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Introduction
Jing Chen works on 'The Unity of Science and Economics: A New Foundation of Economic Theory'.
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Publications
Publications (90)
Bell's inequality is derived from the assumption of hidden variable. The theory of hidden variable was not consistent with the standard experiments known at the time of Bell's formulation. This is why Bell's inequality is not consistent with later experiments. Mathematical or theoretical formulations in Bell's theory are often inconsistent with phy...
General relativity uses a different language, the language of geometry, to describe the same world described by classical mechanics. The results from general relativity should be the same as or similar to the results from classical mechanics. This is indeed the case. In this short note, we will discuss the formula for the formation of blackhole. Th...
Albert Einstein maintained "that the theory of general relativity has provided the first real explanation of the perihelion motion of Mercury". Yet in 1898, Paul Gerber published a paper titled The Spatial and temporal Propagation of Gravity. His basic idea is that the speed of gravitational propagation is finite. This finiteness of speed generates...
Lorentz transformation was proposed to resolve the inconsistency between the theory of aether and the result of Michelson Morley experiment. However, Lorentz transformation brought in its own logical inconsistency. This logical inconsistency is intrinsic to Lorentz transformation. It has not been and could not be truly resolved. We propose that the...
The mechanism of Mid-Pleistocene Transition has been under intense discussion for several decades. We build a simple model of temperature changes on the earth based on the theory of electric circuits. Electric circuits with different parameters respond to external energy inputs of different periodicities with different strengths. Similarly, the ear...
Keynes's ideas underwent a rapid change in a very short time. In 1919, he wrote The Economic Consequences of the Peace. He understood the world as a non-equilibrium system, an unstable society driven by population dynamics and resource availability. In 1928, he gave talks on Economic Possibilities for Our Grandchildren. By that time, he had already...
We present an economic theory of production developed from biophysical principles and consistent with the production decisions facing businesses and other economic actors, including households and governments. The theory is a compact analytical model, derived from thermodynamics and closely related to the Black–Scholes formula for options pricing,...
Bell's formulation assumes that values of spin direction are deterministic. Standard experiments have shown that the values of spin directions, are not entirely deterministic. This assumption in Bell's theory was not consistent with experimental results known at the time of its formulation. Bell's inequality was derived from a theoretical assumptio...
The patterns of temperature change on the earth are difficult to decipher. Sometimes, temperature changes exhibit no apparent periodicities. Other times, temperature changes exhibit periodicities of different lengths. We build a simple mathematical model to describe temperature changes on the earth as a response to external energy flows. The model...
We present a simple mathematical formulation of an entropy theory of value, consistent with evolutionary economics. It is a non-equilibrium theory, logarithmic in form, which explains the roles of monopoly and oligopoly as well as scarcity in determining economic values. It is an objective theory, rooted in physical realities and economic instituti...
We perform a thought experiment. Two entangled electrons go through two Stern-Gerlach magnets at opposite directions. One electron goes through the magnet earlier but has its position measured later than the other electron. We discuss which electron determines the direction of spin of the other electron. This raises the question whether measurement...
We prove that, in a steady state, the product of lifespan and death rate is one. This provides a benchmark for estimating the demographic trends in the future.
The Arrow Debreu model provides a rigorous mathematical foundation for the general equilibrium theory. It has a profound impact on the whole economic theory. Upon close inspection, the Arrow Debreu model is established on a very unrealistic assumption. It assumes that every individual possesses an initial stock that satisfies all his current and fu...
Value theory is the foundation of economic theory. Marginal utility theory value is the dominant value theory. The Arrow-Debreu model, which is built on the utility theory of value, forms the mathematical foundation of general equilibrium theory. But the Arrow-Debreu model doesn't describe economic reality well. We present a mathematical formulatio...
In this short note, we propose a simple mechanism on the source of the earth's magnetic field. The earth is negatively charged. The atmosphere is positively charged. The earth, with its atmosphere, forms a gigantic electric field. The earth rotates. The rotation of the electric field generates the earth's magnetic field.
Theory of finance is generally classified into two main parts: Corporate finance and investment theory. The empirical fits of both parts are generally poor. This is usually attributed to various imperfections and irrationalities. Over time, many sophisticated refinements are designed to capture the perceived imperfections. However, after many years...
