Systems Theory of Macroeconomics, Introduction to

In spite of elaborate descriptive and correlational studies, the most ubiquitous phenomenon in economics, namely inflation, has remained unexplained in terms of its mathematical origins. Keynes had attempted to relate inflation to a mechanism of "sticky wages and prices". Hitherto, such theories of inflation have remained unproven and disputable. Recently, during the so-called "New Economy" era, characterized by a spread of electronic transactions and Internet commerce, inflation eluded policy-makers in a different way, this time by displaying a paradoxically slow rate, 2.5-3.7% since 1994, despite rapid expansion of the U.S. economy. The Systems Theory of Macroeconomics (STM) indicates an erroneous construction in Say's Identity and Walras Law as well as the derived concepts associated with equilibrium theories which have been fundamental for all schools of thought in economics. Subsequently, STM relates inflation to a state function, namely entropy, and derives it as an irreversible process. The part of STM that equates inflation with cost pressures stemming from entropy constitutes the Special Theory. General Theory attempts to quantify and unify the effects of fiscal, monetary and social policies through corrections made to the Quantity Theory, thus modeling the short and long term effects of these policies in tandem or combined, in effect serving to more accurately predict the transmissional dynamics of monetary policy.