoni sketched a new dynamic theory capable of doingwithout the standard assumptions of dynamic and structural stability, as he thoughtthat only by freeing the analysis from these restricti v e hypotheses, and thus bydistancing themsel v es from the neoclassical paradigm, economists could explainthese phenomena without trespassing on the boundaries of economic reasoning. Theheterodoxy of Pantaleoni’s position with respect to contemporary v iews on dynamictheory is apparent: actually, he was closer, as far as the subject and goal of hisanalysis are concerned, to the modern non-mainstream approaches dealing with‘complex’ dynamic phenomena (non-linearity, path-dependency, structural change,etc.). This, to my v iew, makes Pantaleoni’s contribution a ‘classic’ which deser v es tobe re-disco v ered. 2 One of the peculiarities of Pantaleoni’s analysis is the explicit acknowledgement of the role of what he called fatti nuo v i  (literally, ‘new facts’ (NF)) in determining thedynamic trajectories of the economic system. The clearest sign of Pantaleoni’sdetachment from orthodox neoclassical theory is precisely his awareness that thestudy of economic dynamics could not be limited to deterministic laws, as it had toco v er also the effects of  non-deterministic phenomena  *  / what he called the ‘law of NFs’. Moreo v er, the importance attributed to the NFs led him to link in a v eryoriginal way his dynamic theory to the problem of economic beha v ior underuncertainty.Also on the latter theme Pantaleoni’s v iews were indeed faraway from themarginalist and neoclassical orthodoxy. This is shown in particular by his choice to 1 Among the most recent assessments see, in English,Matsuura, 1966  Á  / 1967,Bellanca, 1997 [1995], Sylos Labini, 1997 [1995], and, in Italian,Perillo, 1985; Bellanca, 1990; Michelini, 1993. For a full bibliography of primary and secondary sources on Pantaleoni seeAugello and Michelini, 1997. 2 The primary sources to study Pantaleoni’s dynamic theory are two essays dated 1901 and 1909,‘Caratteri delle posizioni iniziali e influenza che esercitano sulle terminali’ ( The characters of initial  positions and the influence they exercise on the terminal ones ) and ‘Di alcuni fenomeni di dinamicaeconomica’ ( On some phenomena of economic dynamics ). Also the classification of economic phenomena inthe 1913 essay ‘L’atto economico’ ( The economic act ) is quite important. The three essays ha v e beencollected in the 1925 v olumes Erotemi di Economia . All the following translations from Pantaleoni’s worksare mine (the only a v ailable English translation, that of the 1909 essay in v olume 5 (1956) of the International Economic Papers , is largely unsatisfactory). N. Giocoli / Structural Change and Economic Dynamics 14 (2003) 213  Á  /   236  214  analyze a paradigmatic example of decision under uncertainty  *  / a firm’s in v estmentin new producti v e capacity  *  / wholly inside the realm of SKD. Thus, according tohim, economic beha v ior under uncertainty had to be studied with the tools of dynamic theory and, in particular, of his own disequilibrium dynamic theory. Thiswas again a pioneering intuition, which has been until now neglected by thesecondary literature.The paper is structured as follows. InSection 2the main features of the 1909 essayare presented and compared to then orthodox v iews.Section 3is dedicated to theanalysis of the 1901 essay, focusing in particular on the law of the NFs. InSection 4Ishow that the e v entual goal of Pantaleoni’s dynamics was the study of structuralchange.Section 5illustrates how Pantaleoni linked his dynamic theory to theproblem of choice under uncertainty. In the final section, I hint at the analogy, withrespect to dynamics, the NFs and uncertainty, between Pantaleoni and Joseph A.Schumpeter. 2. The 1909 essay and the two kinds of dynamics (1) In this section I present the main features of the 1909 essay ‘Di alcuni fenomenidi dinamica economica’ (Pantaleoni, 1925b), following the guideline of the threegoals that Pantaleoni set out to achie v e: first, to define the three notions of equilibrium, statics and dynamics, and to employ the definitions to e v aluate the stateof the art of contemporary economic theory; second, to identify a new kind of dynamics, not associated with the concept of equilibrium and capable of taking intoaccount the structural changes in the economic system; third, to demonstrate,through the description of some of the phenomena gi v ing rise to it, that such adynamics could be analyzed by making recourse to the categories of economicreasoning.According to Pantaleoni, at the start of the 20th century economics was a ‘Scienceof the laws of economic Equilibrium.’ (Pantaleoni, 1925b, p. 76). He noted that,while as far as economic statics was concerned the science had been brought toperfection by Pareto, no comparable results existed with respect to economicdynamics. This was a serious flaw, because statics was in general just a particularcase of dynamics (Pantaleoni, 1925b, p. 76).The three definitions of equilibrium, statics and dynamics are in Part I of Pantaleoni’s essay. The economic equilibrium is defined as a static position, that is, as‘ . . . absence of mo v ement . . . ’, while the dynamic phenomena are ‘ . . . the mo v ementswhich will take place so that such equilibrium is reached, or those taking place, whenthe equilibrium is perturbed, so that it is re-established, or also so that a new positionof equilibrium is reached . . . ’ (Pantaleoni, 1925b, p. 79). It follows that economicstatics is defined as the study of positions of economic equilibrium, while economicdynamics is the study of the mo v ements taking place in disequilibrium and leading toan equilibrium position (Pantaleoni, 1925b, p 79).Three remarks on these definitions. First, they re v eal a fundamental homogeneitybetween Pantaleoni’s and traditional approaches to dynamics. Indeed, the goal of  N. Giocoli / Structural Change and Economic Dynamics 14 (2003) 213  Á  /   236  215  Part I of the 1909 essay was precisely to define an orthodox framework that wouldbetter emphasize the no v elty of Part II, and in particular Pantaleoni’s idea that thestandard definitions and analysis could not co v er the whole range of dynamicphenomena.Second, the definition of economic equilibrium embraced by Pantaleoni mirroredthe one formulated by Vilfredo Pareto in the Manuel  : economic equilibrium was anindefinitely persistent position such that the system would ne v er spontaneouslyde v iate from it. 3 Thus, also Pantaleoni belie v ed that what characterized equilibriumwas the absence of endogenous moti v es of change: this explained why one couldlegitimately talk of ‘absence of mo v ement’, and then claim that the subject of staticswas to study this kind of positions. 4 Yet, the crucial point is that, according to him,not e v ery equilibrium position was an economic equilibrium, that is, shared theproperty of indefinite persistence. I will soon examine the concept of (pseudo-)e-quilibrium ‘pregnant of dynamism’ that the Italian economist suggested to counterthe Paretian notion (Pantaleoni, 1925b, p. 82). Here it suffices to note thatPantaleoni defined statics as the study of  equilibrium positions, and not of the equilibrium positions, precisely to underline that there were equilibria which did notbelong to the subject of statics. This justifies the name ‘static equilibrium’ used byPantaleoni to denote the Paretian (or, better, Walras  Á  / Paretian) economic equili-brium in the rest of his essay. 5 The definition of static equilibrium in terms of absence of mo v ement might lead usto belie v e that e v en Pantaleoni suffered from the ‘usual’ confusion between staticsand stationarity. 6 As is well known, while the members of the Lausanne school had aclear understanding of the independence of the two notions, this kind of mistake was v ery common among the neoclassical economists belonging to the so-called‘stationarist school’. Hence, one might be led to classify Pantaleoni among thelatter, together with, say, Wicksell, Cassel and Knight. Supporting this solution weha v e the fact that his definition literally identified a stationary equilibrium; 3 Cf.Pareto, 1966 [1909], 153. 4 Pantaleoni’s notion of economic equilibrium recalls Schumpeter’s definition of  dynamic equilibrium asa particular state of a dynamic system characterized by the absence of endogenous dynamics (Schumpeter,1997 [1954], 969). Actually, most of Pantaleoni’s analysis in Part I of the 1909 essay could be exposed interms of the properties of dynamic equilibria. A different issue is to claim that such an interpretation mayreally apply also to the equilibrium notions of the authors of the Lausanne School, as was implicit inPantaleoni’s words. The equilibrium analysis of Walras and Pareto was indeed static , both because it dealtwith relations referring to a single instant of time and because it determined instantaneously the solution of the system, but it was not stationary , because it did not preclude the possibility of changes in past andfuture ‘gi v ens’. On the contrary, the Schumpeterian definition of dynamic equilibrium reduces statics tothe mere description of stationary equilibria, and thus is not compatible with the Walras  Á  / Paretianapproach (Montesano, 1972, 191  Á  / 3). 