Most people agree that human activities are consistent with physical laws. One may naturally think that sensible economic theories can be derived from physical laws and evolutionary principles. This is indeed the case. In this paper, we present a newly developed production theory of economics from biophysical principles. The theory is a compact ana...
We usually consider pension systems from financial perspective. But pension systems have broad impacts to our society. Pension payments increase the incomes of old people. At the same time, pension deductions decrease the incomes of young people, at their most fertile time. This greatly reduces the fertility rate of the population. Societies with h...
The novel coronavirus disease has been around for some time. Most of the time, the viruses are dealt with in an ad hoc manner. We will study the interactions between human societies and germs from the perspective of the whole ecosystem. When we suppress one type of microbes, we celebrate our success. But from the ecological perspective, we open a r...
Modigliani and Miller theory forms the theoretical foundation of corporate finance. Yet Modigliani and Miller theory was derived from a very special case of cash flows. Weighted Average Cost of Capital (WACC), which is part of the Modigliani and Miller theory, plays a fundamental role in capital structure decision and asset valuation. Empirically,...
All animals strive for survival and reproduction. In economic terms, all animals, including human beings, strive for positive returns. Similarly, all businesses strive for positive returns. However, in scientific research, or academic research, we rarely mention returns. Instead, we proclaim to seek truth. But this is not the reality in academic re...
Return is the most fundamental concept in investment. There are two methods to measure returns: Arithmetic return and geometric return. The standard investment theory, Markowitz portfolio theory and CAPM, uses arithmetic return. Geometric return provides more accurate and precise measurement of investment performance. Because of this, geometric ret...
Value theory is the foundation of economic theory. Marginal utility theory value is the dominant value theory. Arrow Debreu model, which is built on the utility theory of value, forms the mathematical foundation of general equilibrium theory. But Arrow Debreu model doesn't describe economic reality well. We present a mathematical theory of the scar...
Carbon atoms are an essential component of life. The levels of carbon dioxide in the atmosphere are very low due to strong demand for carbon from living organisms. The increase of carbon dioxide increases the carrying capacity of the earth. Carbon dioxide is a greenhouse gas. Its increase makes the earth a greener place.
Modigliani and Miller theory forms the theoretical foundation of corporate finance. Yet Modigliani and Miller theory was derived from a very special case of cash flows. Weighted Average Cost of Capital (WACC), which is part of the Modigliani and Miller theory, plays a fundamental role in capital structure decision and asset valuation. In practice,...
Return is the most fundamental concept in investment. There are two types of returns: Arithmetic return and geometric return. They give different results. Arithmetic return is simpler to calculate and has been used for a longer period of time. It is used in the standard investment theory, Markowitz portfolio theory and CAPM. Geometric return provid...
In the current pandemics of novel coronavirus disease, many governments adopt the policy of "herd immunity". We attempt to "flatten the curve". It is to slow down the speed of infection. This is also to acknowledge, at least implicitly, we can do little to influence the total number of infections. We reach this conclusion based on the mathematical...
There has been an empirical regularity of steady human lifespan expansion for more than a century. From this regularity, many researchers suggest this trend will be extended indefinitely. We apply the inverse relation between lifespan and fertility rate to give a quantitative estimate about the possible future path of lifespan. The results suggest...
We generalize matter wave theory by replacing Planck's constant with a general coefficient. Then we solve for the existence of standing wave solutions in the hydrogen atomic system to recover Planck's constant. The method can be applied to other physical systems to find their corresponding constants. For solar system, we use the corresponding const...
We calculate the frequency of matter-wave of electrons orbiting the hydrogen nucleus at the ground state. It is the same as the value of light frequency corresponding to the ground state from the Rydberg’s formula. The result will stimulate students’ interest to further understand the mechanisms of quantum theory.
Researchers can perform very complex procedures related to living systems. Yet we cannot generate even the simplest form of life from inorganic materials. To further our investigation on the origin of life, we must consider what the most essential properties of life are. Once we understand what constitutes the bare minimum life, it may not be diffi...
