ON THE EIGHT BASIC UNITS OF A DYNAMIC ECONOMY CONTROLLED BY FINANCIAL INSTITUTIONS*

Martin Shubik

Review of Income and Wealth, 1975, vol. 21, issue 2, 183-201

Abstract: The elegant general equilibrium world of Arrow and Debreu has had a considerable mathematical development in the last decade. Underlying this work is an extremely parsimonious model of the economic system. In particular, only one economic actor is distinguished, the consumer who maximizes his welfare (the firm which maximizes profit is an automation). One class of economic entities is considered. These are goods and services. There is no important operational distinction made between a good, which is durable, and a service, which is not. It is suggested here that a more fruitful basic economic model needed to achieve a unification of micro and macroeconomic theory needs both more actors and more basic economic units. Specifically, the structure of process in a political‐economy is such that even at the level of relatively abstract theory operational differences among consumers, entreprenuers, administrators, financiers, and politicans should be discernible. Furthermore, several basic economic entities (or “basic particle”) must play important discernible roles in an adequate theory. In partiuclar, in the “real sector” physical assets should play a mahor role, i.e., the distinction between durable goods and consumables or services should be important. The paper sector must also be present with the roles of flat money, ownership claims and contracts all distinguished. It is argued here that any economy can be characterized in terms of two real and six paper basic units: goods, services and six financial instruments. All other financial instruments can be obtained as mixtures of this basic set.

Date: 1975
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