Elements of the system

A central characteristic of the major models of economic growth – the Neumann, Leontief, and Solow-Samuelson models – is that they are constructed on the basis of a description of the physical conditions of production. The set of production possibilities determines what is argued to be of interest in such models: the equilibrium state of the system and the stability or relative stability of that state. The description of the material transformations of the general economy-environment system discussed below diverges in a number of very fundamental ways from these models, but it rests on the same conviction that the dynamics of economic systems depend on the physical conditions of production. The axiomatic framework of a model of a dynamic economic system should include a stylized description of these conditions. This is what Fuss and McFadden (1978) have called “the traditional starting point of production theory.” It is instructive that they and other proponents of duality theory have since abandoned such an approach on the grounds that economic data allegedly contain all the information relevant to the analysis of production. As we will see, however, the conditions of production remain the only credible basis for the analysis of economic systems unprotected by the free gifts and free disposals assumptions, and managed according to a set of signals as incomplete as the set of prices turns out to be.