Economists measure periods in units of economic time. In the market period, time is compressed so that supply cannot vary. In the short period (SP), time occupies an interval in which fixed investments cannot change; in the long period, time is sufficient to allow all inputs to vary. Fixed investments include specialized skill and ability, machinery, and organizational structure. In the SP, one can only mix and match fixed investment to meet changing demand and supply conditions. Alfred Marshall (1842-1924), the reigning British economist of his day who is credited with these views, was aware that no sharp line of demarcation could be drawn between the short and the long periods ( 1982). A day gives an intuitive feel for the market period. For the SP, one considers not only the given supply of, say, bread for that day, but goes back to the planting of wheat, which started approximately a year before, and the expected prices set at that time. The expected price may reach its normal values from two months to a year, bracketing the SP.
One problem with the SP is whether fixed investments should extend beyond the production period. Plough or die-casting equipments may last for only one production period, and the stock of capital should reflect the life of such short-lived equipment. If the adjustment spreads over time based on available price signals, then the SP definition is in jeopardy. Alternatively, one can deduct values from equipment in the previous period. Another problem in the SP is that various industries take different time intervals to produce a product with the same plant units, making it impossible to have an aggregate SP for the whole economy. The preeminent economist John Maynard Keynes (1883-1946) answered these problems by using the concept of prime cost, which is the sum of factor and user costs in defining income and its components of savings and investments; by using the concepts of exante vs. expost for equating saving and investment; and finally by settling on the more logical concept of national income identity.
Post-Keynesians have many interpretations of the Keynesian short period. A counter long-period view is that long-period expectations are not realized yet. One argument is that Keynes’s view is a special case of the classical system. Richard Kahn’s (1989) view that short run average cost was constant with a reversed L-shape up to a maximum level of output seems to counter Keynes’s view of a Z curve in chapter 3 of the General Theory. On the special case characteristics, Lawrence Klein (1966) stated that the SP Walrasian (named for the French economist Léon Walras [1834-1910]) equilibrium might not exist in the Keynesian model because of interest inelastic investment or very high interest elastic demand for money due to market imperfections. Marshall’s protégé Arthur Pigou (1877-1959), in correspondence with Keynes, was the first to draw a reversed L-shape labor supply curve for the SP. From the dominant textbook perspective, Keynes’s SP solution made output and employment depend on investment through a multiplier and made the equality between saving and investment follow from two logical premises—income is the sum of consumption and investment, and saving is income less consumption. Keynes appears to fix all capital stock for the whole economy in the SP, analogous to Marshall’s fixing production units for a single industry. Although Keynes dealt with liquidity preference and marginal efficiency of capital schedules that vary with long-term expectation, he defined SP expectation as a day and restricted long-period expectation to the view of mass psychology, which plays out in three months to a year, corresponding to Marshall’s market period and SP, respectively.
Following Keynes, John Hicks (1904-1989) created a temporary (sequential) equilibrium model that reflected Keynes’s SP. Prices are determined in the market period, Monday, and production varies during the rest of the week to meet varying market conditions. The past week, t – dt to t, or the future week, t to t + dt, is an infinitesimal period during which production can change. The long period is a link of various Mondays and weeks together.
For modern policy analysis, the SP equilibrium is reflected in a downward sloping Phillips curve at a position of nonaccelerating inflation rate of unemployment (NAIRU). For the monetarists and the new classical school, adjustments for SP differences between actual and expected prices enables convergence of the aggregate SP supply schedule to the long-period natural level where desired expectations are fulfilled. Robert Lucas and Thomas Sargent (1981), who extended the Walrasian and Marshallian concepts of price taking to the case where price provides information, were not concerned with long- and short-run characterizations, but with drifts in structural parameters of their models. The modern literature also developed an SP non-Walrasian equilibrium concept that depends on current prices and the expectation of future prices based on past and current prices. Thus the economic agents are able to carry out all their preferred actions in current markets.
SEE ALSO Capital; Demand; Expectations; Long Period; Long Run; Long Run Prices; Market Clearing; Short Run; Supply
Hicks, John. 1946. Value and Capital. 2nd ed. London: Clarendon Press.
Hicks, John. 1965. Capital and Growth. London and New York: Oxford University Press.
Hicks, John. 1981. Wealth and Welfare: Collected Essays on Economic Theory. Cambridge, MA: Harvard University Press.
Kahn, Richard. 1989. The Economics of the Short Period. New York: St. Martin’s.
Keynes, John Maynard. 1936. The General Theory of Employment, Interest, and Money. London: Macmillan and New York: Harcourt Brace.
Keynes, John Maynard. 1973. The General Theory and After, Part II: Defense and Development. Vol. 14 of The Collected Writings of John Maynard Keynes. London: Macmillan and New York: St. Martin’s.
Klein, Lawrence R. 1966. The Keynesian Revolution. 2nd ed. New York: Macmillan.
Lucas, Robert E., Jr., and Thomas J. Sargent. 1981. After Keynesian Macroeconomics. In Rational Expectations and Econometric Practice, vol. 1, eds. Robert E. Lucas Jr. and Thomas J. Sargent, 295-319. Minneapolis: University of Minnesota Press.
Marshall, Alfred.  1982. Principles of Economics. 8th ed. London: Macmillan.