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6. Equilibria in the Productive Process

 

Dynamic Stochastic General Equilibrium (DSGE) models, which have played such an important role in modern discussions of macroeconomics, in my judgment fail to serve the functions which a well-designed macroeconomic model should perform.

[W]ith so many parameters, macro-econometrics becomes little more than an exercise in curve fitting, with an arbitrarily chosen set of moments generated by the model contrasted with reality.1Joseph E. Stiglitz, “Where Modern Macroeconomics Went Wrong,” https://www.ineteconomics.org/uploads/papers/Where-Modern-Macroeconomics-Went-Wrong.pdf. Accessed May 26, 2019.

— Joseph E. Stiglitz, “Where Modern Macroeconomics Went Wrong” (2017)

 

6.0 The Problem of Data

Part of the problem in modern macroeconomics is, at this time, data needed to explain economic change is not yet available. Contemporary economics is still rooted in descriptive circular flow models. And, accounting does not yet distinguish between basic and surplus transactions, nor levels in surplus supply chains. Once two-flow structures are adverted to, however, accounting will track ongoing and emerging aggregates of basic, surplus and redistributive transactions. With the two-flow structure in mind, then, we make a fresh start. 

 

6.1      Changes in Economies

Changes in economies are sometimes described as what happens between periods that are conspicuous for being, in some sense, “stable.”2Here, we use the word “stable” descriptively and non-technically. In the literature, terms such as “stability,” “stationary state,” “steady state” and “equilibria” are defined in various models. For instance, it is said that an economy is stable when there is “modest growth in GDP and inflation is kept to a minimum.” There is also stability in the sense of being opposite to instability. Instability is sometimes an adjective for when there are fluctuations in stock markets. Extreme cases are the “2008 meltdown,” the Great Depression, and the 1882 Bourse crash in France. As indicated in A Very Brief Introduction, sec. 4, most of what goes on in the stock markets is not part of the productive process. Booms and slumps will be discussed in sec. 8, below.

Questions of terminology aside, there have been periods in history during which economies evidently did not change very much. And, there have also been periods of great change, sometimes taking place over long periods of time. For instance, broadly speaking, there were three “agricultural revolutions,”3Within these transitions, there were numerous local shifts including, for instance, what has been called the British Agricultural Revolution. all three of which were part of large scale economic change. The first of these was humanity transitioning from hunting and gathering to settled agriculture.4This has also been called the Neolithic Revolution. This occurred in many contexts, circa 10,000 B.C.E. – 2,000 B.C.E. The second is what happened to agriculture as part of the Industrial Revolution.5For instance, horses and oxen were replaced by steam-powered tractors. In that way, tilled acreages were soon doubled or tripled in size, without increasing labor. The third agricultural revolution began in the 20th century, a transitioning to chemical fertilizers, insecticides, genetic engineering and, generally, farming methods that take advantage of modern biochemistry.

 

6.2      The Immediate Plan

In sections 7 and 8, we provide preliminary results on the “mechanics” of change due to innovation6There is a vast literature on economic growth and development. Eventually, results will be recycled. See sec. 10.. Before that, however, we briefly describe certain normative equilibria. This will help later toward understanding economic growth and development that occur rather than “growth and development” as defined in contemporary models.

 

6.3      Elementary Description of Certain Normative Equilibria in the Productive Process

One way to begin is to look to pre-history. For long periods of time very little changed in primitive economies.7See, e.g., A Very Brief Introduction to Economics’ New Standard Model, sec. 1.

If it happened that increasingly large amounts of time and energy were needed to make spears, traps, baskets, nets, and other tools, then there would be increasingly less time to acquire the necessities of life.8This happened when, e.g., natural resources needed for tools were being depleted. Examples are well known. On the other hand, if increasingly large amounts of time were needed to acquire the necessities of life, there would be less time for making and maintaining needed tools. In other words, part of how early economies survived is that, in the long run, neither basic nor surplus production were at the expense of the other. Similar observations can be made about economies in early history, medieval agricultural economies, and modern economies. The observation here is not that basic and surplus production are the same but rather that there are periods during which a balance between them is sustained over time.9Financial aspects of such equilibria will be discussed in section 8. We call such periods equilibria in the productive process. But, economies can move away from such equilibria. How that happens is a topic for the next section.

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