Mechanical Inertia and Economic Dynamics: Pareto on Business Cycles

Abstract

In the second volume of his Cours, published a hundred years ago, Vilfredo Pareto (1897, section 928) put forward what was probably the first mathematical model of the business cycle. Apart from Knut Wicksell's (1899) review of Pareto's book and Jess Benhabib's (1979) short article (partly based on Wicksell's comments), Pareto's model has gone unnoticed. According to the view advanced by Pareto in the 1890s, concepts from physics are essential, not only in the realm of static equilibrium, but also in the investigation of economic dynamics. The model follows a new presentation by Pareto of his equations of general equilibrium, where he attempted to take into account the influence of “inertia” (habit) by applying d'Alembert's principle of mechanics. He concludes that the solution to the consumption equations has a cyclical pattern and uses that to explain business cycles as oscillations in aggregate production driven by changes in consumption.