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International Economics, Robert A. Mundell, New York: Macmillan, 1968, pp. 298-317.
Robert A. Mundell
The stability analysis introduced by Hicks has been one of the most successful failures in economic theory. Originally developed to integrate statical and dynamical general equilibrium theory, it was used by Hicks (, p. 62) as a bridge between dynamics and comparative statics:
The laws of change of the price system, like the laws of change of individual demand, have to be derived from stability conditions. We first examine what conditions are necessary in order that a given equilibrium system should be stable; then we make an assumption of regularity; that positions in the neighbourhood of the equilibrium position will be stable also; and thence we deduce rules about the way in which the price-system will react to changes in tastes and resources.
But the stability conditions were not founded on an explicitly formulated dynamic system. Hicks had defined stability along conventional lines:
In order that equilibrium should be stable, it is necessary that a slight movement away from the equilibrium position should set up forces tending to restore equilibrium....
but concluded that stability requires that
. . . a rise in price makes supply greater than demand, a fall in price demand greater than supply.
This is indeed the stability condition corresponding to a dynamic system in which excess demand causes a rise in price, but, as Samuelson pointed out, the proposition is not explicitly derived as the condition of convergence of such a dynamical system. The problem may be considered trivial in the case of a single market,3 but it raises difficulties in analysis and interpretation in the case of multiple exchange (exchange of more than two commodities), as Hicks foresaw (, p. 66):
What do we mean by stability in multiple exchange ? Clearly, as before, that a fall in the price of X in terms of the standard commodity will make the demand for X greater than the supply. But are we to suppose 