The diagram applies to only a few people. To better understand our social system as a whole, we need to study the subject of theoretical macroeconomics. I have written a book on this past badly explained and much confused but vital topic. The following article is about it.
Making Macroeconomics a Much More Exact Science
Today macroeconomics is treated inexactly within the humanities, because it appears to be a very
complex and easily confused matter. But this does not give it fair justice, because we should be trying
to find a viable approach to the topic and examine it in a way that avoids these problems, and for us to better understand of what it comprises and how it works. Suppose we ask ourselves the question: “how many different KINDS of financial (business) transaction occur within our society?”
The simple and direct answer shows that that only a limited number of them are possible or necessary.
Although our sociological system comprises of many millions of participants, to properly answer this
question we should be ready to consider the averages of the various kinds of activities (no matter who
performs them), and simultaneously to idealize these activities so that they fall into a number of
commonly shared operations. This approach uses some general terms for expressing the various types
of these transactions, into what becomes a relatively small number. Here, each kind is found to apply
between a particular pair of agents—each one of which has individual properties. Then to cover the
whole sociological system of a country, it requires only 19 kinds of exchanges of the goods, services,
access rights, taxes, credits, investments, valuable legal documents, etc., verses the mutual and
opposing flows of money.
The argument that led to this initially unexpected result was prepared by the author. It may be found in
his working paper (on the internet) as SSRN 2865571 “Einstein’s Criterion Applied to Logical
Macroeconomics Modeling”. In this model these double-flows of money verses goods, etc., necessarily
pass between only 6 kinds of role-playing entities (or agents). Of course, there are a number of different configurations that are possible for this type of simplification, but if one tries to eliminate all the unnecessary complications and sticks to the more basic activities, then these particular quantities and flows provide the most concise yet fully comprehensive result, which is presentable in a seamless
manner, for our whole social system and one that is suitable for its further analysis.
Surprisingly, past representation of our sociological system by this kind of an interpretation model has
neither been properly derived nor formally presented before. Previously, other partial versions have
been modeled (using up to 4 agents, as by Professor Hudson), but they are inexact due to their being
over-simplified. Alternatively, in the case of econometrics, the representations are far too complicated
and almost impossible for students to follow. These two reasons of over-simplification and of complexity are why this pseudo or non-scientific confusion has been created by many economists, and it explains their failure to obtain a good understanding about how the whole system works.
The model being described here in this paper is unique, in being the first to include, along with some
additional aspects, all the 3 factors of production, in Adam Smith's “Wealth of Nations” book of 1776.
These factors are Land, Labor and Capital, along with their returns of Ground-Rent, Wages and
Interest/Dividends, respectively. All of them are all included in the model, as a diagram in the paper.
(Economics’ historians will recall, as originally explained by Adam Smith and David Ricardo, that there
are prescribed independent functions of the land-owners and the capitalists. The land-owners speculate in the land-values and rent it to tenants, whilst the capitalists are actually the owners/managers of the durable capital goods used in industry. These items may be hired out for use. Regrettably, for political reasons, the concept of these 2 different functions were combined by John Bates Clark and company about 1900, resulting in the later neglect of their different influences on our sociological system-- the terms landlord and capitalist becoming virtually synonymous along with the expression for property as real-estate.)
The diagram of this model is in my paper (noted above). A mention of the related teaching process is
also provided in my short working paper SSRN 2600103 “A Mechanical Model for Teaching
Macroeconomics”. With this model in an alternative form, the various parts and activities of the Big
Picture of our sociological system can be properly identified and defined. Subsequently by analysis, the way our sociological system works can then be properly seen, calculated and illustrated.
This analysis is introduced by the mathematics and logic, which was devised by Nobel Laureate
Wellesley W. Leontief, when he invented the important "Input-Output" matrix methodology (that he
originally applied only to the production sector). This short-hand method of modeling the whole system replaces the above-mentioned block-and-flow diagram. It enables one to really get to grips with what is going-on within our sociological system. It is the topology of the matrix which actually provides the key to this. The logic and math are not hard and are suitable for high-school students, who have been shown the basic properties of square matrices and the notation of the calculus.
By this technique it is comparatively easy to introduce any change to a pre-set sociological system that
is theoretically in equilibrium (even though we know that this ideal is never actually attained--it simply
being a convenient way to begin the study). This change creates an imbalance and we need to regain
equilibrium again. Thus, sudden changes or policy decisions may be simulated and the effects of them
determined, which will point the way to what policy is best. In my book about it, (see below) 3 changes
associated with taxation are investigated in hand-worked numerical examples. In fact, when I first
worked it out, the irrefutable logical results were a surprise, even to me!
Developments of these ideas about making our subject more truly scientific (thereby avoiding the past
pseudo-science being taught at universities), may be found in my recent book: “Consequential
Macroeconomics—Rationalizing About How Our Social System Works”. Please write to me
at chesterdh@hotmail.com for a free e-copy of this 310 page book and for any additional information.
