A Dynamic, Signals-Based Reinterpretation of Microeconomic Theory

Abstract

Economics has long been a science of static equilibria, in which time is a second-order rather than first-order concern. Without time, economic modelers may neglect or obscure the role of time-dependent phenomena, e.g. path-dependency, and limit their ability to compare agnostically the model results with empirical observations. In this article, I outline a dynamic, signals-based recipe for building microeconomic models from traditional static models. I demonstrate this recipe using a classic "desert island" Robinson Crusoe (RC) model of consumption. Starting from a classic static derivation, I then move to a dynamic view, using the utility function as a generator of force on consumption. Finally, I show that the resulting dynamic model may be expressed in Lagrangian and Hamiltonian terms. I conclude by suggesting a recipe for scientific iteration using these alternate mechanical formulations, and the alternative explanations these dynamic models may suggest compared to employing a static approach to modeling.