A (Basic) Theoretical Walkthrough of the Economy

The economy actually seems to be composed of fairly simple processes and flows.  The initial capital stock is produced through labor and energy, which then adds value to the raw materials and leads to a diversification of the economy, and gets reinvested in the initial capital stock.  There can be positive shocks (such as technology that saves on labor or energy costs and increases the amount of labor and energy that can be added to the system within the constraints of natural law and conditions) or there can be negative shocks (such as poor weather/climate/environmental conditions, or over speculation and over extension of capital without value being added).  In order to have a robust, highly complex, and large economy, it is likely better to have income dispersed throughout the population to enable everyone in the society to have access and participate in the markets.  This creates a democratizes the economy and society, as well as bring on the Internet of Goods and Services that allows people to innovate, experiment, or spend in the economy on more valuable goods and services.  This has to be enabled and enforced through legislation, just as any institution in the market requires legislation and enforcement in order to produce and perpetuate social institutions in our societies.  This being said, there is likely a diminishing marginal return on wealth that varies from person to person (some people produce more wealth back than others and everyone can only do so much with the wealth that they have, in spite of the quantities that they may possess).  To this end, there are likely maximum amounts of wealth that are valuable to the economy per person or family, even if it would be better for some people to control more of the wealth than others to a limited extent.

The government’s role in the economy can then add value to the economy by creating and sustaining certain economic, social, and environmental conditions through law, law enforcement, and the investment in services and goods that the private investors in the regular market economy would not do voluntarily or in good quality.  As such, while it’s an opportunity cost between government spending and private investment (there is no free lunch), there is some degree of government spending on certain programs and projects in certain and general conditions that does add benefit to the society and the economy that would not be created in laissez-faire market conditions.  Overall, the economy is going to grow perpetually provided that the activities and people in the economy do not bring on negative shocks through their actions, no negative shocks occur in general that are beyond  our control, and  within the constraints of technology, demand, and physics that is present in our universe.  There is likely to be periods where the marginal growth rate slows down due to the size of the pie growing in proportion to the rate at which it Is growing and/or due to the temporary lack of new demand and innovation in the economy.

This is before we get into notions of what the economy grows into and  how the economy affects the societ(ies) in which it is embedded.  This then becomes a normative question of taste and desire, rather than a question of a description of facts and functions. The point of this exercise is to talk through the processes of the economy in simple terms.  The actual activity in the economy is quite dynamic, just as weather patterns are in nature.  However, to my mind (and, it is my mind only until it is confirmed or denied by empirical investigation), these are the processes by which the economy grows or shrinks in actuality.  Hopefully this may help others develop models to test relative to actual real world data rather than leaving us to rely on untested, untestable, or potentially incorrect theories about how the economy works.

See on Scoop.itIt Comes Undone-Think About It


Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: