Modern Economy and Reconsideration of the Equilibrium Assumption : Is it possible to reconstruct "effective" economics?

Kitamura, Kazuhito (2025): Modern Economy and Reconsideration of the Equilibrium Assumption : Is it possible to reconstruct "effective" economics?

Abstract

This paper challenges traditional economics' reliance on Adam Smith's "invisible hand" and its assumption of equilibrium derived from nominal variables, arguing that this hinders economists' understanding of modern economies. It proposes "dynamic equilibrium," where stability arises from interactions between agents' internal characteristics and external factors. A key equation derived from the paper is "R_t-ρ=n+D_a-(U_(θa)θ)/U_c". Its left-hand side, the discrepancy between asset return (R_t) and time preference rate (ρ), is balanced by two forces on the right-hand side: retaining capital within the economy (the marginal utility of assets compared to consumption) and promoting its diffusion and dilution (capital outflow (D_a) and population growth (n)). That suggests that if time preference is an inherent trait, economies with a lower time preference will have a funds surplus, but this will be partially offset by capital outflow or a weak asset preference, so the decline in the real interest rate will be limited, and vice varsa. The paper argues that while conventional economics has focused on the left-hand side of this equation, understanding the right-hand side is crucial. This mechanism will be able to pragmatically explain various modern economic phenomena through the immobilization of the relations between debtor and creditor even when agents are rational and markets are efficient : for example, long-term global imbalances, deflationary equilibrium in developed economies, and inequalities of income and assets and so on. Ultimately, the paper reinterprets modern economic disequilibrium as a result of rational agent behavior, offering insights for more effective macroeconomic policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: dynamic equilibrium; time preference; asset preference; capital flows; global imbalance
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62 - Existence and Stability Conditions of Equilibrium; D - Microeconomics > D0 - General > D00 - General; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D50 - General; F - International Economics > F0 - General > F02 - International Economic Order and Integration; F - International Economics > F6 - Economic Impacts of Globalization > F61 - Microeconomic Impacts; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R13 - General Equilibrium and Welfare Economic Analysis of Regional Economies

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