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How Covid-19 Pandemic Changes the Theory of Economics?

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  • Matti Estola

Abstract

During its history, the ultimate goal of economics has been to develop similar frameworks for modeling economic behavior as invented in physics. This has not been successful, however, and current state of the process is the neoclassical framework that bases on static optimization. By using a static framework, however, we cannot model and forecast the time paths of economic quantities because for a growing firm or a firm going into bankruptcy, a positive profit maximizing flow of production does not exist. Due to these problems, we present a dynamic theory for the production of a profit-seeking firm where the adjustment may be stable or unstable. This is important, currently, because we should be able to forecast the possible future bankruptcies of firms due to the Covid-19 pandemic. By using the model, we can solve the time moment of bankruptcy of a firm as a function of several parameters. The proposed model is mathematically identical with Newtonian model of a particle moving in a resisting medium, and so the model explains the reasons that stop the motion too. The frameworks for modeling dynamic events in physics are thus applicable in economics, and we give reasons why physics is more important for the development of economics than pure mathematics. (JEL D21, O12) Keywords: Limitations of neoclassical framework, Dynamics of production, Economic force, Connections between economics and physics.

Suggested Citation

  • Matti Estola, 2020. "How Covid-19 Pandemic Changes the Theory of Economics?," Papers 2012.04571, arXiv.org.
    • Handle: RePEc:arx:papers:2012.04571
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    References listed on IDEAS

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    1. Matti Estola, 2001. "A Dynamic Theory Of A Firm: An Application Of 'Economic Forces'," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 163-176.
    2. Philip MIROWSKI, 1989. "The Rise and Fall of the Concept of Equilibrium in Economic Analysis," Discussion Papers (REL - Recherches Economiques de Louvain) 1989046, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    3. Estola, Matti & Dannenberg, Alia, 2012. "Testing the neo-classical and the Newtonian theory of production," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6519-6527.
    4. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-122, February.
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    More about this item

    Keywords

    limitations of neoclassical framework; dynamics of production; economic force; connections between economics and physics.;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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