Modigliani and Miller propositions form the theoretical foundation of corporate finance and asset valuation. They exert tremendous influence on financial research and financial practices. Yet Modigliani and Miller propositions were derived from very restrictive assumption of cash flows. We prove that their derivation is not valid for more general p...
From the properties that the value of commodities should satisfy, it can be derived that the only mathematical formula to represent value, as a function of scarcity, is the entropy function. From this function, the main factors that influence the value of a commodity are scarcity of the commodity, the number of producers, and the market size. In pa...
We present an analytical theory of main factors in economic activities. The main result is a formula of variable cost as an analytical function of value of product, fixed cost, lifespan of the investment, discount rate and uncertainty. The formula takes the same form as the Black-Scholes formula of European call options. With this formula, together...
Identifying impact factors on software development productivity and the static relations between the impact factors and performance has been the main focus in the literature. Insight into the dynamic relation between key factors and performance dimensions would expand and complement the conventional wisdom on software development productivity. This...
This book presents a new economic theory developed from physical and biological principles. It explains how technology, social systems and economic values are intimately related to resources. Many people have recognized that mainstream (neoclassical) economic theories are not consistent with physical laws and often not consistent with empirical pat...
Human societies are complex thermodynamic systems. It is natural to ask to what extent results obtained from simple thermodynamic systems can be extended to provide insights into more complex thermodynamic systems. We apply some simple results from thermodynamics to examine relations among population size, migration patterns, living standard, space...
We present the implications of a simple analytical theory in which economic crisis emerges from rising real resource costs in systems with high fixed costs relative to variable costs. We show the integral role played by financial fraud in this process, and explain the effects of austerity and stimulus policies in the face of crisis under differing...
A new modeling approach to analyze the impact of schedule pressure on the economic effectiveness of agile maintenance process is presented in this paper. Based on a causal loop diagram the authors developed earlier and the analytical theory of project investment, this paper analyzed the effect of schedule pressure on the economic effectiveness. Pre...
We present a common analytical framework for evolutionary and institutional economics, conceived as the study of systems that do not tend toward, nor necessarily fluctuate around, a steady state. Using an evolutionary equation, we derive an analytical theory of the relation between resource abundance and the rate of return available under differing...
Rapid accumulation of empirical studies in behavioral finance calls for a unified and consistent theoretical synthesis. Instead of building up a behavioral theory of economics directly, we present the entropy theory of mind, which is an economic theory of mind. Then we integrate the value and cost of information processing into the overall picture...
In this paper, we provide a model that permits systematic and even quantitative assessment of the policy implications of increasingly scarce and expensive resources. Specifically, we model the return to investment as a function of fixed cost, discount rate, uncertainty, project duration and the volume of output. Institutions can be understood as th...
Human activities are an integral part of the ecological system. Yet the current mainstream economic theory is largely detached from the physical resources that the human society builds on. In this work, we look at the human society from the fundamental thermodynamic laws and the chemical properties of the elements carbon and hydrogen. From the phys...
Black-Scholes formulas for European call and put options are the core of the option theory. However, Black-Scholes formulas are often considered difficult by many students. In this short note, we present an intuitive understanding of the Black-Scholes formulas. This intuitive understanding makes the option theory more accessible to many people.
Returns of stock prices often exhibit cycles of momentum and reversal. During various phases of the cycles, trading volumes and trading behaviors of investors of different sizes often show distinct characteristics. It has been a long standing challenge to describe the multiple patterns simultaneously from a quantitative theory. In this paper, we pr...
Tremendous effort has been spent on the construction of reliable efficient frontiers. However, mean-variance efficient portfolios constructed using sample means and covariance often perform poorly out of sample. We prove that, the capital market line is the efficient frontier for the risky assets in a financial market with liquid fixed income tradi...
Systems move from low entropy state to high entropy state. This directional movement is what drives, among other things, the living organisms. Since all living organisms need to tap into this entropy flow for survival, it is inevitable that human mind is evolved to identify entropy as the most fundamental concept. This explains why information, whi...
From the mainstream economic theory, unregulated free markets usually are optimal. Regulation is warranted only when market is imperfect. However, all organisms and organizations regulate their internal environments. Many also regulate their external environments. In general, "higher" organisms and organizations regulate their internal environment...
