A New Macroeconomic Structural Model Reveals the Economic Law of Inertia and Simulates the Housing Bubble

Abstract

Since Adam Smith, economic thought has maintained that the economy has an inherent tendency to reach an optimal equilibrium under perfect competition. I demonstrate, contrary to this orthodoxy, that the economy constituted with Homo economicus under perfect competition continues its predetermined oscillatory motion perpetually as a frictionless oscillator. With this Economic Law of Inertia, we recognize orderly motion beneath the apparently disorderly motion of the real-life economy. Any discrepancy between the orderly motion and the observed motion is considered to be the result of a disturbance, or an economic force, being applied to the real-life economy. I introduce several economic forces such as static friction, productivity changes, changes in investment and speculative demand to explain key macroeconomic phenomena including the business cycle and the housing bubble. In principle, we can simulate the motion of the real-life economy with a detailed knowledge of its initial conditions and all the forces acting on it.