Managerial economics

About: Managerial economics is a research topic. Over the lifetime, 1524 publications have been published within this topic receiving 83965 citations.

Fundamental Equation of Economics

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.

An Economic Model of Induction

Abstract: Inductive generalization (i.e., validation of general claims based on empirical evidence) is a critical method in science that is also notoriously difficult to justify. In particular, induction is not required to test honestly produced claims. We examine the role of induction in an economic model where agents may strategically misrepresent what they know. Our main result shows that induction is required to test and potentially reject expert’s claims. This result provides an economic argument for induction based on incentive problems. ∗We thank Wojciech Olszewski, Eran Shmaya, Marciano Siniscalchi and Rakesh Vohra for some useful discussions, as well as seminar audiences at the Canadian Economic Theory Conference 2012, the Fifth Transatlantic Theory Workshop, the Summer meeting of the Econometric Society 2012, XIII Latin American Workshop in Economic Theory, Jolate conference in Bogota and the Washington University seminar series. Sandroni gratefully acknowledges financial support from the National Science Foundation. All errors are ours. †Department of Managerial Economics and Decision Sciences, Kellogg School of Management, Northwestern University, Evanston, IL 60208. (e-mail: al-najjar@kellogg.northwestern.edu) ‡Department of Managerial Economics and Decision Sciences, Kellogg School of Management, Northwestern University, Evanston, IL 60208. (e-mail: l-pomatto@kellogg.northwestern.edu) §Department of Managerial Economics and Decision Sciences, Kellogg School of Management, Northwestern University, Evanston, IL 60208 (e-mail: sandroni@kellogg.northwestern.edu).