Low interest rate environment encourages borrowing. During inevitable downturns in business cycles, heavy borrowing makes it more vulnerable to financial crisis. Low interest rate environments also favor high fixed cost investments, which have low variable costs and hence, have more significant scale economy than low fixed cost investments. In a la...
From monetary policies to climate change problem, from the burden of private credit card debts to the evaluation of public projects, discount rate is the central issue. Yet, there is little clear understanding about the nature of discounting. The main problem in the theory of discounting is that “an economist who knows the literature well” is “able...
The Black-Scholes option theory provides a simple analytical model about the yields of corporate bonds. We extend the theory to model the yields of default free government bonds from a simple observation. From the purchasing power perspective, the values of corporate and government bonds follow similar patterns. The option theory based model of the...
Many people have recognized the fundamental flaws in the mainstream economic theory. At the same time, most people feel that it is unlikely to develop an economic theory that is both relevant and analytical tractable. It is often thought that social problems are too complex to be described by a simple mathematical theory. Whether or not a system is...
Most people agree that human activities are consistent with physical laws. One may naturally think that sensible economic theories can be derived from physical laws and evolutionary principles. This is indeed the case. In this paper, we present a newly developed production theory of economics from biophysical principles. The theory is a compact ana...
To investigate the competitive dynamics of dominant-fringe firm competition, this paper considers a new analytical theory of production and competition, which incorporates the relationships amongst fixed costs, variable costs, market uncertainty and product value. In particular, we examine the role of the production cost in the dynamic dominant-fri...
Social systems are a part of physical systems. In principle, social systems can be described by physical laws. However, there is a long running debate about how much knowledge from physics can be applied effectively to understand human societies. Compared with the vast amount of literature in both natural science and social science, attempts to und...
The mind of animals, just like the bodies of animals, is shaped by natural selection to best adapt to physical laws. Specifically, the mind is evolved to search for natural resources at low cost. Since entropy provides a universal measure of resources, it is inevitable that information, which we collect for our survival, is represented by the entro...
Languages and cultures are mediums of transmitting information. Their value rests on their ability to lower variable costs in communication. Lower variable cost systems in general entail higher fixed costs. Each culture or language has evolved to adapt to the local environment. As environment changes, however, different cultural systems may fare di...
More and more researchers in ecological economics have recognized that the biophysical approach provides a better foundation to understand human society and its long term evolution than mainstream economic theory. However, ecological economics textbooks are still written from the mainstream economics perspective. This is largely due to a lack of an...
In this paper, we present a newly developed analytical thermodynamic theory and show that it offers a simple understanding of entrepreneurship. The approach we present in the paper is different from previous work on the subject in that we not only borrow the mathematical tools from, and the analogy to thermodynamics but treat economics in general a...
Purpose
The paper seeks to develop an analytical theory of project investment.
Design/methodology/approach
The authors derive a partial differential equation that the variable cost of a project should satisfy, determine a proper initial condition through a thought experiment, and solve the equation.
Findings
A formula of variable cost as an analy...
To investigate competitive dynamics of the dominant-fringe firm competition, this paper considers a new analytical theory of production and competition, which incorporate the relationships among fixed costs, variable costs, market uncertainty, and product value. We particularly examine the role of the production cost in the dynamic dominant-fringe...
This paper consists of two parts. In the first part, we develop a new information theory, in which it is not a coincidence that information and physical entropy share the same mathematical formula. It is an adaptation of mind to help search for resources. We then show that psychological patterns either reflect the constraints of physical laws or ar...
In the last two decades, a lot of models have been developed about the new trade theory. The work by Avinash Dixit and Joseph Stiglitz (1977) is often credited as the crucial innovation that made the new trade theory possible. In Dixit and Stiglitz (1977) and later works, models of production costs involve fixed costs and variable costs, which make...
We present a unified analytical theory of production and capital structure of firms. It is extended from an analytical theory of production, whose main result is an analytical formula of variable cost of production as a function of fixed cost and uncertainty. Problems on capital structure can be naturally incorporated into the theory on production...
