Static Economics: Scope, Importance and Limitations

Let us make an in-depth study of Static Economics:- 1. Meaning of Static Economics 2. Scope and Importance of Static Economics 3. Limitations.

Meaning of Static Economics:

The word ‘static’ has been taken from physical science. It points to a position of complete rest.

In other words, by static is meant a position where there is the absence of any movement.

But the concept of statics has its different meaning in economics. It does not point to a position of complete rest or no movement.

In economics, the concept of static refers to a situation where there is a movement. But this movement is continuous, certain, regular and constant. Static economics does not deal with the unexpected changes. It studies only the expected economic activities. There are no windfall changes or fluctuations in economic activities. According to Prof. Harrod, “An economy in which rates of output are constant is called static.”

Economic activities are repeated in different time periods in a static economy. No changes in economic activities occur. For example, India’s national income increased by 5% in 1977-78. The increase in 1978-79 and 1979-80 was also 5%.

The study of national income is called a static analysis because the rate of increase in national income is the same. In other words, this study of India’s national income shows that Indian economy passed through a stationary state during these years. According to J R. Hicks, “Economic statics covers that part of economic theory where we do not trouble about dating.”

Prof. Schumpeter defined static analysis as “a method of dealing with economic phenomena that tries to establish relations between elements of economic system, prices and quantities of commodity, all of which refer to the same point of time.” In this way, from Schumpeter’s definition we come to know that static analysis refers to the economic phenomena of the same period. So time factor has no role to play in static analysis. This type of economic analysis refers to a stable equilibrium.

According to Prof. Stigler, “The stationary state is an economy in which the tastes, resources and technology do not change through time.” Static economic analysis is also known as a timeless economy. The pricing of commodities is an important example of static economy. Here we suppose that the price is determined by the forces of demand and supply which belong to the same time period. Price, demand and supply refer to the same time period.

The determinants of demand and supply are supposed to be constant in static economics. Under perfect competition, price is determined by the forces of demand and supply. This analysis of pricing is related to economic statics. The meaning of static economic analysis can be explained with the help of Fig. 1.2.

In the figure 1.2, DD is the market demand curve and SS is the market supply curve. E is the point where the quantity demanded and supplied is equal to OM. The price OP is determined by the interaction of the forces of demand and supply. Here demand, supply and price refer to the same time period. And this timeless economic analysis is called static economic analysis. Prof. Clark has pointed out the features of a static economy.

They are:

(i) No change in the population and its composition.

(ii) No change in the quantity of capital.

(iii) No change in the techniques of production.

(iv) No change in the working and organisation of industrial units.

(v) No change in the habits, tastes and fashions of the people i.e. the wants of people remain the same.

Scope and Importance of Static Economics:

Static economics occupy an important role in economics. According to Prof. Harrod, “Statics will remain an important part of the whole economics.”

We can explain the importance and scope of static economics as under:

1. It is the simple and easy method of economic analysis. It is easier to understand and economical in thought.

2. It is the basis of the principle of free trade. The principle of free trade which was favoured by classical economists like Adam Smith is an integral part of static economics.

3. Robbins’ definition is also the subject matter of static economics. Robbins defined economics as a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. This definition is a part of static economics.

4. Static economics gives knowledge of the conditions of equilibrium. It tells that price is determined where demand for the supply of goods is equal. Similarly, income is in equilibrium where planned investment and planned savings are equal.

5. It is the basis of dynamic analysis. Prof. Hicks has pointed out that static economics occupies an important role because it gives a lot of information for the proper understanding of dynamic economics. We can understand the path of equilibrium only after studying the conditions of equilibrium.

6. Keynes’ theory is also static in nature. It shows only a once-over change of variables like consumption function, multiplier, liquidity preference, etc. The effect of once-over change of economic valuables is studied in static economics.

Limitations of Static Economic Analysis:

Static economic analysis has its drawbacks too.

They are given below:

1. Constancy of Variables:

Prof. Clark and Stigler have assumed many economic variables as constant. They are population, quantity of capital, natural resources, techniques of production, habits and fashions, etc. We know that these economic factors change in reality. So static economic analysis is far from reality.

2. Unrealistic Assumptions:

Static analysis is based on unreal assumptions like perfect competition, perfect mobility, perfect knowledge, full employment, etc. These assumptions are far from the real world. That is why Prof. Hicks said, “Stationary state in the end is nothing but an evasion.”

3. It ignores Time Element:

Another shortcoming of the static analysis is that it studies a timeless economy. But in reality, many changes occur with the passage of time. Therefore, it gives a narrow explanation of economic problems.

4. It does not Explain the Path of Equilibrium:

Static analysis explains only the final state of equilibrium. And comparative statics compares only the two final equilibrium states. It does not show how this new equilibrium has been reached. Though comparative static economic analysis has many drawbacks, yet it occupies an important role in economics.

Many important classical laws are a part of static economic analysis. Moreover, it is a simple type of economic analysis. It is easier to understand.