Dynamic Economics: Concept, Importance and Limitations

Let us make an in-depth study of Dynamic economics:- 1. Concept of Dynamic Economics 2. Scope and Importance of Dynamic Economics 3. Limitations.

Concept of Dynamic Economics:

The concept of dynamics is derived from Physics. It refers to a state where there is a change such as movement.

Tides of the sea, a bird flying in the sky are examples of dynamics. But the word ‘dynamic’ has a different meaning in economics.

We have know that there is movement in statics also but this movement is certain, regular and expected. While dynamics refers to that movement which is uncertain, unexpected and irregular.

Therefore, an aero plane flying in the sky is in a dynamic state only if its direction, height and speed are uncertain. We know from day to day experience that fluctuations occur in the economy quite often. And it is not possible to make correct predictions about such fluctuations.

The concept of dynamics is nearer to reality. In dynamic economics we study the economic variables like consumption function, income and investment in a dynamic state.

According to Prof. Harrod, “Economic dynamics is the study of an economy in which rates of output are changing.”

In the real world, economic variables like population, capital, techniques of production, fashions, habits, etc. do not change at a constant rate. The rate of change is different at different times.

For example, the population of a country may increase at a rate of 2% in the first year; 3% in the second year and 5% in the third year, if the other economic variables change at unequal rates, the rate of output will also change at different times. In a dynamic state, there is uncertainty of every change. So, it is not possible to make correct predictions.

According to Prof. Hicks, “Economic dynamics refers to that part of economic theory in which all quantities must be dated.”

From Prof. Hicks’s definition, we come to know that time element occupies great importance in dynamic economics. Here economic variables are related to different points of time. According to Baumol, “Economic dynamics is the study of economic phenomenon in preceding and succeeding events.”

Comparative economic statics does not show the path of change of the old to new equilibrium. But in dynamic economics we also study the path of change or the movement towards equilibrium. This path can be explained with the help of the diagram given below which relates to price determination in a market.

In the diagram drawn below, DD is the demand curve and SS is the supply curve. Suppose the initial price is OP₁. At OP₁ price, supply of the commodity is more than its demand. As a result, price falls. This process of falling price continues till demand becomes equal to the supply of the commodity.

E is the point where demand for and supply of the commodity are equal. This is a point of equilibrium. Here OP is the equilibrium price. OM is the quantity demanded and supplied. This equilibrium path of the price change is shown through the arrow lines in the figure.

Recently the concept of dynamics has been applied to the economy as a whole, Prof. Clark has pointed out the following features of a dynamic economy:

(i) In a dynamic economy, population grows;

(ii) Quantity of capital grows;

(iii) Modes of production improve;

(iv) Industrial institutions undergo changes. Inefficient organizations are replaced by efficient organisations.

(v) Habits of the people, fashions and customs change, as wants of the people increase.

We can conclude by saying that dynamic economics relates to a dynamic economy where uncertainty and expectations play their part.

Scope and Importance of Dynamic Economics:

Dynamic economics is becoming more and more popular since 1925. Though the principles advocated by Clark and Aftalian were dynamic in nature yet their main purpose was to explain the business fluctuations. After 1925, dynamic economics became popular not only in business fluctuations but also in the determination of income and growth models.

The following points explain the scope and importance of dynamic economics:

1. Study of Time Element:

Time element occupies an important role in dynamic economics. Economic problems concerning continuous change of economic variables and path of change can be studied only in dynamic economics.

2. Trade Cycles:

Theories of trade cycles have been advocated only through the introduction of dynamic economics. Theories of trade cycles are based on dynamic economics as they refer to the fluctuations of the different time periods.

3. Basis of many Economic Theories:

Dynamic economics has an important place in economics because many economic theories are based on it. For example, saving and investment theory, theory of interest, effect of time element in price determination, etc. are based on dynamic economics.

4. More Flexible Approach:

Dynamic analysis is more flexible. Models regarding the possibilities of economic change can be development in dynamic analysis. That is why it has been found a useful mode of study. Dynamic economics is also useful in solving the problems of economic planning, economic growth and trade cycles.

5. Realistic Approach:

Dynamic economic analysis is nearer to the reality. In a real world, economic variables like national income, consumption, etc. change irregularly and uncertainly. Moreover, economic variables of the previous period also affect the present economy. And time clement occupies an important role in economic analysis.

Limitations of Dynamic Economics:

Dynamic economic analysis has its shortcomings too. It is difficult to understand.

Its main limitations are the following:

1. Complex Approach:

Dynamic economic analysis is a complex approach for the study of economic variables because it is based on time element. To find solutions of various problems, we have to make use of mathematics and economics which is beyond the understanding of a common man.

2. Not Fully Developed:

Many economists like Samuelson and Harrod, have developed dynamic approach of economic analysis. They have developed their theories through dynamic analysis. But this mode of economic analysis has not been fully developed. The reason is that factors affecting economic variables change very soon. Dynamic approach is not developing at the speed at which economic factors change.