SMALL PERTURBATION APPROACH TO A TRANSIENT INTER-REGIONAL ECONOMY ACCOUNTING FOR WAGES, PRICES, AND TRANSACTION COSTS

Abstract

Meaningful and useful representation of inter-regiona l economics over time requires the explicit modelling of human activity in production, consumption, and rest—a representation that has been foreclosed in standard (neoclassical) economics due to a crucial misstep in utility theory during the marginal revolution of the 1870s. In this error, utility (satisfaction) was directly identified with consumables, rather than exclusively with the processof-knowing attending all activity including consumption, resulting in the suppression of differential time in expectational planning. Differential time in a canonical methodology has been restored to economic theory in four earlier conference-papers by incorporating 20 th century understanding of subjective uncertainty, intertemporal time preference, expectation theory, and psychosomatic cognitive-function into Gossenian utility theory. Application of this approach has yielded explicit modelling of liquidity preference, endogenous prices and interest rates, return on (labor) investment, and social psychology. Progress is extended in the present work by formulating endogenous labor-rates and commodity prices in an inter-regional market that evolves over a oneyear intertemporal period. The method of small perturbations, well-established in applied physics, is introduced to help deal with complexity and nonlinearity in economic behavior. In an initial expository treatment, small differences in productive-ca pability among three geographical regions are assumed resulting in corresponding first-, second-, and third-order assessments of agent and regional behavior. Due to the simplifying assumption of mirror-image agents throughout the three-region economy, finite transactions in the labor and commodity markets are delayed to the third-order level, although first-order approximations to the wage-rates and commodity-prices are formulated. Transaction cost, estimated to comprise over 50% of all economic activity, is given an introductory formulation.