How Covid-19 Pandemic Changes the Theory of Economics?

TL;DR

This paper introduces a dynamic economic model inspired by physics to better forecast firm bankruptcies during crises like Covid-19, addressing limitations of traditional static frameworks.

Contribution

It presents a novel dynamic theory for firm production and bankruptcy prediction, linking physics models to economic behavior, which improves forecasting accuracy.

Findings

Model can predict bankruptcy timing based on parameters

Dynamic framework explains stable and unstable adjustments

Physics-inspired approach enhances economic modeling

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.