5 In what follows I will use the terms economic equilibrium and static equilibrium as synonymous. Thishowe v er should not be taken to mean that the equilibria which are not static are beyond the boundaries of economic analysis. 6 The confusion, v ery common in the economic literature until the clarifying contributions by Frischand Samuelson, is examined bySchumpeter, 1997 [1954], 963  Á  / 7,Montesano, 1972, 186  Á  / 94,Donzelli,1986, 222  Á  / 8,Weintraub, 1991, Ch.2. N. Giocoli / Structural Change and Economic Dynamics 14 (2003) 213  Á  /   236  216  moreo v er, he adopted at least one of the typical hypotheses of the stationaristapproach, namely, that the static equilibrium presumes the in v ariance of theeconomic structure (Pantaleoni, 1925b, p. 83). Howe v er, such a conclusion wouldbe incorrect for a number of specific reasons which I will clarify in the next sections,but, more generally, because his own definitions of statics and dynamics deny it . Thisleads to my third remark.There is no doubt that, as noted also bySchumpeter, (1997 [1954], p. 967, fn.11),the latter definitions were not satisfactory. Pantaleoni associated statics anddynamics to the idea of ‘mo v ement’ and not, as it would be correct, to the presenceof an explicit temporal element. Furthermore, both notions were defined with respectto the equilibrium position, and not independently of it. Yet, he considered bothstatics and dynamics as methods of research , or, at least, as distinct class of problems .Notably, he took statics as just a particular case of dynamics, its problems being asub-class of the wider class of dynamic issues. This, to my v iew, should set the recordstraight with respect to the accusation that Pantaleoni confused statics withstationarity, though it has to be admitted that the demarcations he drew amongthe different notions were much v aguer than the neat ones en v isaged by Walras andPareto. 7 (2) The most v isible inno v ation brought forth by Pantaleoni’s 1909 essay was thedefinition of the three forms and the two kinds of dynamics (Pantaleoni, 1925b, p.77).The three forms were: (i) the dynamics leading the economic system back to thesame equilibrium from which it had mo v ed away; (ii) the dynamics bringing theeconomic system to an equilibrium different from the pre v ious one; (iii) the dynamicswhich did not lead the system (at least in a definite time span) to any equilibrium, butkept it indefinitely in a state of  agitazione (literally, ‘shaking’), that is, of non-equilibrium. 8 According to Pantaleoni, the three forms could be reduced to just two fundamental kinds of dynamics. The forms (i) and (ii) were indeed quite similar: first of all, bothbrought the system back to a position of static equilibrium; second, and mostimportant, both shared the assumption that the dynamism took place ‘ . . . maintaining identical the fundamental premises of the economic system . . . ’ (Pantaleoni, 1925b, p.83, srcinal emphasis), srcinal emphasis). In modern jargon, this amounts to saythat the two forms dealt with dynamic phenomena under conditions of  structural in v ariance of the economic system. Consequently, he pooled them under the heading dinamica del primo genere , or first-kind dynamics (FKD). The third form, instead, 7 Note also that, from the v iewpoint of an analytical reconstruction of Pantaleoni’s contribution todynamic theory, the major weakness of the pre v ious definitions is precisely their ambiguity with respect tothe issue of whether statics and dynamics are methods of research or just classes of problems. Gi v en thatPantaleoni continuously fluctuated between the two possibilities, in what follows I will try to point out thecases where this ambiguity affects the interpretation of his thought. 8 I use the term ‘non-equilibrium’, instead of ‘dis-equilibrium’, to emphasize Pantaleoni’s willingness todetach himself from traditional equilibrium analysis. Among the cases of non-equilibrium feature in factalso the positions of non-persistent (pseudo)-equilibrium. N. Giocoli / Structural Change and Economic Dynamics 14 (2003) 213  Á  /   236  217
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