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A Scientific Macroeconomic Model Derived from Fundamental Equation of Economics

Author

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  • Wayne, James J.
Abstract
The poor performance of macroeconomic models during the great recession of 2008 has forced many economists to re-examine macroeconomic theories, and search for creditable alternatives to the popular dynamic stochastic general equilibrium (DSGE) models. This paper derives a new macroeconomic model from recently published Fundamental Equation of Economics (FEOE) and applies the new model to answer a general question what causes economic crises. The macro model known as the indeterministic balance sheet plus (IBS+) model proposed in this paper for the first time turns out to be a special breed of accounting models. Different accounting models are more or less same in the way of handling empirical accounting data and flow of funds, and different in the way of forecasting the future. The IBS+ macroeconomic model takes the indeterministic view of the future balance sheets with the emphasis on probabilistic causalities, tail risks, economic reality described by balance sheet accounting, truthfully capturing the sectorial flow of funds and dynamics of economics, universally applicability, and a rock solid scientific theoretical foundation. The IBS+ model is very different from the popular dynamic stochastic general equilibrium (DSGE) models and agent-based computational economic (ACE) models. Through a side by side comparison, we prove that IBS+ model is superior to DSGE or ACE models in many ways. This paper concludes that DSGE models are probably intellectual dead ends, and economists should stop investing heavily with DSGE models and instead should replace DSGE models with IBS+ models. Economic crises have plagued humanity since the dawn of capitalism. Despite intense studies over last several hundred years, the questions about causes, forecasting, and prevention of economic crises remains unsolved. This paper proposes a classification of causes of economic crises using IBS+ models to analyze balance sheets of key economic sectors. Applying this classification to examine recent economic crises, we conclude that most economic crises are caused by mismanagement of balance sheets by key economic players. This paper suggests that economic crises are largely caused by inevitable misbehavior of humanity and not caused by any fundamental flaw of capitalism. Just like improving the individual health and personal hygiene is the key to prevent epidemic diseases in societies, the key to prevent future economic crises is to promoting financial disciplines and strengthening risk management of key players in economics. Because some economic crises can be caused by natural and man-made factors beyond the scope of economics like earthquakes and wars, the frequency of economic crises can be minimized by proper risk management practices but economic crises can never be completely eliminated. Historically, treating mismanagement of balance sheets as main causes of economic crises is a generalization of Austrian business cycle theory, Fisher’s debt deflation theory, and Minsky’s financial instability hypothesis.

Suggested Citation

  • Wayne, James J., 2014. "A Scientific Macroeconomic Model Derived from Fundamental Equation of Economics," MPRA Paper 59591, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59591
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    File URL: https://mpra.ub.uni-muenchen.de/59591/1/MPRA_paper_59591.pdf
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    References listed on IDEAS

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    Citations

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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. 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.
    4. Wayne, James J., 2014. "Human Behavior Paradox and a Social Science Interpretation of Quantum Mechanics," MPRA Paper 59718, University Library of Munich, Germany.
    5. Wayne, James J., 2014. "Tragedy of Commonly-Shared Debts," MPRA Paper 59712, University Library of Munich, Germany.
    6. 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.
    7. 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.
    8. Wayne, James J., 2014. "Fundamental Design Flaws of United States Constitution," MPRA Paper 59664, University Library of Munich, Germany.

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    More about this item

    Keywords

    macroeconomics; macroeconomic model; econophysics; quantum economics; dynamic stochastic general equilibrium model; DSGE; modeling; fundamental equation of economics; physics laws of social science;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C0 - Mathematical and Quantitative Methods - - General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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