All human activities, including mental activities, are governed by physical laws and are essentially thermodynamic processes. However, current economic theories are not established on these foundations. This pioneering book seeks to develop an analytical theory of economics on the foundation of thermodynamic laws. A unified understanding of economi...
Some recent empirical works indicate that investor performance and market patterns are primarily information driven instead of a behavioral phenomenon. However, Grossman and Stiglitz information theory and its variations offer little guidance in identifying informed investors and in distinguishing between securities with scarce information and thos...
We develop an economic theory of information generalized from the entropy theory of information and show that it provides the foundation to understand market behavior. One fundamental result from this information theory is that information with higher value is in general more costly. Another fundamental result from this information theory is that t...
A simple and consistent theory based on credit distortion is developed to understand the origin of the Asian financial crisis and past financial crises in the emerging markets. We prove that, without the explicit and implicit guarantee of various government agencies on the credit risk of foreign loans, the interest rate on foreign loans would be th...
Most of the theories in behavioral finance rely on some kind of psychological biases. However, the potentially boundless set of psychological biases that theorists can use to build behavioral models and explain observed phenomena creates the potential for "theory dredging." We develop a unified theory of human psychology based on entropy law, the m...
Jing Chen discusses how the study of derivatives securities provides a simple way of understanding financial markets and how derivative deals offer some early warning signals.
Social and biological systems, as open dissipative systems, need to extract low entropy from the environment to compensate for continuous dissipation. This process can be represented by lognormal processes, with a deterministic representation of a thermodynamic equation. From here, we develop an analytic thermodynamic theory of social sciences. Mos...
This paper develops a new theory of investment based on a newly developed information theory. This new information theory states that information is the reduction of entropy, not only in a mathematical sense, as in Shannon's theory, but also in a physical sense. The rules of information transmission developed in Shannon's theory, as mathematical ru...
We first show that human beliefs and preferences are evolutionary adaptations to efficiently process information and to increase the chance of survival in the environment of our evolutionary past. Then we demonstrate that the entropy theory of information provides the foundation to understand market behavior. One fundamental result from the informa...
In economic literature, the cost of obtaining information is generally determined exogenously. In physics, however, there is a long tradition to link the entropic cost of obtaining information to the value of information. Recently, an entropy theory of value, or information theory of value was developed to provide a unified understanding of economi...
More than half century ago, Shannon's identification of information as the reduction of entropy greatly clarified the meaning of information and established information theory as a science. Since all human activities represent extraction and transformation of low entropy from the environment, it is natural to relate economic value to low entropy. H...
Economic and biological systems, as open dissipative systems, need to extract low entropy from the environment to compensate for continuous dissipation. This process can be represented by lognormal processes, which in turn can be mapped into a thermodynamic equation. From here, we develop an analytic thermodynamic theory of economics. Since a therm...
People generally agree that life processes are thermodynamic processes and that the "lower" needs of human beings, such as eating, are thermodynamic processes. But the "higher" needs, such as literature, arts, are seen as beyond the working of the entropy law. However, good poems and distinct piece of paintings are rare events, characterized by hig...
Economic and biological systems, as open dissipative systems, need to extract negative entropy from the environment to compensate for continuous dissipation. This process can be modeled by lognormal processes, which in turn can be represented by the Black-Scholes equation and option theory. Since the Black-Scholes equation and all other thermodynam...
Geographical clusters of innovative activity are mediums for the efficient transfer of tacit knowledge and its effective translation into innovation. Their force of attraction stems from their ability to lower variable costs in innovative processes. Lower variable costs are the result of extensive investments in a common fixed asset: the economic a...
Self-sustaining non-equilibrium systems, such as economic and biological systems, can be modeled with option pricing theory. We recognize that variable cost of a production mode can be represented by call option price with fixed cost as the strike price. This analytic representation enables us to utilize the rich results from the option theory syst...
Jing Chen discusses how the study of derivatives securities provides a simple way of understanding financial markets and how derivative deals offer some early warning signals.
There has been constant debate about the predictability of the security markets. We examine the relationship between the prices of a stock and its convertible bond during the Hong Kong stock market bubble of 1997 and its subsequent crash. We find that the price behavior of the share and the convertible bond not only gave a clear signal of the marke...
