Our inquiry differs from classical analysis and from traditional economics. Functional Macroeconomic Dynamics prescinds from human psychology to replace Walras’ general equilibrium with a prior and more fundamental equilibrium to which human participants must adapt.
Participants are not to dominate as willy-nilly, ignorant, external, efficient causes, but rather to adapt to the immanent intelligibility of the objective mechanism. This immanent intelligibility is the set of laws explaining the process – laws not to be enforced by a civilian police force but rather abstract laws to be understood and honored by enlightened free people. Continue reading →
There are five figures below from CWL 15: The single figure on the left represents the interrelations of interdependentMonetary Flows; and the figure contains the important condition of dynamic equilibrium: G = c”O” -i’O’ = 0. The four figures stacked on the right demonstrate aspects of the productive phases constituting a Pure Cycle of Expansion. The bidirectional arrows uniting the two sides signify that the dynamic equilibrium among interdependent flows specified on the left is to be achieved consistentlythroughout the long-run expansion represented on the right. This condition of dynamic equilibrium is that the crossover flows between the two interacting circuits must continuouslybalanceeven as they continuously vary in magnitude in the succession of phases constituting the expansionary process. Just as the general laws of simple parabolic or pendular motion are explanatory and applicable to any particular instance of initial angle and velocity, so a) the primary relativities of productive and monetary flows, and b) the primary differentials of long-term expansion explain the economic process, and are normatively relevant in every particular instance. All five diagrams are unitary. Each and every velocitous and accelerative flow of products and money has proximate or remote explanatory aspects embedded in all five diagrams. (Continue reading)
Andrei Shleifer is a professor of economics at Harvard University. Nicola Gennaioli is a professor in the Department of Finance at Bocconi University, Milan.
A Crisis of Beliefsis well worth reading as either a treatise on psychology or as an application of a model of psychology to people’s mistaken thinking and acting in certain economic circumstances.
But Gennaioli and Shleifer must ask, How would the human participants act if, instead of being a bundle of desires, fears, cognitive biases, and ignorance regarding the abstract primary relativities of the economic process, they understood the laws of the process and the precepts for adaptation yielded by the laws? That is to ask, Is there a set of laws independent of human psychology and above intellectual ignorance to which human participants would enlightenedly adapt if they understood them? And, if so, is not the primary responsibility of professors of macroeconomics to educate and enlighten participants as to the laws they are violating so as, thus, to curb automatically their irrational psychological tendencies? Continue reading →