Summary: The great achievements made since China’s reform and opening up are a major economic theoretical phenomenon, and also a major puzzle of the neoclassical school. Science is a formal logic system constructed by scientists about the development law of research objectives. From a scientific point of view, the major confusion of a theory often means a major defect in the basic logic of the theory, which means the significant innovation needs of the theory.
This paper first discusses the basic methodological problems of science, mathematics and basic law assumption. Through the micro mechanism analysis of the market, it is pointed out that there is no competitive equilibrium in the exchange of investment goods, Pareto optimized competitive equilibrium in the exchange of non-investment goods, and no optimized competitive equilibrium in commodity production. Based on the economic reality that the British unemployment rate remained above 10% (Phillips, 19 58) from 1921 to 1939, this paper holds that the basic assumption of market economy without government intervention and full utilization of labor and social capital is too strong; the assumption of Keynes school on the optimization of market economy is too strong.
Based on the research results of other scholars, this paper first puts forward the three basic laws of mutual independence in the market economy. First, the exchange of non-investment goods can realize the competitive equilibrium of Pareto optimization; second, the free market without government intervention; third, knowledge is infinite dimension, but the growth of any dimension is no more than a constant Euclidean space in a certain time. On this basis, this paper constructs a mathematical model of market economy of government management. The model government manages the market economy with the virtual monetary system, and the finance is balanced by monetary issuance.
Similarly, the Solo model suggests that capital accumulation and population ratio have optimized equilibrium solution; the Hicks model suggests that the IS-LM curve intersection is equilibrium interest rate, corresponding to the optimal government policy and the optimal social output; this model suggests that the constant price social output has an upper limit determined by the economic endowment, and the government policies beyond a certain range cause more inflation and cause economic instability, which constitutes the constraint of government policy. Economy endowment is the first comprehensive index reflecting the capital accumulation of economy proposed in this paper, which is the upper limit of social output of economy at constant price. Under the premise of ensuring the inflation rate in the policy target, the government adjusts the total social demand through monetary policy and government investment and expenditure, so as to minimize the economic fluctuations, maximize the economic endowment, and maximize the growth potential of the economy. The model government realizes its value proposition through government investment and expenditure, such as balanced development and common prosperity in various regions. The government should balance efficiency and fairness and optimize investment and expenditure projects to achieve long-term, sustainable, high-quality and stable development of the economy. Model economies can be protected from financial and economic crises, but managing cross-border capital flows in the private sector is the premise of their establishment and existence.
The market economy model of government management proposed in this paper becomes a new economic theoretical framework juxtaposed with the neoclassical and Keynesian schools. As with Hicks, Solow, Romer, and Manquin, the model is not tested and empirically demonstrated in this paper.