We can formalize the theory using a structural macroeconomic model inspired by New Keynesian frameworks but augmented with explicit variables for power concentration. This shifts the mechanism of inflation from being purely a function of aggregate demand/supply to one that incorporates market power and bargaining power. The Mathematical Model of the "Power Triangle" Theory We define a three-equation system that describes the behavior of firms, labor markets, and monetary policy within this theoretical framework. 1. The Augmented New Keynesian Phillips Curve (NKPC) The traditional NKPC relates inflation (\(\pi _{t}\)) to expected future inflation (\(E_{t}[\pi _{t+1}]\)) and the output gap (\(y_{t}\)). This theory adds the Power Triangle components as key drivers of firm pricing behavior. \(\pi _{t}=\beta E_{t}[\pi _{t+1}]+\kappa y_{t}+\phi _{E}X_{t}^{E}+\phi _{P}X_{t}^{P}+\phi _{S}X_{t}^{S}\)Where: \(\pi _{t}\) is the inflation rate.\(\beta \) is the discount factor.\(y_{t}\) is the output gap (a measure of economic activity/demand pressure).\(\kappa \) (kappa) is the slope of the Phillips curve, determined by the frequency of price changes.\(X_{t}^{E}\): Economic Power (e.g., Market Concentration, Gini Coeff).\(X_{t}^{P}\): Political Power (e.g., Lobbying Spend).\(X_{t}^{S}\): Social Power (e.g., Union Density).\(\phi _{E},\phi _{P},\phi _{S}\): Parameters representing the sensitivity of inflation to power dynamics. Theoretical Prediction: The coefficients \(\phi _{E}\) and \(\phi _{P}\) are expected to be positive (higher concentration means higher prices/markups). The coefficient \(\phi _{S}\) (union power) might have a more complex effect, potentially stabilizing wages and thus prices, or driving wage-push inflation. 2. The IS Curve (Aggregate Demand) This equation describes how the output gap responds to interest rates (\(i_{t}\)), but also acknowledges that economic power distribution affects consumption and investment decisions. \(y_{t}=E_{t}[y_{t+1}]-\frac{1}{\sigma }(i_{t}-E_{t}[\pi _{t+1}]-r_{t}^{n})-\gamma _{E}X_{t}^{E}\) \(i_{t}\) is the nominal interest rate set by the central bank.\(\sigma \) is the intertemporal elasticity of substitution (how sensitive consumption is to interest rates).\(r_{t}^{n}\) is the natural rate of interest.\(\gamma _{E}\): A parameter capturing how high economic inequality (\(X_{t}^{E}\)) suppresses aggregate demand (as richer people tend to save more than they consume). Theoretical Prediction: \(\gamma _{E}\) is positive, meaning that policies that reduce \(X_{t}^{E}\) actually stimulate demand in a stable way. 3. The Central Bank/Policy Rule (Monetary Policy) A conventional central bank might follow a Taylor Rule, reacting to inflation and the output gap. The Laniyan theory suggests the government's fiscal and structural policy is more effective. \(i_{t}=r_{t}^{n}+\psi _{\pi }\pi _{t}+\psi _{y}y_{t}+\text{Structural\ Policy\ Interventions}_{t}\)The key departure is that the government implements structural policies (\(\text{SPI}_{t}\)) that directly target \(X_{t}^{E}\), \(X_{t}^{P}\), and \(X_{t}^{S}\), as described in the previous policy sections (anti-trust enforcement, tax reform, etc.). These interventions fundamentally alter the coefficients \(\phi _{E},\phi _{P},\phi _{S}\) over the long run, not just move the short-term levers. Summary of the Mathematical Model This 3-equation dynamic stochastic general equilibrium (DSGE) structure incorporates the "Power Triangle" as structural determinants of the economy's supply side (the Phillips Curve) and demand side (the IS Curve). The mathematical framework allows for simulation and rigorous econometric testing using the time-series data we discussed earlier.
The theory shifts the focus from traditional central banking operations to a novel approach centered on managing "debtflation" through consumer credit policy in an "alternative financial system."
This framework fundamentally challenges the conventional monetary policy used by formal central banks. Conventional vs. Alternative Central Banking Feature Conventional Central Bank (Formal Sector)"
Alternative Central Bank" (Laniyan Theory)Primary GoalPrice stability (controlling inflation) via monetary aggregate control.Guaranteed price stability and universal prosperity by controlling power/debtflation.
Key OperationMop-up operations (selling securities, raising interest rates) to withdraw money supply and slow the economy.
Prop-up operations (targeted credit expansion) to inject liquidity and stimulate the economy.Policy ToolOpen market operations, reserve ratios, policy interest rates.Targeted consumer credit policy, direct lending programs to specific percentiles.Focus
Managing overall money supply and systemic risk.Addressing "debtflation" (the deflationary pressure caused by excessive private debt and inequality) by empowering the consumer base.
The "Abraham Rule of Debtflation" This "rule" appears to be a proposed policy directive for the alternative central bank, which aims to counteract "debtflation" by deliberately targeting the demand side of the economy, specifically at the lower percentiles. Instead of the formal central bank's "mop-up" operations (which are contractionary and aim to cool an overheating economy), the alternative bank engages in "prop-up" operations that are expansionary and aim to lift an economy suffering from debt-induced stagnation. The rule suggests: Targeted Credit Injection: The "alternative central bank" would ensure the availability and affordability of financial capital specifically for micro, small, and medium enterprises (MSMEs) and consumers, particularly those in the bottom percentiles.Bypassing the Formal System: This implies that traditional commercial banks may not be effectively transmitting credit to the people who need it most, requiring an alternative mechanism.Focus on the Real Economy: The goal is to stimulate consumption and production directly by empowering "consumer borrowers," who are seen as the "brainbox of the economy". Modeling the "Prop-Up" Operation In an econometric model, this shifts the focus from the general money supply (\(M_{2}\) growth) to targeted credit variables within the IS curve: \(y_{t}=E_{t}[y_{t+1}]-\frac{1}{\sigma }(i_{t}-E_{t}[\pi _{t+1}]-r_{t}^{n})-\gamma _{E}X_{t}^{E}+\delta C_{t}^{C}\)Where \(C_{t}^{C}\) is the new variable for Consumer Credit issued to the bottom percentiles, and \(\delta \) is the coefficient for the effectiveness of this "prop-up" operation. The "Abraham Rule" implies a policy choice: The government minimizes conventional "mop-up" operations (\(i_{t}\) hikes) and maximizes "prop-up" operations (\(\delta C_{t}^{C}\)) to achieve stability. We have integrated the idea of "debtflation" and an "alternative central bank" into the model structure. Are you interested in exploring how one might measure the success of these "prop-up" operations in an econometric analysis
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