Keynes warned about relying solely on comparative statics to analyze the effects of exogenous shocks in The General Theory
What Keynes is asking us to envision here is not the comparative static analysis relied on in both mainstream textbooks and, indeed, in his own analysis of the "multiplier" process associated with a permanent increase in public investment in chapter 10 of The General Theory.
Rather, Keynes is describing a potentially endless dance of shifting curves across time whose final resting place, if any, is unknowable - a process ruled out, and thus hidden from the reader 's view, by the failure to move beyond comparative statics in IS/LM theory. I repeat here a relevant comment from Keynes mentioned above:I should, I think, be prepared to argue that, in a world ruled by uncertainty, with an uncertain future linked to an actual present, a final position of equilibrium, such as the one we deal with in static economics, does not properly exist.
(CW 29, p. 229)
Though Keynes did use a comparative-static analysis of a permanent change in the level of public and semi-public capital investment in The General Theory, he also warned us in that book that comparative statics should only be the first step in the full analysis required to understand the dynamic impact of economic "shocks" or unexpected policy changes on economic outcomes, not the only step. This is so important and so at odds with Modern Keynesian methodology that I quote him at length here. He began by saying that the use of comparative statics "must not lead us into supposing that [the curves or functions] are, strictly speaking, independent" as required in comparative statics (CW 7, p. 297).
The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide us with an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the possible interactions of
A digression 285 the factors amongst themselves.
This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error. It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis... that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep "at the back of our heads" the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differential equations [representing out-ofequilibrium processes] "at the back" of several pages of algebra which they assume will all vanish. Too large a proportion of recent "mathematical" economics are merely concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentions and unhelpful signals.(CW 7, pp. 297-298, emphasis added)
He made a similar point in chapter 18. He said that economic models divide "determinantsofoureconomic system" intotwo groups: endogenous and exogenous variables. This division is "of course, quite arbitrary from any absolute standpoint. The division must be made entirely on the basis of experience" (CW 7, p. 247). If we want to ask what the initial effect of a fall in investment spending on income and employment will be when holding expectations, confidence, and the balance sheets of firms, financial investors, and households constant, a comparative-static exercise may be adequate to the task. But if we want to know what changes will result from the decline in investment in the trajectory of the economy over a longer period, we must allow those variables initially and arbitrarily held constant to react to the first-stage or comparative-static changes. If these changes affect expectations and/or confidence and/or balance sheets (or indeed any other determinant of the AD or AS functions), this will cause additional, endogenously generated movements whose end point is unpredictable. The induced effects on variables initially held constant will be of especially great significance in turbulent times such as the 1930s and the post-2007 global economic and financial crisis.