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This work shows that the gap between theory and facts in modern macroeconomics can only be elimated by nonlinear macroeconomic dynamics with certain following characteristics.

Dealing with factors affecting economic growth in knowledge-based societies, the author shows that the interaction between material and nonmaterial values is the ultimate source of all economic growth. The model thus developed predicts the quantitative facts concerning business cycles better than the conventional real-cycle models, while also producing a new growth path whose existence is verified by empirical facts. The results provide strong evidence of the economic relevance of nonmaterial values, and also prompt a new view of the stochastic elements in the business cycles.

1. Facts: A leisure term with an unbounded value function, when added to utility in the Lucas (1988) 'mechanics of economic development', expands enormously the range of data covered by the theory. To explain this we have to ask two questions. First: why leisure would be so much desired? Perhaps because leisure is one's own time and such a leisure term means an unbounded value of individual freedom. But why leisure is economically productive, as implied by the results obtained in this study? Perhaps because cognitive innovations often occur during the time which in economics is registered as...

DYNAMIC ECONOMICS with increasing returns is extended to cope with economic growth, the business cycles and the irregular swings in the long-term development as different aspects of the same dynamical system, the economic system "as a whole." HUMAN CAPITAL emerges as the seminal concept: economic growth is in this dynamics causally reduced to the growth of human capital and thus to the growth of exact scientific knowledge. An analysis of this knowledge shows that quality education in hard sciences must be a prime target of future economic policies. A CAUSAL STRUCTURE, new in economics,...