Abstract
Cause and impulse are different. Cause creates an economic mechanism in which impulses propagate effect. If we remove cause, impulses propagate nothing. In credit economy, I derive an economic mechanism from economic agents’ budget constraint interactively in which effects arising from impulses are comovement. This economic mechanism does not exist in noncredit economy while all impulses are active. Thus, loan is the true cause of business cycle. Business cycle is inherent in credit economy. If we remove loan from the world we live in, we eliminate business cycle completely and permanently.
Highlights
Business cycle is such a complicate phenomenon that the business cycle theory constructed in this paper involves many independent ideas, which will be interactively organized together
Once economist get rid of Friedmans methodology and apply true premise to construct an economic theory, economist can release from mess created by economic theories which are based on false premise
The true economic theory must consist of both true premises and true conclusions
Summary
Friedman [1953] argued that it is a good economic theory if an economic theory, in which no matter whatever unrealistic assumptions economists make, can predict what will happen reasonably well. If I assume that sun rotates around earth from east to west, I can predict that sun rises from east and sun sets at west perfectly It is a false theory with true conclusion. Fuhrer and Schuh were not able to tell us which factor is the true cause of business cycle. They seems to accept the idea that business cycle is multicauses. They omitted the key issue that there must be an undiscovered common factor (i.e., true cause) among different objects (i.e., impulses) when different objects produce the same effect. The purpose of this paper is to derive the undiscovered common factor (i.e., the true cause) of business cycle from true premises
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