The diagram applies to only a few people. To better understand our social system as a whole, we need to study the subject of theoretical macroeconomics. I have written a book on this past badly explained and much confused but vital topic. The following article is about it.
Making Macroeconomics a Much More Exact Science
Today macroeconomics is treated inexactly within the humanities, because it appears to be a very
complex and easily confused matter. But this does not give it fair justice, because we should be trying
to find a viable approach to the topic and examine it in a way that avoids these problems, and for us to better understand of what it comprises and how it works. Suppose we ask ourselves the question: “how many different KINDS of financial (business) transaction occur within our society?”
The simple and direct answer shows that that only a limited number of them are possible or necessary.
Although our sociological system comprises of many millions of participants, to properly answer this
question we should be ready to consider the averages of the various kinds of activities (no matter who
performs them), and simultaneously to idealize these activities so that they fall into a number of
commonly shared operations. This approach uses some general terms for expressing the various types
of these transactions, into what becomes a relatively small number. Here, each kind is found to apply
between a particular pair of agents—each one of which has individual properties. Then to cover the
whole sociological system of a country, it requires only 19 kinds of exchanges of the goods, services,
access rights, taxes, credits, investments, valuable legal documents, etc., verses the mutual and
opposing flows of money.
The argument that led to this initially unexpected result was prepared by the author. It may be found in
his working paper (on the internet) as SSRN 2865571 “Einstein’s Criterion Applied to Logical
Macroeconomics Modeling”. In this model these double-flows of money verses goods, etc., necessarily
pass between only 6 kinds of role-playing entities (or agents). Of course, there are a number of different configurations that are possible for this type of simplification, but if one tries to eliminate all the unnecessary complications and sticks to the more basic activities, then these particular quantities and flows provide the most concise yet fully comprehensive result, which is presentable in a seamless
manner, for our whole social system and one that is suitable for its further analysis.
Surprisingly, past representation of our sociological system by this kind of an interpretation model has
neither been properly derived nor formally presented before. Previously, other partial versions have
been modeled (using up to 4 agents, as by Professor Hudson), but they are inexact due to their being
over-simplified. Alternatively, in the case of econometrics, the representations are far too complicated
and almost impossible for students to follow. These two reasons of over-simplification and of complexity are why this pseudo or non-scientific confusion has been created by many economists, and it explains their failure to obtain a good understanding about how the whole system works.
The model being described here in this paper is unique, in being the first to include, along with some
additional aspects, all the 3 factors of production, in Adam Smith's “Wealth of Nations” book of 1776.
These factors are Land, Labor and Capital, along with their returns of Ground-Rent, Wages and
Interest/Dividends, respectively. All of them are all included in the model, as a diagram in the paper.
(Economics’ historians will recall, as originally explained by Adam Smith and David Ricardo, that there
are prescribed independent functions of the land-owners and the capitalists. The land-owners speculate in the land-values and rent it to tenants, whilst the capitalists are actually the owners/managers of the durable capital goods used in industry. These items may be hired out for use. Regrettably, for political reasons, the concept of these 2 different functions were combined by John Bates Clark and company about 1900, resulting in the later neglect of their different influences on our sociological system-- the terms landlord and capitalist becoming virtually synonymous along with the expression for property as real-estate.)
The diagram of this model is in my paper (noted above). A mention of the related teaching process is
also provided in my short working paper SSRN 2600103 “A Mechanical Model for Teaching
Macroeconomics”. With this model in an alternative form, the various parts and activities of the Big
Picture of our sociological system can be properly identified and defined. Subsequently by analysis, the way our sociological system works can then be properly seen, calculated and illustrated.
This analysis is introduced by the mathematics and logic, which was devised by Nobel Laureate
Wellesley W. Leontief, when he invented the important "Input-Output" matrix methodology (that he
originally applied only to the production sector). This short-hand method of modeling the whole system replaces the above-mentioned block-and-flow diagram. It enables one to really get to grips with what is going-on within our sociological system. It is the topology of the matrix which actually provides the key to this. The logic and math are not hard and are suitable for high-school students, who have been shown the basic properties of square matrices and the notation of the calculus.
By this technique it is comparatively easy to introduce any change to a pre-set sociological system that
is theoretically in equilibrium (even though we know that this ideal is never actually attained--it simply
being a convenient way to begin the study). This change creates an imbalance and we need to regain
equilibrium again. Thus, sudden changes or policy decisions may be simulated and the effects of them
determined, which will point the way to what policy is best. In my book about it, (see below) 3 changes
associated with taxation are investigated in hand-worked numerical examples. In fact, when I first
worked it out, the irrefutable logical results were a surprise, even to me!
Developments of these ideas about making our subject more truly scientific (thereby avoiding the past
pseudo-science being taught at universities), may be found in my recent book: “Consequential
Macroeconomics—Rationalizing About How Our Social System Works”. Please write to me
at chesterdh@hotmail.com for a free e-copy of this 310 page book and for any additional information.