By basic, I'm referring to the simplest equilibrium possible: small communities with few extra amenities. There are stark contrasts between the basic equilibrium environments of today's developed nations, versus the managed resource capacity of earlier local communities. Early basic equilibrium was non monetary and self sufficient, even if precariously so. Today's basic equilibrium environments often appear less precarious by comparison, given their general equilibrium dependence (retirement, disability, etc).
Basic equilibrium could be a useful construct, in that it suggests conceptual framing for the evolution of general equilibrium conditions. General equilibrium is often expressed either in terms of concrete mathematical formulas, or assumed to be complex beyond comprehension. How to think about the matter differently?
Regular readers won't be surprised that I imagine basic equilibrium, as local sets of non tradable sector housing and time/knowledge based services. It's interesting that these now burdensome aspects of our lives, evolved prior to money. Money became necessary as tradable sector activity grew more complex. Not only did tradable sector activity appear random as contrast with non tradable sector activity, it started society down the path to long term growth and progress. Gradually, the (constantly) changing relationships between tradable and non tradable sectors, generated the complexity which makes it difficult to categorize general equilibrium dynamics.
Over time, the basic equilibrium of local sectors gradually become enmeshed with governmental budget burdens, which feature in today's growth limits. Nevertheless: While governments contribute to economic stagnation, by no means are they alone. They don't have a monopoly on the economic activities which lead to income capture or excessive human capital requirements (input). As more inputs are required in relation to output, governments are left with fewer output results to redistribute. Both public and private interests have inadvertently reduced aggregate output potential and marketplace expansion. Albeit by different means, different sectors often emphasize aggregate input over aggregate output - a problem which likely impacts both total factor productivity and the natural rate of interest.
A notable feature of today's basic equilibrium settings, is the dearth of locally derived income. Yet those earlier, non monetary basic equilibrium communities were self supporting because they had to be. They had to solve for basic equilibrium as best they could. Hence survival meant awareness of the vital relationship, between aggregate inputs and aggregate outputs.
While national dependence still appears safer than risky self supporting alternatives, communities are nonetheless vulnerable to the growing budgetary battles of the present - especially the struggles which involve healthcare. In the modern version of nationally defined basic equilibrium, one's personal time value may not provide adequate survival options, in the event of budget breakdown. Is it possible to change this circumstance? No matter how small, a local community needs the same understanding re inputs to output ratios, as their governments.
There's a childhood game called "Red Light Green Light", which provides what I hope is a simple way to envision total factor productivity, aggregate inputs and outputs, and the natural rate of interest. I'll briefly explain the game. First, we drew a line at the end of the street, where the person making the calls would stand. Everyone else faced the caller from a distance, and approached the line on the green light announcement. If they were still moving when "red light" was announced, they had to back up and start over.
Now, imagine the game as an economics scenario. Perhaps one could think of the person making the calls for red or green light, as referring to recessions and recoveries. Each sector is represented, as a person approaching the line. Each step forward by a sector participant, represents an output gain over the required inputs, which in turn means extra resource capacity beyond what was needed to begin with. The steps taken by all sector participants during the course of the game, is total factor productivity. The line is the natural rate of interest. As each sector crosses the line, their additional resource capacity ("left over" outputs) becomes available for redistribution, whether for savers, governments, firms or others.
Why is it so difficult, for the time based product of non tradable sector activity to cross the line? More inputs are being required, in relation to the total output these participants gain before they can proceed forward. Yet this handicap in total factor productivity is hidden, by others who have already crossed the line where their additional gains become available for redistribution. Another sector which experiences difficulty crossing the line, is loan formation which focuses on the income capture of consumers, instead of generating new growth potential.
By turning more time value (input) into output, during the entire process of human capital investment, sectors which feature time based product could also cross the line, thereby making their contribution to the natural interest rate. As more total output once again becomes available for redistribution, growth could resume, and monetary policy could return to a true normal. Let's solve for basic equilibrium.
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