Discussion Paper

No. 2017-110 | December 11, 2017
A dynamic theory of economics: What are the market forces?

Abstract

The main weakness in the neoclassical theory of economics is its static nature. By a static model one cannot explain the observed time paths of economic quantities, like the flows of production of firms, the flows of consumption of consumers, and the prices of goods. The error in the neoclassical framework is that economic units are assumed to be in their optimum state and thus not willing to change their behaviour. Therefore, in neoclassical models a static equilibrium prevails. In this paper, the authors change this assumption so that economic units are assumed to be willing to improve their current state that may not be the optimal one. In this way, one can explain economic dynamics where every economic unit is changing its behaviour towards improving its welfare. The authors define the economic forces acting upon the production of firms, the consumption of consumers, and the prices of goods are changing in time. They show that in this dynamic system, business cycles and bankruptcies of firms emerge in a natural way like in the real world.

JEL Classification:

D11, D21, C63, C02

Assessment

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Cite As

Alia Asha Dannenberg, Matti Estola, and Anna Dannenberg (2017). A dynamic theory of economics: What are the market forces? Economics Discussion Papers, No 2017-110, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-110


Comments and Questions


Anonymous - Referee Report 1
December 11, 2017 - 15:34

See attached file


Anonymous - This paper has problems:
December 12, 2017 - 23:21

(in *reversed* order of importance)

Problem 1- Theorems 1 and 5 are not theorems; they are definitions.

Problem 2- Theorems are not defined in a proper mathematical way and are not proved.

Problem 3- Since authors define production and consumption as flows \dot(Q) and \dot(X) (i.e., time ...[more]

... derivatives), this necessitates a discussion of how the associated stocks change in time.

Problem 4- From the abstract: <<Therefore, in neoclassical models a static equilibrium prevails.>> This is too bold a statement. There is a huge literature on dynamic neoclassical models of economic systems. This paper does not engage with this literature. A careful reading from Solow (1956, QJE) to some randomly chosen papers (from the Top-5 journals) developing and estimating dynamic stochastic general equilibrium models would convince the authors that contemporary neoclassical economic theory is definitely not static.

Problem 5a- The contribution of this paper is not clear: Authors indicate that Estola and Dannenberg (2012) and Estola (2015) test the theory presented in this paper with real data. But they do not inform readers about the nature of these tests. More importantly, they do not discuss how this paper differs from these two studies and also from other studies of themselves.

Problem 5b- The contribution of this paper is not clear: The closing paragraph of the paper reads <<Our title asks: “what are the market forces?”. Our analysis gives a well defined answer: the market forces are marginal costs, marginal willingness to pay and price.>> Unfortunately for this paper's fate, we all know this since Alfred Marshall.


Anonymous - Reply to referee 2
January 17, 2018 - 22:10

See attached file.


Alia Asha Dannenberg - Reply to referee 1
December 19, 2017 - 21:01

Reply to referee 1 is found in the attached file.


Saviour Lusaya - Forces of Consumption
December 13, 2017 - 13:04

You are assuming that consumption is influenced by the consumer's willingness to pay,how would you quantify willingness to pay as a force? Shouldn't willingness to pay be influenced by other factors such as income level and preference?.
Also, the model is not very conclusive. The paper should show what ...[more]

... has been deduced from the model you have built.
The abstract is also not very conclusive.


Alia Asha Dannenberg - Reply to referee 3.
January 14, 2018 - 16:05

Marginal willingness-to-pay (MWP) of a consumer, as we define it, is a function of the income of the consumer, the interest rate as well as the prices of all goods. These are the factors that affect the MWP of consumers together with the assumed form of the utility function. However, ...[more]

... we have proved in Estola & Hokkanen (199?) that in the optimum the MWP of a consumer is independent of the applied utility function that describes the same preference order.


Alia Asha Dannenberg - Correction to previous reply
January 17, 2018 - 16:57

Our reference was due to a mistake badly formulated. Correct reference is: Estola & Hokkanen (1999).

Estola, Matti & Hokkanen, Veli-Matti: "A Dynamic Theory of Consumer Behaviour". The Current State of Economic Science, Edited by Shri Bhagwan Dahiya, Spellbound Publications PVT. LTD., Rohtak 124001, 1999.


Romar Correa - Comment
December 13, 2017 - 16:43

See attached file


Saviour Lusaya - VALIDITY OF THE MODEL
December 14, 2017 - 09:32

This is great observation


Alia Asha Dannenberg - Reply to referee 4
January 19, 2018 - 12:11

Reply to referee 4 is found in the attached file.


Anonymous - Comment 5
January 12, 2018 - 11:59

See attached file


Alia Asha Dannenberg - Reply to Referee 5
March 21, 2018 - 21:51

Reply to Referee 5 is found in the attached file.