Ebook: The Visible Hand: Synergetic Microfoundation of Macroeconomic Dynamics

In the last decade highly innovatory developments have taken place in theoretical economics. The new focus of interest seems to be twofold: Firstly, nonlinear models for dynamic processes of the economy are constructed to extend the scope of linear models for tlle stationary euqilibrium state; and secondly a new approach is made to solve the everlasting problem of the relation between micro-and macro-economics. The interdisciplinary field of synergetics is deeply involved in this evolution. The author has made a remarkable contribution to both foci: His application of synergetic concepts to the theory of business cycles combines a partial solution of the micro-macro-problem, namely the modelling of the macro-economic effect of the decisions of investors, producers and consumers, with the natural introduction of nonlinearities. The arising new business cycle theory can on the one side be validated by empirical evidence and on the other hand the typical behavior of nonlinear dynamic systems including the transition to deterministic chaos can be clearly demonstrated. The hope is justified that the model presented in this book is a fw·ther important step in reaching a new level of the quantitative comprehension of dynamic phenomena in the economy. Stuttgart, June 1991 Prof. Dr. Wolfgang Weidlich Foreword It is the author's objective to explain macroeconomic processes on the basis of micro­ economic decision-making behaviour. In order to achieve this goal, the concept of synergetics is presented as a method of describing dynamic phenomena in multi-com­ ponent systems with cooperative interactions between their elements.

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With the help of the method of synergetics this study shows a consistent formal derivation of the dynamics of a macroeconomic system as the effect ofthe decision behavior of the microeconomic agents. A special issue is the economic interpretation of the synergetic modelling of the microlevel and its relation to other economic research on microfoundations of the macroeconomics, i. e. the New Classical and the New Keynesian approach. The transformation of a well-known macroeconomicbusiness cycle model into a micro-based synergetic model gives an illustrative example how the method can be applied to economic problems. It can be shown that the transformed model generates new interesting features like inherent and assymetric cycles, a high stability to exogenous shocks and even a so called "deterministic chaos". Beside these new featuresthe main structure of the basic model in terms of the causality of the relevant parameters remains unchanged. Thus, the investigation gives the researcher an example of a method that makes it possible to "test" the macroeconomic effects of different behavior assumptions of the economic agents on the macrolevel in a dynamic context. The work ends with an attempt of an interpretation of macroeconomic data of the FRG in the last thirty years in the way that it is traced back to changes in the behavior of the economic agents.