Tuesday, February 23, 2016

Defining Alternative Equilibrium

While various forms of alternative equilibrium are (theoretically) possible, I've attempted to portray a specific example which could address a variety of pressing issues. Why would today's economy benefit from additional options, beyond the limits of general equilibrium? Three problems in particular stand out: declining labor force participation (in the U.S.) poor marketplace definition for time based services which people value, and growing long term budgetary problems.

Some of the most important aspects of today's services capacity are poorly organized, in general equilibrium. So long as knowledge based product is partially inaccessible (for both production and consumption), aggregate demand and aggregate supply will both remain problematic. Alternative equilibrium could provide much needed wealth creation, without the first mover problems that are associated with general equilibrium. Nash equilibrium is a helpful way to think about first mover problems. From Wikipedia:
In game theory, the Nash equilibrium is a solution concept of a non-cooperative game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy.
Or simply stated:
Informally, a set of strategies is a Nash equilibrium if no player can do better by unilaterally changing their own strategy.
Even though many aspects of general equilibrium are resistant to change, production reform is possible at the margins, through a form of money built to represent local non tradable sector activity. Both time and resource use would respond to internally structured coordination patterns, particularly for low population densities. Even though knowledge use systems would provide economic complexity where it is sorely lacking, it would exist in a simpler, more compact form than what occurs spontaneously in prosperous cities. Most important, local corporations would manage time value in ways which preserve vital links between aggregate time value and other forms of resource capacity.

General equilibrium is primarily structured to facilitate the coordination of income at higher levels. Alternative equilibrium would generate more basic connections between time value and resource use, and maintain them as a baseline for overall stability. Alternate equilibrium would also be able to utilize non tradable sector activity as a starting point for economic activity, and gradually expand into other areas of production potential.

During periods of strong economic growth, claims on the time value of knowledge product often reflected the relative status of various groups, in relation to government. As a result, individuals and associations alike negotiated prices for skills value which in turn limited their marketplace formation. Unfortunately, this prohibited the dispersion of entire knowledge groups, in ways which could not be alleviated in general equilibrium. Housing stock values also increasingly reflect the artificial limits in knowledge use, which had earlier taken place.

Too many vital aspects of knowledge use also became dependent on the role of fiscal policy, as well. What should have been capable of wealth creation in its own right, became constrained by both budgets and claims on artificial restrictions in general equilibrium. Given the fact too much knowledge product is defined on exclusive and fiscal terms, it has become a drag on productivity - and in increasing instances assumed as not even necessary in the marketplace.

Time based product is quite different from the product of tradable sectors, in terms of supply, demand and marketplace capacity. Were it not so, basic issues re future growth would be difficult to reconcile, and time based services need a more responsive marketplace on monetary terms. In particular, a monetary setting for time based product, would provide relief for government budgets - especially when other revenue isn't forthcoming. How many other potential solutions for long term budget problems are waiting in the wings? I would wager there aren't very many.

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