Monday, October 09, 2006

Nobel Laureate Edmund Phelps, Examine the Divine Economy Model ©.

There are several parallel objectives between Edmund Phelps' contributions to macroeconomics and the discoveries uncovered by the Divine Economy Model ©. I am writing this blog commentary to demonstrate the common threads between his work and the newly emerging divine economy theory.

Both use macroeconomic models and both find that there are problems of information flow that exist in the economy. Both of these approaches find that "individual agents have incomplete knowledge about the actions of others."

The first point of contrast that I will mention is the emphasis that Edmund Phelps gives to expectations. To bridge the information gap created by incomplete knowledge he uses a tool of assumption common in empirical analysis, one that assumes that individuals must base their decisions on expectations. This is quite artificial since it tries to replicate the actions that take place in the market without letting the market itself be the testing ground. Empiricism cannot contain nor grasp the market. This limitation is glossed over in this artificial manner.

In the Divine Economy Model © the lessening of the degree of incomplete knowledge is part of the natural process of the market. This market process can be readily examined using deduction and the subjectivist methodology, revealing in clear terms the causes of the impediments to the flow of information. The greatest impediment at this period in history is interventionism.

Another parallel objective between Edmund Phelps' contribution to macroeconomics and the Divine Economy Model © is the understanding that "by foregoing consumption for investment in physical as well as human capital (education and research), today's generation can raise the welfare of future generations."

In the Divine Economy Model © the "physical as well as human capital" is referred to as capital structure, it is a foundational element, and it is identified as the transformation component of the model. Yes, Mr. Phelps it is true that today's generation can raise the welfare of future generations. It is the natural consequence of the transformation that comes from savings and investment.

My problem with the piecemeal construction and analysis of Edmund Phelps' macroeconomic contributions are the incongruencies in one half of his work due to him focusing his attention on inflation and unemployment in the other half of his work. Intervention for the purpose of 'stabilization' aggravates the problem of the flow of information which he himself says is a negative. And this same 'stabilization' intervention causes overconsumption and malinvestment, certainly not raising the welfare of future generations.

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