While many informative SFEcon models have been created with household utility described by fixed parameters, none of them have fully satisfied the expectations of neoclassical theory, i.e.: its presumption that, for any properly conditioned set of utility parameters, there should exist at least one corresponding set of prices and physical exchanges vindicating the premises of general optimality. The experience upon which we challenge this view requires a bit of introduction.
SFEcon demonstrations are typically begun at a general economic optimum; are driven into chaotic behavior by some combination of exterior stimuli; and are then observed to re-establish generally optimal physical exchanges and prices. Stimuli can be either elastic or plastic.
Elastic stimuli exogenously change a state variable such as the quantity of a good owned by a sector or the quantity of a good on the market. The model responds to these stimuli by recreating the exact physical state that characterized the initial optimum, with the same proportions among commodity prices, but with prices occurring at a different general level.
Plastic stimuli change one or more utility parameters. These impulses require that a model respond by discovering an entirely new physical state, with new proportions among commodity prices that nonetheless fulfill all the criteria of a different, but no less unique and stable optimum.Primitive versions of Model 0 having fixed household utility tradeoffs respond to elastic stimuli exactly as neoclassicism requires. But, when responding to plastic stimuli such as an isolated improvement in manufacturing technique, these models’ emulations never quite settle into a perfect optimum. Rather, they persist in a new physical stasis characterized by: 1) a small but fixed portion of the time continuum claimed by neither labor nor leisure, with 2) fixed amounts of industrial products on the market that 3) somehow fail to induce the temporary surge of demand over supply that might relieve the imbalance.
Such experiments are nonetheless promising in that they portray phenomena of much concern to economists. Our discussion of the household product offers a number of interpretations for these phenomena — the most obvious being that the contrary nature of household utility tradeoffs ...
implies a downward-sloping supply-of-labor schedule.
Further explanation shows that households’ ‘production’ of time, being an exogenous constant , is not subject to economic calculation or adjustment. Imposition of the parameter deducts one degree of mathematical freedom from that available to a generic industrial sector.
While instructive, the primitive model described to this point is overly restrictive in its portrayal of wages as rigid, rather than merely ‘sticky’, in those circumstances where money wages need to fall so that improvements in the economy’s technical potential can become fully realized in a new general optimum. The model must therefore be advanced to embody a certain plasticity of households’ behavior whereby their utility tradeoffs are modified to equate their wage with their leisure’s marginal value.
A household sector’s withdrawal rLK of passive income from its savings position does not operate on the same logic as debt service. Households are composed of free agents whose net cash flows are not subject to intermediation for the sake of optimal returns. Wages-plus-passive-income-minus-consumption is the unmediated definition of net additions to (or withdrawals from) savings. Household optimality can, therefore, only be achieved by altering a household sector’s relationship between its desire for leisure and its desire for consumption.
Model 0’s elementary expression of this phenomenon makes what would normally be the ‘parameter’ ZL (at ULL) into a variable. A variable ZL will provide the degree of freedom lost when the output variable at R0LK becomes the constant -LK, which then allows households to participate in a perfect general economic optimum.