STATIC ECONOMICS AND BUSINESS FORECASTING 11
making great profits and others are having difficulties or incurring
losses, fills him with concern. He wishes his own portfolio to be
well-balanced and diversified. Static economic theory he usually
does not know by name, but the generalizations of static eco-
nomic theory he grasps readily. He is interested in balance and
proportion and equilibrium.
Many of the best students of business forecasting have recog-
nized very frankly their debt to general economic theory and their
dependence upon it. Mr. Ray Vance, for example, in a recent
book states very explicitly that the business forecaster must be
an economist first and a statistician second, that statistical
investigations must be guided by economic theory.
Professor Wesley C. Mitchell, whose contributions to business
forecasting are greater than those of any other single man, gives
evidence in almost every part of his work of his knowledge of and
dependence upon economic theory, static economic theory, and the
equilibrium notion. His Business Cycles could not have been
written by a man who was not deeply learned in this body of
doctrine. He does not find use for the expression “the static
state.” * But his interpretation of the business cycle constantly
employs equilibrium notions. The period of prosperity generates
abnormalities, stresses and strains. Costs get out of proper rela-
tions to prices. There are great inequalities in the rise of costs
and prices. Various other abnormalities occur, such as shortages
! Professor Mitchell says (Business Cycles, page 86):
“One who turns from reading economic theory to reading business his-
tory is forcibly impressed by the artificiality of all assumptions of a
‘static’ or even a ‘normal’ condition in economic affairs. For, despite all
efforts to give technical meanings to these ambiguous terms, they suggest
the idea of an unchanging order, or of an order which economic principles
are always tending to re-establish after every aberration. But a review
of business annals never discloses the existence of a ‘static’ or a ‘normal’
state in either of these senses. On the contrary, in the real world of
business, affairs are always undergoing a cumulative change, always passing
through some phase of a business cycle into some other phase. Prosperity
is relapsing into depression, or becoming more intense, or breeding a crisis;
a crisis is degenerating into a panie, or subsiding into depression; depres-
sion is becoming deeper, or merging into a revival of prosperity. In fact,
1 Roya theory, a state of change in business conditions is the only ‘normal’
I agree with this paragraph, but I do not believe that it touches the
heart of the matter. The static concept in economics should not imply
either that business does not change or that business in its periodical
changes recurs to an identical situation. The static concept is merely a
methodological device for isolating and analyzing a highly important body
of economic tendencies, an understanding of which is necessary for any
realistic study of economic processes.