Andrew Lainton — The Only Way out of the Romer Conundrum is to Dump Wicksells Rocking Horse

All of these models are based on a parable of equilibrium based on Wicksell’s Rocking Horse model. We now know this to be mathematically false, so why don’t we just replace it?

His famous quote from 1918

“If you hit a rocking horse with a stick, the movement of the horse will be very different from the stick. The hits are the cause of the movement, but the system’s own equilibrium laws condition the form of movement”

Wicksells model was one of damped equilibrium. In nature equilibrium is a state of rest, so a pendulum for example will eventually stopped swinging. So the only way to make the rocking horse rock is to hit it with a stick.

The rocking horse symbolizes a system, an economy in this example, The stick represents an exogenous shock. This approach assumes that cycles have exogenous causes. That approach would be incorrect if cycles have endogenous causes.

To get away from models where change is generated by philosogen and chaloric we have to abandon the assumption that what drives cycles is outside the model. To get a rocking horse to rick requires energy, and how much it swings depends on its centre of mass. The economy is much more like a powered rocking horse where its centre of gravity is subject to rare but violent shifts to new equilibria.

Decisions, Decisions, Decisions

The Only Way out of the Romer Conundrum is to Dump Wicksells Rocking Horse

Andrew Lainton