The Unity of Science and Economics: A New Foundation of Economic Theory

Certain principles of established economic theories, such as perpetual growth or sustainable growth, are inconsistent with the physical principles. If an economic theory is more scientifically consistent, could it provide more accurate description of the reality? Many people may feel human societies are too complex to be described from physical principles.  

Life systems, which include human societies, are indeed very complex.  But beneath this complexity lies two common properties. First, all life systems need to obtain resources from the environment to compensate for the continuous dissipation to maintain life. Second, for any life form to be viable, its cost to obtain resources cannot exceed the value of the resources over its life cycle. Similarly, for a business to be viable in the long term, its average cost of operation cannot exceed its revenue. Costs include fixed cost and variable cost.

The first property is a physical principle and the second property is an economic principle. In short, all organisms and organizations need to satisfy a physical principle and an economic principle.

By applying mathematical techniques from quantum mechanics, financial economics and the information theory to these two principles, we have developed a mathematical theory of economics. This theory provides an analytical relation among main factors in economic activities.

Many people have criticized mainstream economic theories for being inconsistent with physical principles. But it is often difficult connecting physical principles to specific economic policies, such as monetary policies,fiscal policies, retirement policies, health care policies, educational policies, and regulatory policies.

Should the interest rate be higher or lower? Should the tax rate be higher or lower? Should the retirement  age be later or earlier? Should governments spend more or less on medical systems? Should the number of years of mandatory education be increased or decreased? Can the magnitude of business cycles and financial crises be reduced? Should government regulate business activities more or less? Does the creation of a Euro zone benefit or harm Europe?

Through our mathematical theory, we can derive very specific longterm impacts of these economic policies.

If it is so fruitful to study social issues based on observable quantities,why is the theoretical foundation of mainstream economics still based on utility, an unobservable quantity?

Over half a century ago, George Zipf advocated that social sciences should be built on observable quantities. He further pointed out that the elite will resist this idea and use the power of academic appointment to deter people from pursuing this approach.  

In general, the elite implement policies that favor themselves, often at the cost of the working class. Without a quantitative theory, the working class cannot measure the precise gains and losses of a particular policy to all the stakeholders involved. This is why the elite will suppress economic theories that are based on observable quantities.  

From our theory, it can be shown that many of the so called “unintended consequences” are really long term byproducts of the intended consequences for policymakers.  Many of today’s social and economic problems arise from these “unintended consequences”.      

Over ten years ago, James Galbraith discussed the social environment within the profession of economists and the prospect of a theoretical revolution. He wrote:

Leading active members of today's economics profession …… have joined together into a kind of politburo for correct economic thinking. As a general rule--as one might expect from a gentleman's club--this has placed them on the wrong side of every important policy issue,and not just recently but for decades. ……

And when finally they sense that some position cannot be sustained, they do not re-examine their ideas. Instead, they simply change the subject. No one loses face, in this club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in. ……

The reduction of many of today's leading economists to footnote status is overdue. But would those economists recognize a theoretical revolution if one were to occur? One is entitled to doubt it. Being right doesn't count for much in this club.

For a theoretical revolution to occur and to flourish, it requires the active participation of many people outside the politburo to champion a consistent and objective way of understanding economics.

Our theory was first systematically summarized in The Physical Foundation of Economics: An Analytical Thermodynamic Theory (2005).This theory includes three parts: Theory of mind, theory of value and theory of production.

An update is presented in a new book, The unity of science and economics: A new foundation of economic theory(2016). The preface of the book provides a detailed introduction of our theory.

Jing Chen

http://web.unbc.ca/~chenj/