DSGE is – to many economists – the standard model and method of macroeconomic analysis. See our treatment of the textbooks’ IS-LM, AD-AS models and the Phillips Curve correlation.
The acronym stands for Dynamic (in Newtonian mechanics an external force causes a change to constant velocity, i.e. an acceleration, which may be negative or positive), Stochastic (random, not according to system, probabilistic, unexplained) General (pertaining to the entire economic process), Equilibrium (essentially Walrasian static equilibrium).
Leon Walras developed the conception of the markets as exchange equilibria. Concentrate all markets into a single hall. Place entrepreneurs behind a central counter. Let all agents of supply offer their services, and the same individuals, as purchasers, state their demands. Then the function of the entrepreneur is to find the equilibrium between these demands and potential supply. … The conception is exact, but it is not complete. It follows from the idea of exchange, but it does not take into account the phases of the productive rhythms. … [CWL 21, 51-52] (Continue reading)
The process is always the current, purely dynamic process. The analysis is purely functional, purely relational and explanatory analysis. The theory is general and universally applicable to concrete determinations in any Instance; The theory is a normative theory having a condition of equilibrium.
Our subheadings in this treatment are as follows:
- Always the Current Process:
- A Purely Dynamic Process Requiring a Dynamic Heuristic:
- A Purely Functional Analysis:
- A Purely Relational, Explanatory Analysis:
- A Theory, General and Universally Applicable to Concrete Determinations in Any Instance:
- A Normative Theory Having a Condition of Equilibrium:
Always the Current Process: Continue reading
The economy is composed of the production of two conceptually distinct, mutually-definitive types of goods. Depending on the context they may be named
- basic goods or surplus goods,
- consumer goods or producer goods,
- accelerated goods or accelerator goods,
- point-to-point goods or point-to-line goods.
An expansion of the surplus production function causes a later acceleration of the basic production function. First one surge, then later the other surge. Note the symbols for time (t) and (t-a) in the following formula, “the lagged technical accelerator.” (continue reading)
kn[f’n(t-a)-Bn] = f”n-1(t) – An-1 CWL 15, p. 37
New foundations for a new science of macroeconomics are grounded in
- a scientific, dynamic heuristic
- the technique of implicit definition
- precise, purely relational, analytical distinctions between fundamental terms representing functional flows of products and money
- the functional interrelations among these interdependent, mutually defining, explanatory functional flows
As both Aristotle and Lonergan acknowledged, forms are grasped by mind in images.
τα μεν ουν ειδη τον οητικον εν τοις φαντασμασι νοει
[Aristotle, De Anima, III, 7, 431b 2] and [CWL 3, title page]
Thus, if we want to have a comprehensive grasp of everything in a unified whole, we shall have to construct a diagram in which are symbolically represented all the various elements along with all the connections between them. [McShane 2014, 11 (quoting CWL 7, 151)]
We wish here to suggest the insights the reader should have to fully appreciate all that is contained in the Diagram of Rates of Flow. (continue reading)