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New Essentials of Economic Theory

Olkhov, Victor (2019): New Essentials of Economic Theory.

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This paper develops economic theory tools and framework free from general equilibrium assumptions. We describe macroeconomics as system of economic agents under action risks. Economic and financial variables of agents, their expectations and transactions between agents define macroeconomic variables. Agents variables depend on transactions between agents and transactions are performed under agents expectations. Agents expectations are formed by economic variables, transactions, expectations of other agents, other factors that impact macroeconomic evolution. We use risk ratings of agents as their coordinates on economic space and approximate description of economic and financial variables, transactions and expectations of numerous separate agents by description of variables, transactions and expectations of aggregated agents as density functions on economic space. Motion of separate agents on economic space due to change of agents risk rating induce economic flows of variables, transactions and expectations and we describe their impact on economic evolution. We apply our model equations to description of business cycles, model wave propagation for disturbances of economic variables and transactions, model asset price fluctuations and argue hidden complexities of classical Black-Scholes-Merton option pricing.

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