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Working paper

How to build an economy free of recession: a new theory rising from the ashes of both Keynesian and Neoclassical economics

15 Feb 2015

Economic recession is a long-standing and often revisited topic. This paper argues that all the existing studies and theories use aggregate macro models which fail to take into account the market saturation phenomenon and thus fail to uncover the fundamental cause of economic recessions. By including a saturation point for consumption of each commodity, introducing the concept of the utility of savings, and linking investment to profitability, the author has built a multi-commodity model to study economic growth and business cycles. The modelling results show that, without product innovation, the economy will reach a consumption and income ceiling so that economic stagnation or a recession is inevitable. This suggests that the deficiency of effective demand postulated by Keynesian economists actually comes from the supply side – the scarcity of product innovation, or the imbalance between investment in production innovation and investment in production. The author further shows that cyclic product innovation leads to cyclic economic growth and that the scarcity of product innovation may be due to the high possibility of innovation failure as well as the problem of innovation imitation. In order to build an economy free of recession, the paper calls for a thorough revision of the patent laws aiming at balancing the high risk of innovation investment with a high return, and the formation of a functional patent market, channelling funds automatically into innovation activities.

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