2. Kinetic Principle of Income Chaos
It can be considered that a regularity exists in a repetitive economic phenomenon and a kinetic principle works in the regularity. It is economics as a social science to explore this kinetic principle. But the world is not dominated just by regular economic phenomena. Sudden events appear without trial and some of them have a profound effect on income. In particular, war, oil shock, riot or other social unrest, political change and sudden change in economic policy are hardly predictable, however, it is a reality that has a significant impact on income.
Therefore, sudden events must be dealt with in the principle of income, but it is difficult to find regularity in themselves because there is no repeatability. The occurrences of these sudden events are largely impossible to predict economically. However, their impacts on income are strong and constant. Exploring the law of these impacts is the principle of income chaos. This issue is discussed already in the Kinetic Principle of Price Chaos, however, it is emphasized as follows.
The characteristic that all the economic activities of economic entities show the result in the future guarantees the scientific nature of the chaos principle. The impact of a sudden event on income has a certain principle of motion due to the characteristic. For example, the outcome of production and investment will appear to be profit or loss in the future. The result of economic activities such as consumption and saving, distribution and storage, deposit and loan, revenue and expenditure, import and export will always appear in the future. Therefore, economic people can not but live for the future.
Who adapts better to the future changes that will emerge or who predicts and responds better to the future determines the success or failure of economic activity. The ability to predict the future along with some luck is the fate of economic people. Therefore, they have to get a special interest in the future income. This interest in the future causes the effect of the future income on the current income and economic people are keen to predict the change in income, that is, economic fluctuation. It does not matter whether the prediction is right or wrong. Rather, it is often wrong, which makes it more important.
In short, current business flow is affected by future business flow. The economy will rise faster if it seems to be going up in the future and the economy will decline faster if it seems to be going down in the future. In addition, current business flow may affect future economic flow. It is usual that the current economic trend is positive and the future economy is strong if other important variable does not cause any remarkable change, and vice versa. As such, the economic cycle is affected primarily by its current trend and future prospect, so we should always be keenly interested in the economic trend to make economic diagnosis and economic forecast be accurate.
This is also true of the principle of price chaos and system chaos. Prices are rising faster if they are going to be higher and they are declining faster if they are going down. The system also shows faster rising when it is seen to be risen and faster falling at the opposite case. That is why the economy is self-fulfilling. In general, the economy moves as economic people believe. The psychological variable of economic people play an important role as above, even though there are often times when a significant economic variable works to change the economic flow.
The income Chaos principle is relatively simple as we have seen above, but its influence is not so tiny. Although the effect of the chaos principle on income is less than that of the decision principle and the fluctuation principle, but it is the most sensitive. All the small fluctuations of the economy is caused by this income chaos principle. Predicting such small economic fluctuations is just more useful in the business world. For an instance, the forecast of stock prices that will appear today, tomorrow, or a week later will be directly linked to the return on investment, rather than predicting them 10 years from now on.
It is desirable for us to consider the current business cycle at first when we read the economy since the income chaos principle affects the business cycle at first. This is the way to diagnose and predict accurately the economic flow. Moreover, it has a series of effects on the principle of income fluctuation and the principle of income determination by showing the ripple effect even when the impact of income chaos principle is given only once. So the income chaos principle is important, and that is why we should have keen interest in the current business cycle.
The stock market shows how important the income chaos principle is. When the prices of stocks continue to rise an optimistic atmosphere is created and the stock market becomes more active. So the volume of transaction increases and the stock prices rise higher. And then the economy is affected by the effect of increasing amount of money, which affects to increase income and wealth. As a result, the economy rises faster and this upturn plays a role in boosting growth which stimulates production, investment and employment. The higher the growth rate, the higher the income and savings, the greater demand for stocks, and the longer the stock prices rise. If this stock price is not sustainable, it will soon shift to a weakness. In extreme cases, stock prices plummet, leading to a financial crisis and an economic depression. This issue will be discussed in detail later in the "Monetary and Financial Theory" and "Economic Pathology".