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Fundamental Equation of Economics

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  • Wayne, James J.

Abstract

Recent experience of the great recession of 2008 has renewed one of the oldest debates in economics: whether economics could ever become a scientific discipline like physics. This paper proves that economics is truly a branch of physics by establishing for the first time a fundamental equation of economics (FEOE), which is similar to many fundamental equations governing other subfields of physics, for example, Maxwell’s Equations for electromagnetism. From recently established physics laws of social science (PLSS), this paper derives a fundamental equation of economics, which is the one mathematic equation that governs all observed economic phenomena. FEOE establishes a common entry point to solve all economic problems without any exception. We show that establishing FEOE clarifies many open questions regarding the foundation of economics. For example, the number one question for all economists ought to be what can be forecasted and what cannot be forecasted in economics. Without FEOE and PLSS, this number one question cannot be answered scientifically within the existing framework of economics. While FEOE re-affirms many existing economic theories, we also have found that many other popular economic theories are not compatible with FEOE, and we conclude that FEOE comes with its own version of microeconomics and macroeconomics. In microeconomics, the framework of laws of supply and demand and market equilibrium, which is traditionally assumed by most economists as the foundation of economics, is replaced by a new model called indeterministic supply demand pricing (ISDP) model. ISDP model is far more precise and universal mathematical abstraction of market reality than the framework of Marshall’s market equilibrium and laws of supply and demand. In macroeconomics, a new macroeconomic model called indeterministic balance sheet plus (IBS+) model can be derived from FEOE. Unlike the popular DSGE and Agent-based Computational Economic (ACE) models, the IBS+ model is universally applicable in any kind of economy, empirically falsifiable, making forecasts with reasonable accuracy, truthful abstraction of reality, capturing macroeconomic dynamics accurately, and most importantly based on a sound theoretical foundation. In conclusion, this paper shows that FEOE provides a solid physics foundation for both theoretical and practical economics. Therefore, after establishing the fundamental equation of economics in this paper, there should be no doubt that economics is simply a branch of quantum physics in parallel with chemistry and optics. Over last four hundred years, there are many schools of thoughts emerged in economics while there is only one school of thought by Newton-Einstein-Bohr survived the experimental and theoretical scrutiny in physics over the same period. The logic conclusion is that there must be only one school of thought allowed in economics as a subfield of physics.

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  • Wayne, James J., 2013. "Fundamental Equation of Economics," MPRA Paper 59574, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59574
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    References listed on IDEAS

    as
    1. McCauley, Joseph L., 2003. "Thermodynamic analogies in economics and finance: instability of markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 329(1), pages 199-212.
    2. Wayne, James J., 2013. "Physics Laws of Social Science," MPRA Paper 47811, University Library of Munich, Germany.
    3. Robert M. Solow, 2001. "From Neoclassical Growth Theory to New Classical Macroeconomics," International Economic Association Series, in: Jacques Drèze (ed.), Advances in Macroeconomic Theory, chapter 2, pages 19-29, Palgrave Macmillan.
    4. John Hicks, 1981. ""IS-LM": An Explanation," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 3(2), pages 139-154, January.
    5. McCauley, Joseph l., 2004. "Thermodynamic analogies in economics and finance: instability of markets," MPRA Paper 2159, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The fundamental equation of economics
      by Economic Logician in Economic Logic on 2013-11-18 21:15:00

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    Cited by:

    1. Wayne, James J., 2014. "Generalized Second Law of Thermodynamics and Its Applications in Social Science," MPRA Paper 59734, University Library of Munich, Germany.
    2. Wayne, James J., 2014. "Psychohistory Paradox and Introduction to Quantum Social Science," MPRA Paper 59858, University Library of Munich, Germany.
    3. Kakarot-Handtke, Egmont, 2014. "Onblog Economics Muddle Busting," MPRA Paper 60543, University Library of Munich, Germany.
    4. Wayne, James J., 2014. "Arrow of time Phenomena in Social Science and Sixteen Global Mega Trends of Human Society," MPRA Paper 59685, University Library of Munich, Germany.
    5. Wayne, James J., 2014. "Human Behavior Paradox and a Social Science Interpretation of Quantum Mechanics," MPRA Paper 59718, University Library of Munich, Germany.
    6. Wayne, James J., 2014. "Tragedy of Commonly-Shared Debts," MPRA Paper 59712, University Library of Munich, Germany.
    7. Wayne, James J., 2014. "A Scientific Macroeconomic Model Derived from Fundamental Equation of Economics," MPRA Paper 59591, University Library of Munich, Germany.
    8. Wayne, James J., 2014. "Commonly Shared Foundation of Mathematics, Information Science, Natural Science, Social Science, and Theology," MPRA Paper 59834, University Library of Munich, Germany.
    9. Wayne, James J., 2014. "A Physics Solution to the Hardest Problem in Social Science: Physics Foundation of Permanent World Peace," MPRA Paper 59634, University Library of Munich, Germany.
    10. Wayne, James J., 2014. "Fundamental Design Flaws of United States Constitution," MPRA Paper 59664, University Library of Munich, Germany.
    11. James J. Wayne, 2015. "Predicting Major Economic Events with Accuracy: A New Framework for Scientific Macroeconomic Models," American Journal of Economics and Sociology, Wiley Blackwell, vol. 74(2), pages 419-456, March.

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    More about this item

    Keywords

    causality; econophysics; economic forecast; laws of supply and demand; market equilibrium; macroeconomic model; laws of physics; physics laws of social science; fundamental equation of economics;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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