"An Essay on SFEcon’s ‘Perfect Markets Model’"
An Essay on SFEcon’s ‘Perfect Markets Model’ ABSTRACT: All SFEcon models of macroeconomic adjustment are essentially ‘finite state machines’ in that they are only aware of their current state, and of a set of rules for advancing the current state through one differential element of time. To such a view, the global economic order would appear to be an analog computer, simultaneously controlling all stocks S of Good J among the assets of Sector I in Economy K at time t. The task of economic science would then be to imagine how a physical state Sijkt might be continuously controlled by an abstract system of financial state variables giving expression to prices and interest rates. SFEcon’s prototypes respond to this challenge with inherently stable and goal-seeking behaviors, proceeding through quite recognizable business cycles toward a material balance in which general equilibrium prices cooperate with marginal products to produce Pareto’s optimum. (Py dY/dE = Pe at each cell in the matrix, while everything being used in current production E is exactly replaced by that production Y). SFEcon’s models of economic adjustment are structured by a three-dimensional input/output matrix comprising any number of sectors, and segmented into any number of national tables. Models operate by continuously re-evaluating and actuating rates of material flow among the economic sectors. These flows are controlled by prices, currency values, and interest rates which are themselves systematically adjusted by references to the model’s physical state, even while it advances through a succession of chaotic states toward a unique general economic optimum. Novel hyperbolic production functions have been devised to regulate the informational exchange between the models’ physical and financial states. Parameters shaping these highly non-linear boundary conditions are easily derived in mathematically closed-form from routinely published I/O data. SFEcon posts several prototypes at www.sfecon.com. The economic theory embodied by these models can be expressed in terms most compatible with academic interchange if three limits are imposed on what the prototype models portray: 1) efficient markets, whereby everything in supply at a given moment is being used; 2) modeling of an isolated economic system having no foreign trade or investment; and 3) activity in every cell of the input/output matrix describing the economic system. These simplifications allow a sufficiently compact notation to reveal solutions the familiar Vienna Problem, while demonstrating the computation of an absolute measure of value for economics that is no more variable than the metric ton, the board-foot, or the BTU.